Mood of the Boardroom: New requirements 'could do harm'

CEO David McLean. Photo / Supplied

Westpac CEO David McLean warned that the Reserve Bank's increased capital requirements for the big banks were in danger of harming the New Zealand economy, in an interview for the 2019 Mood of the Boardroom survey.

He has expressed extreme concern about changed Reserve Bank policies and strong concern about access to capital for the general business community. in the long run, the Australian banks would emerge relatively unscathed from the new capital requirements, he said.

They will survive, says McLean. "They'll either give NZ the capital because we can get a return or they won't. But, guess what, we're about 10 per cent of the Australian banks. If they don't invest here, they'll invest somewhere else, Australia or wherever."

Meanwhile, what happens to the New Zealand economy? he asks.

McLean says regulations like capital requirements should be decided by a separate banking regulator rather than the Reserve Bank, a body like APRA (Australian Prudential Regulation Authority) in Australia, for instance, which works like the FMA (Financial Markets Authority).

The Reserve Bank's moves on bank capital requirements had been "sub-optimal policy making", he says. "They should have done a cost-benefit analysis up front, they should have flagged some of these issues for debate like the 100 or 200 years risk factors before coming out with a draft policy."

It would have been very interesting to see why New Zealand's risk appetite was seen as so low that it requires the extraordinary level of protection of these capital requirements, he says.

The bank chief says interest rate cutting by the Reserve Bank is potentially counterproductive as it is having an unnerving effect on New Zealand confidence, rather than the bold, proactive stance they were perhaps aiming for. "Some people I talk to are spooked more. People have said to me: 'What do they know that I don't?'"

Businesses were telling him they were not investing at these rates though they were at all-time lows.

They were saying: "Lower rates are not going to make much difference because the thing holding me back is worry and uncertainty."

The Westpac CEO argues that Government fiscal policy should perhaps be doing more of the work the Reserve Bank is trying to achieve with cutting interest rates. The Government should spend more but it is important it holds "to some fiscal discipline" to the opposition's chagrin — a strange role-reversal.

"The Government does need to keep its powder dry in case something really goes wrong, which is admirable," he acknowledges.

McLean says he was not suggesting "sugar rush" type handouts, but rather getting things done in infrastructure, education, health and housing. That would have a real sustainable, long-term impact for the country. "Building more sustainable things with their investment is a much better way to do it but that takes longer to get going and they've just taken far too long to get going."

For now, the economy's fundamentals are still there for doing good business, McLean says. He believes it is the intangible things that are causing the slowing economy — things like confidence.

"Confidence took a shock with the election and then a couple of government actions early on, but most government policy hasn't been anti-business" he says.

He thinks domestic concerns have been overtaken by the global worries. And the global situation is quite alarming, although the hope was the big players would find some middle ground. Scenarios that could play out between China and the US could be "quite scary" McLean says. He believes a concern is that NZ could become caught between two powers and have to make difficult choices.

The 1 per cent conundrum

Businesses say it will take more than a drop in the OCR to 1 per cent to increase their companies' appetite to invest in a lower interest rate environment.

Reserve Bank Governor Adrian Orr has urged the Government and business to reassess their hurdle rates on investment projects since the bank reduced the OCR to 1 per cent. But 77 per cent say it will not be the spur for increased investment.

"Fifty basis points is irrelevant to the decision-making," said an energy sector chief.

"What is relevant is the confidence in policies and regulatory settings. And that isn't solid."

"Bank margins have gradually been increasing and the prospect of increased bank capital provisioning means further margin hikes are likely," said a property boss.

"While the lower-risk free rate means a reduced weighted average cost of capital, corporates investing in long-dated assets will still need to have a view on the risk-free rate through the lifespan of that asset," said a leading chair.

A number of CEOs said they had already made significant investment decisions.

And there was a hint Orr's move had spooked some.

"If anything, by dropping the OCR by more than the market was expecting, despite unemployment reaching its lowest level in years, the Governor undermined business confidence and raised the suspicion he was working to enhance the Government's chance of being re-elected in 2020," said a banker.

Minter Ellison's Lloyd Kavanagh said it suggested the Reserve Bank's concerns about the economy were greater than they have said, a view supported by several funds chiefs.

But others like Stevenson group's Mark Franklin applauded the positive decision, saying it gives the market some steer.

Barfoot & Thompson's Peter Thompson said it should provide a springboard to get on and build infrastructure — like a second harbour bridge.

A leading policy advocate said Orr was the governor of the RBNZ, not Minister of Finance. "If he wants to run fiscal policy, he should run for Parliament." But Simplicity's Sam Stubbs felt as an ex-commercial banker and fund manager, Orr was extremely well-placed to make these comments.

"Rarely in NZ's history have the requirement to invest, and the ability to fund the investment via debt and local savings (KiwiSaver, IWI, NZ Super, et al), been there at the same time. We must seize this opportunity."

Asked if Orr was overstepping his mandate by calling on the Government to increase spending on infrastructure, 54 per cent said no.