Ann Sherry: Transtasman bank link is about reality

Ann Sherry

Opinion

Two months ago, the New Zealand and Australian governments decided to establish a transtasman banking regulatory council to further investigate harmonisation of banking regulations.

Since then most of the discussion in the media has portrayed this huge opportunity as something to be feared and avoided - taking the vast potential for this exercise down to simplistic, unhelpful debate on the perils of New Zealand's banking sector being controlled by one regulator that happens to be based in Sydney.

This completely misses the point. This discussion is not about a single regulator. It is not even about banking. It is about how we can take the transtasman reality of 75 per cent of our exports going to Australia and 37 per cent of our holiday traffic coming from there, and develop that dynamic further toward a single economic market.

That market is, after all, the end-game of this conversation. What it presents to New Zealand is an opportunity to be the architect of its position in a future economic landscape revolving around regional trading blocs, which will take form and establish relationships and priorities for themselves whether or not New Zealand is involved.

The action we take now will have impact on generations well beyond today's. Inaction will also have far-reaching consequences. It is in doing nothing, rather than engaging with the single-market process, where New Zealand risks being, as the media have put it, gazumped.

As an Australian running a major New Zealand business, I am aware that action or inaction by New Zealand also affects Australia. Obviously, Australia faces similarly important choices - it has a much larger economy but it, too, faces a struggle for relevance, without further scale, in a global landscape characterised by powerful regional blocs.

Of course banking plays a role in all this. The Trans-Tasman Council recognises that the banking system is key to a single economic market through enabling the smooth functioning and growth of associated trade, labour flow, tourism and other elements. As well, increasingly, banks are dealing with a customer base that is operating transtasman, and must develop capabilities to serve them.

Nevertheless, banking remains just the mechanism beneath the real transtasman issue of the single market. It should not be the only focus, especially when that focus is based on an emotive, scaremongering drive to seal New Zealand's banking system off from vaguely defined notions of distant Australian regulators, rapacious Australian banks and what happens in the event of a financial collapse (the likelihood of which, for an AA-rated bank, is less than once every 900 years).

Let's be clear: our banking system is better off having the degree of Australian ownership it does. The balance-sheet strength and market scale of Australian banks brings benefits such as the ability to share in investment in risk-management and technology and a lower cost of capital for borrowers for housing or business investment to the New Zealand market.

Additionally, the history of banking here is of Australian ownership. Australians banked the goldminers in the mid-19th century because there was no one else to do it. The first two New Zealand banks were the ANZ and the Bank of New South Wales (now Westpac), yet somehow today's position of 85 per cent of the sector being in Australian hands is regarded as having been achieved by force or stealth.

What is really at stake is the long-term soundness and efficiency of the banking system. What would New Zealand get if the demonising in the media of banking regulatory harmonisation and Australian-owned banks led to a completely ring-fenced banking sector here?

It would be a financial system populated exclusively by small, locally owned institutions with inevitable capital restraints and growing challenges to serve an increasingly outwardly focused customer base and, indeed, to survive at all in a global market.

None of this means that sovereignty concerns are irrelevant. When harmonisation is a growing reality across a number of areas of the economy, including tax triangulation, competition policy, accounting standards and securities recognition as well as banks, they are quite natural.

Any discussion about what part New Zealand should play in a converging regional economic environment, and to what extent it should forge further links with Australia, should not be taken lightly. Change is challenging.

But the discussion is not addressing the real issues of significance for this and future generations of New Zealanders (and Australians). Why are we not debating how we can expand our capacity and influence; how we act and motivate others to ensure we have robust institutions on a global scale?

Both Michael Cullen and Australian Treasurer Peter Costello have noted that harmonised regulations may lead to a single, joint regulator. This has led most commentators to conclude that because Australia is the larger economy, we would be forced to sign everything over to the Australian Prudential Regulatory Authority (Apra) and be controlled from Sydney.

However, given the degree of integration of the banking systems across the two countries, for any joint regulator to be effective it would have to be a genuinely transtasman operation. It would be in neither Australia's or New Zealand's interests to simply accept the overlay of Apra regulations and have the job run purely from Sydney.

Harmonisation is an opportunity for a far more imaginative best-practice combination of New Zealand and Australian regulations, and those from other jurisdictions such as the United States and Britain (both have supervisory oversight of the Australian-owned banks in the New Zealand market).

Prudential supervision requires direct, not remote, contact. A joint regulator would require local knowledge to do its job properly in different jurisdictions, and New Zealand should expect to be involved in the joint regulator's objectives for both sides of the Tasman.

Sovereignty and control concerns should be debated and given a fair hearing within the far broader context of the economic legacy, not just next year but for the next generation. This is a generation on the move, looking for new markets for their intellectual property and product, choosing a home location that may be different from their marketplace. Our long-term national wealth is dependent on them doing well.

The emotive focus on banking, particularly on local control and disconnecting transtasman linkages, fails to take account of this banking customer base that is operating transtasman; of the future New Zealanders who have to live, work and run businesses in the transtasman market; and of the significant opportunity presented to us right now to get it right for the long term.

* Ann Sherry is the chief executive of Westpac New Zealand.