Do your homework, Cullen tells Brash

By VERNON SMALL deputy political editor

A furious Michael Cullen has ticked off Reserve Bank Governor Don Brash for criticising New Zealand Post's "People's Bank" without bothering to get the facts.

The Minister of Finance, who is also understood to be angry at Dr Brash overstepping his brief, rubbished his advice, which included a proposal to subsidise beneficiaries' bank fees instead of starting a new bank.

In a terse reply to Dr Brash's November 17 advice, Dr Cullen said he would not follow his suggestion to refer the six-page letter to Prime Minister Helen Clark, Deputy Prime Minister Jim Anderton and officials.

"I would have to follow the letter up with one of my own clarifying that your letter was based on a number of presumptions that were not valid and the correspondence will only create confusion where none exists," Dr Cullen said.

In particular, he slammed Dr Brash for commenting without seeing NZ Post's business plan, which made it clear there would be no Government guarantee of deposits - one of Dr Brash's main concerns.

Yesterday, Dr Cullen told the Herald: "It would have been helpful if there had been a bit more consultation with NZ Post before the letter was written. I think that is as far as I should go.

"I think it would have been helpful if the letter had been written with more information to hand."

A spokeswoman for Dr Cullen said he had not received any subsequent advice from Dr Brash about the bank.

A spokesman for Dr Brash said the unsolicited advice was given under section 33 of the Reserve Bank Act, which allows him to "advise the minister on matters relating to the operation of the financial system."

Dr Brash refused to answer the Herald's questions, or justify using that section of the act to propose other solutions to the Government's policy intentions.

His suggestions included a fee-for-service arrangement with banks or payment by the Government of a fee attached to welfare beneficiaries' accounts.

"Such an approach would be less prone to 'middle-class capture,' would ensure contestability and transparency, and would enhance the prospect for control of costs by the current and future Governments."

Dr Brash pointed to the harm the People's Bank might do to smaller regional institutions, the cost and difficulty of setting up banking systems, and the low level of expertise within NZ Post.

He also warned about the risks of compensation payments if a state bank insisted on access to the existing banks' clearing and settlement system - something the Government or NZ Post had never contemplated.

The Reserve Bank registers banks operating here and will formally consider NZ Post's request for a licence.

Dr Brash and Dr Cullen stressed yesterday that this was a separate issue, and the concerns raised by Dr Brash had no bearing on that process.

The Reserve Bank's view was included in a welter of anti-state bank views from the Government's leading advisory agencies, the Treasury and the Crown Company Monitoring Advisory Unit, released yesterday along with a downbeat assessment of the bank's prospects by independent analysts Cameron and Co.

The papers included draft Treasury letters to NZ Post, in Dr Cullen's name but never sent, rejecting plans for a bank.

Mr Anderton, who championed the bank, dismissed the criticisms as the inevitable view of the "policy Establishment."

But Opposition Leader Jenny Shipley said the papers showed Helen Clark had ignored repeated warnings and paid $80 million to buy Alliance support.

The cabinet gave the bank the go-ahead in February and agreed to make a $72.2 million capital injection, forgo $6 million in dividends and allow NZ Post to use $4.8 million of its own for start-up costs.

Dr Cullen said proposals to have a smaller capital injection and forgo several years' dividends had been rejected to make it clear there was no on-going Government contribution.

The Cameron report and the Treasury concluded that NZ Post's view on the number of customers who would switch to the bank were too optimistic.

NZ Post might also have underestimated the competitive response from other banks.

"In short, officials consider that Newbank is a high-risk venture. We have reservations about key assumptions on which the forecasts are predicated and we do not consider that likely returns match the level of financial risk involved."