Tim Brown: Transtasman debate needs to be honest

Banking is perhaps our largest single industry in assets, profits and employment, yet it doesn't make a thing. It provides the lubricant for those who do make and consume, the country's households, businesses, savers and borrowers. Consequently, bank mistakes or failures cause enormous harm.

The United States Depression of the 1930s resulted from bank failures. New Zealand's boom and bust of the late 1980s was a result largely of poor bank lending and the subsequent failure of the DFC, BNZ, NZI and a host of smaller, bank-like companies.

Against this backdrop, the Reserve Bank is establishing measures which ensure that if the parent of a major New Zealand bank fails overseas, the consequences on the local part of the bank can be managed in a way that best serves our economy.

If, for instance, the Australian banks' push into China were to turn sour and result in a failure of one of those banks, the Reserve Bank wants to ensure New Zealand is treated fairly.

In such a scenario, it is easy to imagine an overseas liquidator sucking the proceeds of the bank's New Zealand assets overseas, leaving creditors here high and dry. Even if an overseas liquidator didn't deliberately try to take advantage of such a situation, someone sitting in Sydney in the middle of a banking panic would have little regard to the effect on New Zealand bank customers, businesses and economy.

It is not realistic to expect a foreign official in such a situation to be willing to have New Zealand's best interests at heart.

The "insurance" being developed by the Reserve Bank is complex, comprehensive and pragmatic. It recognises that bank failure is as much an emotional issue as a financial one.

A bank will have "failed" as soon as the Herald carries a photograph of a queue at its doors and a headline "Depositors panic". Bank success is based on a widespread view of its creditworthiness; failure is the converse.

Recently, the Australian Banking Association commissioned a report to argue against the Reserve Bank's plans. It purported to find such "insurance" unnecessary because the risk of one of the major Australian banks failing was "less than once every 900 years".

Tell that to Apra, the Australian regulator whose mission is to protect against the failure of Australian banks and other financial institutions, and which has an annual budget of more than A$70 million ($74.87 million). There have been several failures of large Australian financial institutions in the past two decades alone.

Ann Sherry, the chief executive of Westpac New Zealand, took a different approach in a Perspectives article, arguing that the Reserve Bank's initiatives would isolate the New Zealand banks from their parents and result in "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".

Although the tone of these comments perhaps reflects the condescending attitude shown by many Australians to New Zealand, these arguments apply as validly to Australia's banking system, yet Australia feels it necessary to protect its banks through far more rules than anything proposed by the Reserve Bank.

Ann Sherry notes that "harmonising" bank regulation (read "letting the Australians do it without Reserve Bank involvement") is a part of better transtasman commercial relations. She says that we are in a global world, with developing trade blocs, and that New Zealand must take part or be marginalised.

But where does Australian control of banking regulation fit in to that? Why will it improve our export performance? Why will Australians buy more New Zealand goods? How will it provide greater access to cheaper capital? And why will more tourists come?

The cost to New Zealand of this "harmonisation" is not trivial. Let's see what New Zealand gets before some politicians do a deal on our behalf.

Ann Sherry did not write an article for the Herald because she has any interest in how better transtasman relations would help our apple growers or wine producers - or anyone else with an interest in better access to Australian markets. She wrote because the Reserve Bank is implementing rules that do not suit the Australian banks.

National Australia Bank, the parent of the Bank of New Zealand, is reportedly about to lay off several thousand staff in Australia. How much more convenient if those staff could be culled here and the back-office functions transferred to Australia?

Over the past two years, the BNZ reported profit before tax of $1.38 billion and paid tax of $186 million - $268 million less than a 33 per cent tax rate would imply.

Last year, ANZ-National achieved profit before tax of $1.04 billion, on which it paid $84 million tax - $258 million less than implied by the 33 per cent mark.

Westpac's New Zealand operations do not publish accounts, so we do not know if it pays any income tax here.

The big four Australian-owned banks have estimated that if our Inland Revenue Department pursued claims on all their New Zealand-structured finance transactions (that is, deals done to lower the amount of tax they pay here), the bill could be up to $1.63 billion.

If the chief executive of Westpac New Zealand could announce that its New Zealand operations paid a full 33 per cent tax on profits, and that her bank was transferring back-office operations here from Australia because of our more efficient business environment, it would be possible to read her protest about the Reserve Bank without a strong suspicion that her motives are cynical and selfish.

The debate about "harmonisation" of bank regulation needs some honesty from those pushing the barrow. Assertions that it is all part of the Anzac spirit, and that our good ol' mates from over the Tasman wouldn't let us down, deserve a "yeah right".

Michael Costello, Ann Sherry, Kerry McDonald and others are pushing for a takeover by the Australian regulator, which will result in the Australian-owned banks paying less tax here and transferring functions, and hence employment, out of this country, leaving us with hollowed-out and dumbed-down branch offices.

They cloak their case in generalisations and vague "she'll be right, mate" assertions. The Australian banks do not care what we think unless we also carry a big stick. The National Australia Bank has a huge business here, yet it doesn't have a single New Zealander or New Zealand-based individual on its board.

This debate has a strange quality to it. The Reserve Bank and the Treasury have produced quality research on bank regulation. The Ministry of Economic Development and even the Australian Efficiency Tribunal have also taken part.

All found, the Reserve Bank's current model makes sense and should be progressed. None identified that model as an impediment to our wider interests or that there are gains from handing over banking regulation to Australia.

Set against this has been the occasional threats of the Australian Treasurer and high commissioner and superficial arguments such as those Ann Sherry put forward.
In this context, any development of "harmonisation" that takes place after some political sleight of hand should be treated as complete political arrogance, something our Government is, thankfully, naturally very opposed to.

* Tim Brown, an executive of listed infrastructure company Infratil, has worked in banking in a number of treasury and capital markets areas.