Archive | Economy

Reserve Bank proposes forcing commercial bank owners to lift their capital levels to bear greater share of financial system risks

The Reserve Bank went out to consultation on Friday on a proposal for bank owners to lift their shareholding stakes – their capital ratio – and thereby bear a greater share of the financial system’s risks.

The consultation has 2 closing dates on successive Fridays in March, the 22nd & 29th, depending on which consultation document you look at.

Deputy governor & financial stability general manager Geoff Bascand put the bank’s case: “Insisting that bank shareholders have a meaningful stake in their bank provides a greater incentive to ensure it is well managed. Having shareholders able to absorb a greater share of losses if the company fails also provides stronger protection for depositors.

“Bank crises happen more often than many people care to remember, and the economic & social costs of bank failures can be very high & persistent. These proposals are designed to make bank failures less frequent. With these changes we estimate the banking system will be resilient to shocks that might occur only once every 200 years.

“We are proposing to almost double the required amount of high quality capital that banks will have to hold. In practice, actual changes to the amount that they hold will be less than double and will vary. The increase will depend on their current levels of capital, how much extra they choose to hold above the required minimum, and whether they are a large or small bank.

“Generally, it will be an increase of between 20-60%. This represents about 70% of the banking sector’s expected profits over the transition period. We expect only a minor impact on borrowing rates for customers.

“While borrowing costs may increase a little, and bank shareholders may earn a lower return on their investment, we believe these impacts will be more than offset by having a safer banking system for all New Zealanders.”

Mr Bascand said the Reserve Bank was consulting on a 5-year transition period for banks to meet the new requirements.

 Links: Reviewing bank capital rules
Non-technical summary 
Consultation paper: How much capital is enough?
Speech: Higher capital better for banking system & New Zealand
Video: What is capital adequacy?
Video: Governor Adrian Orr describes importance of bank capital
Earlier consultations: Review of capital adequacy framework for registered banks

Attribution: Bank release.

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Self-drive, the catalyst for monumental transformation

I read a US newsletter at the weekend that looked at change resulting from self-driving electric cars, but not just about the vehicles themselves. In this commentary, I take the possibilities further.

My conclusion: Change is not going to happen overnight, but it will be rapid, it will change how you regard your personal convenience and it will wring fundamental changes in property use, and therefore in property ownership, tenancy, value, design.

While you work through the questions & issues below, keep in mind that common use of land-based self-driving electric vehicles might become historic almost before it becomes common.

First, the questions:

Will you own a car – or, in families, multiple cars?

Will you expect to drive to work, as you do now?

Where will you park?

Who will provide that parking?

How do you shop? Mostly, weekly at the supermarket?

Do you use your car for lazy storage?

Do you use storage, music up loud, door-to-door as your excuses for an aversion to public transport?

How might pricing of vehicle ownership, journeys & parking change, and how might public transport be transformed?

Why own for minimal use when you can summons a vehicle at will, to take you door-to-door if necessary?

Now go through some answers:

While you might maintain that you need your car, most decisions of that nature have never really been yours to make.

The people who created mass production of cars were able to do so based on pricing low enough for widespread ownership. But think back to New Zealand’s brief era of carless days, when your vehicle had to be off the road for a stipulated one day/week, which roughly coincided with the start of mass importing of second-hand cars from Japan. Suddenly, from the inconvenience of having to travel by public transport occasionally, New Zealand was awash with cheap cars. You could go where you wanted, whenever you wanted.

Except, it’s reached the point that you can’t quite go whenever you want, because congestion has reached such a level that your journey becomes much slower. In response you look at passengers passing you in the bus lane and ponder joining them, or you drive to work in the dark.

In Auckland, if you cross the harbour bridge in peak traffic, you can see maybe 10 people near you – one per vehicle, all forced by congestion to travel slowly.

Parking made harder

The era of Uber is upon us – and the suggestion is that the Uber will lose its driver too. Pricing will dictate whether you travel as a solitary occupant in a car, or multiple. Either way, you will be taken from your door to your ultimate destination, or perhaps to a conveyance which carries more people.

Your own car will sit in its garage, and soon you will figure you don’t need it. One reason will be that you can order up a vehicle to suit your travel purpose – if you have more luggage, a bigger vehicle; travelling to the supermarket you don’t need space, but travelling home you do. Or perhaps you do all that shopping onscreen, without going anywhere.

You may see those possibilities as pure & unlikely conjecture until you consider the next point: the decision won’t be yours.

The next stage in your decision on how to get to a fixed place of work will occur when your employer, or the building owner, decides you don’t need a parking space because self-drives & public transport eliminate the need. Parked cars which do nothing but sit, waiting for you to come back in 8 hours, are a very large expense. The building owner will convert that parking space to other uses, especially if it becomes harder to fill every space.

Then, the road maintenance equation

It occurs to you that your journey could be much faster because there’s less competition on the road… Except, who pays for that road’s existence & maintenance? The motorist, the local council & the Government do – the motorist via taxes & levies, the council via rates & perhaps fuel taxes & targeted rates, the Government via those taxes & levies.

If there are fewer users, or use is far more efficient courtesy of the self-drive & decline of private ownership, government & council will pursue ways to lower their costs. And when they discover less road surface is needed, or they can get away with providing less, they will reduce maintenance. Much like Auckland Council’s decision not to mow the berm outside your house anymore, authorities will see the way clear to trim road surfaces based on saving money – 4 lanes back to 2 and, within suburbs, 2 back to a single lane.

This can happen because there will be fewer parked cars, and eventually none, the self-drives will be able to negotiate a single lane, and.. well, you’ll have even more berm to mow. The road surface that remains will be a coarser, cheaper product next time it’s laid, the maintained suburban road surface can be shrunk, and arterials – even motorways – probably can too.

You’ll turn your garage over to storage, or another bedroom, or a games room or home office.

The city end of the equation

Your decision on how to travel will be driven by external imperatives – council maintenance costs, shifts in tax spending, reduced provision of parking. Many of the parking lots around the inner city have existed because of property development downturns. The bungy site on Victoria St, right in the heart of the city, is vacant because the 1987 property & sharemarket crashes killed development plans, and more recent plans there have been more grandiose than real.

Feeding on to Victoria St East, the exit from the council’s Victoria St parking building is briefly on to High St – which is a popular nominee as one of the streets for a council project to trial more car-free areas. The council’s Downtown parking building has been considered for a number of years as a high value development proposition. Changes such as those would be dramatic, but no longer whimsical once self-drive vehicles start to appear.

Now to city occupants, and then to fringe centres

Offices & apartments without parking provided will become the norm, and those old basement parking floors will lose that value. Owners will look to new uses in old buildings and design parking out of new buildings. In the old buildings that will be an interesting exercise, because in many of them the ceilings will be too low. It will take ingenuity to find economic solutions.

For the individual, you’ve lost your parking floor in the office building, and all the other parking floors & parking buildings are being converted. You will be forced to seek other travel options – bus & train for distance or, as we’re starting to see, bike or scooter for shorter journeys.

But not everybody works in a central city office or shop. Suburban work centres are likely to face the same pressures for change, and industrial precincts might too. Think, as a property owner, what you can do with the space occupied by 30 or 50 employees’ cars. Tenants, especially in outlying areas, pay low rent for parking. Building them out will provide a better return.

Other consequences

If you accept that these kinds of change are not just on their way sometime, but more likely imminent – perhaps within a decade – you can turn your mind to other consequences.

Fewer cars, fewer motor mechanics, a whole sector of insurance becomes redundant. Car sale yards & car loans will be history. Tradies will become lords of the road, but their costs will also rise through higher contributions for upkeep. Delivery vans will have a bigger role.

Just the change from oil to electric is a revolution in itself. The oil industry has held sway for a century, but its decline will be swift if battery-operated travel can prove efficient, practical & cheap. That will ring in momentous change in international affairs, in economic relationships, in degrees of political power. Revolutions in self-drive & public transport will force local change.

Real or unreal? We don’t know yet. What we do know is that if change like this is catapaulted into our lives, it pays to start thinking of options early.

Attribution: Comment.

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Trump, China, and what’s it got to do with us?

This article is a summary about position-taking, influences, and the broad impacts on New Zealand. It doesn’t quote anybody, but contains conclusions derived from wide reading. That’s time-consuming, but I figure this is a valuable exercise if you’re looking beyond your nose for pointers of economic direction & property market changes.

Donald Trump’s role in both his campaign for the US presidency and as president has been to disrupt the status quo.

Although he’s hired many people with experience in “deep state” roles, their tasks have been to support his disruptive campaign. Some failed the adjustment.

Mr Trump’s additional roles have been to pump up the US’s prospects as an economic performer, and to continue the US’s insistence on holding hegemonic international power.

Mr Trump has had a privileged upbringing, and in business he’s used other people’s money. Where there’s been failure, as in business bankruptcy, he’s loaded the consequences on to his lenders.

He’s taken the same approach internationally, hence his battles with China, and he’s in the process of changing the economic rules.

The US had a public debt mountain when he took office, and he’s grown it, even before you count the huge expansion in military spending. The US Federal Reserve wants to reduce the debt it created through quantitative easing and has been slowly clawing back treasury stock, and cautiously lifting its target interest rate.

Neither of those practices suits Mr Trump, who wants a low interest rate to keep public debt repayments down, which also keeps asset prices up, and wants plenty of money available for business to thrive.

Since Mr Trump started his trade war with China, the suggestion has frequently been made that China might slash its holdings of US treasuries to spite him, but that prospect looks less & less likely. China has already found it doesn’t have the same volume of exports on which to place tit-for-tat tariffs, has seen its international reserve decline and faces a worsening economy at home. One thing it has achieved is to shift some international transactions into other currencies – its own & Russia’s in particular.

China is in the middle of a transformation from mass exporter of low value goods to a more intelligent economy based on greater skilled input, but on that journey it has to deal with performances by local government entities which have spotted investment opportunities, both locally & internationally, only to find the glitter can wear off.

Like many Chinese investors keen to shift cash offshore and into assets, Chinese corporates went shopping around the world, outbidding each other as they searched for chest-thumping acquisitions, only to find that the return on overpriced assets tends to be unsustainable.

New Zealand developers have employed Asian investors for 2 decades as seed investors in apartment projects, which wouldn’t have been built if local investors were the only source of funds. But market downturns, as is happening now, mean the off-the-plan investor is more likely to lose (or make much less) with a sale on project completion. Apartment developments are still being planned, but their timing will depend to a large extent on how these bigger international manoeuvres work out.

China has used devaluation to combat the Trump trade war manoeuvres. US commentators are loud in describing devaluation as currency manipulation, but not calling out the strong-arm tariffs as equal manipulation.

Both these countries – and many others, including New Zealand – want their currencies down to encourage exports and discourage imports, but devaluations only work if other countries you trade with aren’t doing the same thing.

As this currency battle spreads, trading relationships will change. China can end the Trump trade war by conceding on intellectual property allegations – the most likely outcome, although it will take some time to occur as China looks for ways to circumvent the concessions – or it can look for alternative markets.

In that alternative pursuit, China & Japan have become friendlier, China is looking to conduct more trade with South-east Asia, and China & India are looking at stronger relations, replacing their animosity.

China’s Belt & Road initiative, a project with long-term structural consequences for international trade and also for political power strategies, is winning initial positives despite allegations of abuse of debt positions. But the Belt & Road enters the hegemony fray: while the colonial & subsequent western dealing with Africa was largely a matter of take with little give, China is going in offering sorely needed infrastructure development.

The same difference is going to apply in the Pacific Ocean, where western support for small island nations was begrudging. Now those dots in the ocean are becoming important spots in the hegemony struggle, and support will switch from donations to highly priced access fees.

All of these battles will have serious impacts on New Zealand’s economy – some positive, some negative.

Although New Zealand is big compared to the other island nations, this country will also become a target in the hegemony battles. We are never going to be a military power, so we will need other means of defence. One of those is likely to be to trade with both sides in other battles. Another will be to grant access without allowing domination. Our moralistic streak may have to be subdued and our historic allegiances further tested.

If you look at the international & New Zealand pictures as I’ve painted them here, you will see potential for very good times – and also harrowing periods if we get it wrong.

One of the big questions in international finance at the moment is the worldwide bubble in investment, pumped up by national debt, along with negligible interest rates which encourage asset price escalation. How long can it last? And what happens when the merry-go-round stops?

Factors affecting the answers to those 2 questions are numerous, but those you can most rely on are the outcomes of 2 elections – the pending mid-term vote in the US, scheduled for next Tuesday their time, and the 2020 US presidential campaign.

The mid-term vote could see the Democrats locked in a power struggle with the president, or Mr Trump set free to continue as he pleases. Whatever the outcome internally, US dealings with the rest of the world are unlikely to change radically in the short term. No matter who is in power in the US, it is a country that fronts the world with a self-belief that nobody matches; it’s a nation born to be in charge, no matter that so often it does this badly.

New Zealand is likely to become a sanctuary, and therefore a target for investment. That will place New Zealand in a positive light, at least for the short term.

Feel free to disagree, open my eyes, suggest other options.

Attribution: Bob Dey.

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Putting change in context

Over the last 3 days the Government has provided context for change.

Finance Minister Grant Robertson made the change in direction from the previous National-led government distinct yesterday in a speech to the Local Government Association’s annual conference in Christchurch.

His central point is to move away from the purely economic measure of gross domestic product (gdp): “We are taking a broader view of success, by looking at how we improve the living standards & wellbeing of all New Zealanders.”

He also wants to replace the broken local council funding system, but that at the moment is a more complicated story.

Housing & Urban Development Minister Phil Twyford’s aims & preferred methods are distinctly different from those of predecessor Nick Smith, as he made clear in a visit to Mangere on Friday for the start of the programme to regenerate Housing NZ stock: “This is a first for a total joined-up approach for transitioning infrastructure & regeneration.”

And in tertiary education, Education Minister Chris Hipkins advanced his thinking on Friday on appointing a commissioner to replace the board at Unitec. From what I can see in board documents, Unitec’s problems were more about national governance than what Unitec itself was trying to achieve, but the outcome ought to be a vast improvement in handling education for trades, particularly those related to construction. The aim: to prioritise vocational education & training after a period when funding clearly didn’t match that aim.

I’ve posted separate articles on Mr Robertson’s speech and Mr Twyford’s visit to Mangere. You can also check the links below to Mr Robertson’s speech and Mr Hipkins’ brief statements on Unitec (no story on that one at the moment).

My own view:

I haven’t analysed the wellbeing & living standards framework methods of calculation, but I know gross domestic product is a poor measurement which was being misused. For some time I’ve preferred to calculate GDP per capita to see if New Zealand’s economy was actually strengthening, given that 4 years of high migration inflows ought to lift overall production, but not (at least immediately) raise growth/head.

Related stories, 16 July 2018:
Putting change in context
Robertson outlines focus shift from GDP measure to wellbeing
Demolition starts on Mangere regeneration project
Finance minister calls Productivity Commission in to examine local body funding

Attribution: Government announcements.

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Robertson outlines focus shift from GDP measure to wellbeing

Finance Minister Grant Robertson outlined yesterday how the Government intended to revert to the 2002 version of wealth as a target for the nation – wellbeing, instead of gross domestic product.

In a speech to Local Government NZ’s annual conference in Christchurch, Mr Robertson said the coalition government elected last year recognised that it faced major challenges, and couldn’t tackle them alone. He outlined how central & local government could work together to achieve better outcomes for all New Zealanders.

The central focus of Mr Robertson’s address:

“For us in central government, this means doing things differently and measuring success differently.

“Previous governments have measured success in terms of economic growth – simple measures such as GDP (gross domestic product). But while measures like GDP remain important indicators of economic activity, they do not paint a full picture of people’s wellbeing or living standards.

“Many of our international peers have been envious of the GDP growth New Zealand experienced in recent years. But we’ve also seen increases in statistics that suggest that growth did not result in real tangible improvements to many people’s lives.

“For example, our levels of homelessness have been described as the worst in the OECD; the number of children living in poverty is not something we can be proud about, and tens of thousands of our young people are not in employment, education or training. This is not success.

“We believe that economic growth is a means to an end, not an end in itself. We are taking a broader view of success, by looking at how we improve the living standards & wellbeing of all New Zealanders.

“By placing wellbeing at the heart of what we do, we will be able to measure the extent to which our policies & investments are making real improvements to people’s lives.”

The living standards framework

Enter the living standards framework (LSF), which Treasury is developing: “The LSF uses a set of indicators for the current wellbeing of New Zealanders, and for their future wellbeing, based on the stock of the 4 capitals which determine intergenerational wellbeing: financial/physical, natural, human and social.

“This work will underpin our world-first Wellbeing Budget in 2019. This budget will be the first major step for the Government in applying a wellbeing framework to strategic decisions.

“Wellbeing is not only driven by central government actions. We recognise the crucial role local government plays in maintaining & enhancing New Zealanders’ wellbeing through the services, infrastructure, regulations & placemaking you provide to your communities.

“This was factored into the original Local Government Act 2002, by requiring local government to focus on promoting the social, economic, environmental & cultural wellbeing of communities, in the present & for the future. However, in 2012 the previous government removed these 4 wellbeings from the act, arguing that local government needed to be ‘streamlined’.”

Wellbeing bill before select committee

The Local Government (Community Wellbeing) Amendment Bill, which is before a select committee, is intended “to restore the wellbeing needs of communities to their rightful place as a central focus of local government decisionmaking, recognising the important role local government plays in ensuring people’s wellbeing.

“There is an obvious overlap with the 4 capitals of the Treasury’s LSF, meaning that both local & central government will soon be working with a closely aligned core focus on improving the wellbeing of our people.”

The power game

The Robertson line also shifts the use of power, which was firmly at the centre under the previous government, until long negotiations wrought change in the Auckland transport alignment project (ATAP) between the Government & Auckland Council.

That revised project was in sharp contrast to the approach of former housing minister Nick Smith over Auckland Council’s questioning of aspects of the government-council housing accord & special housing areas, where the minister told the council that, if it didn’t act quickly, the government would take over the housing area approval process.

Mr Robertson: “The relationship cannot be Wellington telling you what to do. Rather, we want to work with you to help deliver local solutions to local issues.

“For example, with our Provincial Growth Fund we aren’t taking a top-down approach. We aren’t interested in coming to tell you what you’re good at and what you should invest in.

“The ideas are better generated from the ground up. We want you to tell us what would benefit your region. That’s the only way such an initiative will work.

Funding solution required

“But we understand that for local government to be in a position to provide local solutions, you need the ability to finance them.

“We know there has been a huge increase in demand for investment in infrastructure all across the country.

“The previous government did not recognise the scale of development, maintenance & replacement of infrastructure needed to support a rapidly growing population and a surge in international visitor numbers.

“Infrastructure investment plays an important role in increasing housing affordability, by allowing for new developments to take place and catering for increasing demand on existing systems.

“We recognise there are some constraints that are preventing local authorities from effectively funding their obligations and from financing community expectations. Some of these can be described as ‘hard’ constraints, while others may be ‘soft’:

  • Hard constraints could be regulatory or legislative barriers that prevent local authorities being able to fund or finance infrastructure;
  • Soft constraints could be factors that influence the behaviour & practice of local authorities.

“Addressing the challenges of infrastructure funding & financing (IFF) is a key pillar of the urban growth agenda (the UGA). The UGA is an ambitious & far-reaching programme designed to improve housing affordability for New Zealanders by addressing the fundamentals of land supply, development capacity & infrastructure provision.

“IFF is specifically about reforming the existing system to provide a broader range of funding tools & mechanisms, as well as creating alternative financing models. The underlying question is whether there are funding or financing constraints hindering the timely rollout of infrastructure.

“Efficient construction of infrastructure in support of urban developments is, of course, a key determinant of the rate of land supply & therefore housing affordability.

“Different councils face different issues, yet affordability, availability of funding streams & appropriate pricing are key to any solution. We acknowledge that some high growth councils are up against their debt limits, so financing is the key constraint. That’s why we are also exploring the potential for diversifying the available sources of project financing.

“Project financing requires a dedicated revenue stream to service that capital; a revenue stream derived from charges for the provision of the infrastructure.

“The ability to identify & charge beneficiaries influences the viability of those projects, and so provides an important signal as to which projects should proceed & when. So, there is an efficiency element to this work as well.

“Central government will be exploring ways to get past funding & financing barriers. Yet we cannot do this in isolation. This is about partnering with local councils to ensure that you have the tools to provide the much needed infrastructure for your communities.”

Link:
Finance Minister Grant Robertson, 15 July 2018: Full speech to Local Government NZ conference

Related stories, 16 July 2018:
Putting change in context
Robertson outlines focus shift from GDP measure to wellbeing
Demolition starts on Mangere regeneration project
Finance minister calls Productivity Commission in to examine local body funding

Attribution: Robertson speech.

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The budget (for what it’s worth)

Government budgets used to be about micro-managing things like tax hikes increasing the prices of cigarettes & beer & petrol. They’re still about micro-managing, with some subtle touches.

One of those subtleties is that the spends are announced as totals but the sums coming from the Government coffers are trickled out. The new trick is the 4-year spread, through 2 election campaigns.

Yesterday’s election-year budget was very much about reducing the opportunities for the Opposition to campaign, and the Government’s done this with social welfare handouts & investments.

It’s a slow awakening for a government which has been reactive through its 3 terms, and it’s a questionable one.

Many of the measures announced yesterday & through preceding months increase dependency on the state, and not just for poorer citizens. Business, innovators, exporters – everybody has a potential handout to stretch their fingers out for. Ironically, socialism creep from a supposedly capitalism-supporting government.

If you think about why dependency is increased, you’ll find 2 reasons. One is that management of basics like housing construction and the control of economic inputs like migration has been abysmal, hurting those at the bottom of the pile but also causing widespread damage for everyone trying to go about their business.

The answer is to pay handouts, when for a government of this one’s ideology it should be about creating the basis for a thriving private sector, which would reduce the need for handouts.

The other reason is that support for private enterprises has been structured as handouts, instead of being in the form of facilitation. There’s a small but essential difference, partly due to the control factor but, more importantly, due to the inability to understand how to lift an economy.

One potential beneficiary has fared less well, and that’s Auckland. The Government didn’t trumpet too loudly that it’s finally paid the entry fee to Auckland’s city rail link project, but it did state once more that roads are the way ahead.

Every Aucklander knows that alternatives are imperative before the region is consumed by total gridlock, but roads are where the big infrastructure money has been directed.

In summary:

It’s a budget which displays largesse, which will be lapped up by a nation of beneficiaries.

It’s a budget aimed at winning an election through the offer of small individual gains, not at demonstrating what it could have been used for: demonstrating prowess at advancing the nation economically.

Links:
Treasury, Budget 2017
Labour on budget
Greens on budget
NZ First: Budget a ploy to hide crises

Attribution: Budget documents, my comment.

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Reserve Bank releases capital adequacy issues paper

The Reserve Bank published an issues paper today on regulation of banks’ capital adequacy.

It’s seeking feedback by Friday 9 June and will follow up with detailed consultation documents on policy proposals & options for each of 3 components later this year, with a view to concluding the review by the first quarter of 2018.

Deputy governor Grant Spencer foreshadowed the broad-ranging capital review in March, in a speech in which he compared the average housing risk weights of large banks in 6 countries.

New Zealand was clearly the most heavily weighted towards housing at 28.3%, followed by Australia at 23.5% (and its bank overseers also tightening the reins), then a long way back to Denmark 13.9%, the UK 11.7%, Canada 7.2%, Sweden 6.8%.

The Reserve Bank aims to identify the most appropriate capital adequacy framework, taking into account experience with the current framework & international developments.

The review will focus on the 3 key components of the current framework:

  • The definition of eligible capital instruments
  • The measurement of risk, and
  • The minimum capital ratios & buffers.

Paper sets out 2 sides

In its issues paper summary, the bank said it recognised the need to balance the benefits of higher capital against the costs, but set out 2 sides to the argument: “It is expected that a higher level of capital would reduce the probability & severity of bank failures and would smooth out credit cycles.

“But banks typically argue that capital is a costly source of funding and that if they had to seek more of it they would need to pass on costs to customers, leading to reduced investment & growth.

“There has been debate about the extent to which these costs reduce national welfare. In one view the capital levels of banks are inefficiently low because of implicit government guarantees of creditors or other incentives. Raising the minimum capital requirement restores efficiency by reversing the implicit subsidy to bank shareholders, and in this way improves overall welfare.

“A growing number of academics, most notably Anat Admati from Stanford University & Martin Hellwig from the Max Planck Institute for Research on Collective Goods (as well as some regulators) have argued that the costs to society as a whole of higher capital are very low and that capital requirements should be much higher than they are now.

“These authors are associated with the ‘big equity’ view and are distinguished by the extent to which they see significant increases in capital as being possible without net negative economic impacts.

“Empirical studies have attempted to quantify the costs & benefits of increasing capital requirements, and to determine the optimal capital ratio which has the greatest net benefit. In the more mainstream studies the Reserve Bank has considered so far, a typical optimal ratio is about 14%, but estimates do vary widely (the range is roughly 5-17%). The Reserve Bank will continue to review & assess these studies, but also welcomes the views of submitters on this issue.”

The bank said that, at this early stage of the review, it hadn’t formed a view on the final calibration of capital requirements, but said it was likely to take into account the studies it had seen, as well as empirical evidence.

Links:
Review of the capital adequacy framework for registered banks
Grant Spencer’s March speech

Attribution: Bank release.

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Joyce lifts infrastructure intentions and talks new operating mechanisms

New finance minister Steven Joyce (pictured early in his career as a sod-turner) looks to have increased the annual allocation to capital infrastructure spending from $900 million to $4 billion for the 2016-17 financial year, with the promise of upping the budget for the following 3 years by $4.3 billion.

Mr Joyce took over finance from Bill English in December, in the reshuffle following Mr English’s appointment as prime minister. The country goes to a general election on 23 September

Under the more conservative English programme, the allocation to capital infrastructure over the next 4 years was $900 million/year. Mr Joyce said yesterday the focus would be on the infrastructure that supports growth, and those annual allocations would rise to $2 million in the 2017-18 financial year and $2.5 billion in each of the following 2 years.

Both the Property Council & Infrastructure NZ focused on the $11 billion figure Mr Joyce waved in front of them, which included the $3.6 billion already budgeted.

Property Council chief executive Connal Townsend said a lot of the country’s infrastructure was at the end of its useful life and he expected asset replacement would feature prominently in the Budget: “Government’s announcement is a recognition that houses & commercial properties do not exist in isolation but need to be supported by infrastructure such as roads, schools & hospitals….

“Under-investment in infrastructure creates significant deadweight losses for the wider economy. Property Council is pleased that Government recognises this. Infrastructure spending must be seen for what it really is. It is an investment in our cities and a productive input into the wider production process, rather than a mere cost.”

Infrastructure NZ chief executive Stephen Selwood said: “This is a massive increase and the largest capital investment commitment by any government since the 1970s. But it must be said that New Zealand’s growth challenge is the highest it has ever been, and meeting population demands requires the services for a city larger than Nelson to be added every year.

“Added to the growth challenge is New Zealand’s historic under-investment in infrastructure. The reality is that it would not be difficult to spend $11 billion in 2017 alone.”

Mr Joyce said: “We are growing faster than we have for a long time and adding more jobs all over the country. That’s a great thing but, to keep growing, it’s important we keep investing in the infrastructure that enables that growth.”

“We are investing hugely in new schools, hospitals, housing, roads & railways. This investment will extend that run-rate significantly, and include new investment in the justice & defence sectors as well.”

Mr Joyce said the budgeted new capital investment would be added to the investment made through baselines & the National Land Transport Fund, so the total budgeted for infrastructure over the next 4 years would be about $23 billion.

He said the Government wanted to extend that further, with greater use of public-private partnerships and joint ventures between central & local government & private investors.

“As a country we are now growing a bit like South-east Queensland or Sydney, when in the past we were used to growing in fits & starts. That’s great because we used to send our kids to South-east Queensland & Sydney to work, and now they come back here. We just need to invest in the infrastructure required to maintain that growth. Budget 2017 will show we are committed to doing just that.”

Mr Joyce will give details of the initial increase in the May Budget.

Attribution: Ministerial release.

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Leading banker takes Australian politicians to task on governance, finance, infrastructure, urban prospects

Australian politicians’ ears must have been burning when bank chief Ken Henry addressed the country’s Committee for Economic Development in Canberra on Thursday, because he wasted no words in portraying the destruction – instead of construction – of a sound future they continued to guarantee.

The Unconventional economist on MacroBusiness, Leith van Onselen, wrote: “Dr Henry pulled no punches in admonishing the Government’s negligence in managing Australia’s mass immigration programme.”

Mr van Onselen also raised questions arising from Australian Productivity Commission reports, including An ageing Australia: Preparing for the future.

But migration & age were just 2 of the questions raised by Dr Henry, who chairs the National Australia Bank. He talked about the notion that endless growth was a practical proposition for Sydney & Melbourne, how every proposal for major infrastructure was drowned in political wrangling and – in the sector he knows best – how every tax reform proposal of the last decade had failed.

Below are some excerpts from his speech:

Business at odds with community

“According to our research, Australian businesses see our strong rate of population growth as a positive. …. In the broader community, there is considerably less support for a larger population. People are concerned about the impact of a growing population on traffic congestion, urban amenity, environmental sustainability & housing affordability. And they worry about our ability to sustain Australian norms of social & economic inclusion. These concerns are understandable.

“Australia’s business leaders have to accept responsibility for ensuring that strong population growth, and the investment opportunities that go with it, lift economic & social opportunity for all, without damaging the quality of the environment we pass to future generations. That means that we have to take an interest in traffic congestion, housing affordability, urban amenity & environmental amenity, including climate change mitigation & adaptation….

“If we want better access to skilled domestic workers, then we are going to have to offer those workers the prospect of better lives. If we want modern & efficient infrastructure, then we are going to have to take an interest in the design of our cities; we are going to have to take an interest in regional development; and we are going to have to take an interest in the planning of new urban centres.

“If we want less red tape & less regulation, then we are going to have to demonstrate that regulation is not necessary….

“Meanwhile, our politicians have dug themselves into deep trenches from which they fire insults designed merely to cause political embarrassment. Populism supplies the munitions. And the whole spectacle is broadcast live via multimedia, 24/7. The country that Australians want cannot even be imagined from these trenches….

“Almost every major infrastructure project announced in every Australian jurisdiction in the past 10 years has been the subject of political wrangling. In the most recent federal election campaign, no project anywhere in the nation – not one – had the shared support of the Coalition, Labor & the Greens.

“Every government proposal of the last 10 years to reform the tax system has failed.

“And the long-term fiscal, economic growth & environmental challenges identified in 4 intergenerational reports over the past 15 years?  The opportunities identified in the White paper on Australia in the Asian century? Simply ignored.

“The reform narrative of an earlier period has been buried by the language of fear & anger. It doesn’t seek to explain; rather, it seeks to confuse & frighten.

“Meanwhile, the platform burns.”

Growing Sydney & Melbourne

Dr Henry also spoke about the Australian budget & tax system, a strongly growing but aging population, climate change & energy security, and making the most of the Asian century.

“How will we fund the biggest infrastructure build in our history? And what about infrastructure planning?” he asked, before questioning the sense in adding 7 million people to the populations of Sydney & Melbourne:

“On the basis of official projections of Australia’s population growth, our governments could be calling tenders for the design of a brand new city for 2 million people every 5 years; or a brand new city the size of Sydney or Melbourne every decade; or a brand new city the size of Newcastle or Canberra every year. Every year.

“But that’s not what they are doing. Instead, they have decided that another 3 million people will be tacked onto Sydney and another 4 million onto Melbourne over the next 40 years.

“Already, both cities stand out in global assessments of housing affordability & traffic congestion.

“And even if we do manage to stuff an additional 7 million people into those cities, what are we going to do with the other 9 million who will be added to the Australian population in that same period of time? Have you ever heard a political leader addressing that question? Do you think anybody has a clue?

“At the very least, we are going to have to find radical new approaches for infrastructure planning, funding & construction. And that includes energy infrastructure, critical to our economic performance and our quality of life.

“The biggest challenge confronting the energy sector is that climate change policy in Australia is a shambles. At least 14 years ago, our political leaders were told that there was an urgent need to address the crisis in business confidence, in the energy & energy-intensive manufacturing sectors, due to the absence of credible long-term policies to address carbon abatement. It is quite extraordinary, but nevertheless true, that things are very much worse today.”

  • Dr Henry was Secretary of Australia’s Treasury Department from 2001-11, and was appointed a director of the National Australia Bank in November 2011 and chair in December 2015. From June 2011-November 2012, he was special advisor to the prime minister with responsibility for leading the development of the white paper on Australia in the Asian century. He’s a former member of the board of the Reserve Bank of Australia, the Board of Taxation, the Council of Financial Regulators, the Council of Infrastructure Australia and chaired both the Howard government’s tax taskforce in 1997-98 and the Rudd government’s review of the tax system in 2008-09, and he’s governor of the organisation he was addressing above, CEDA.

Links:
23 February 2017: NAB chair Ken Henry’s full speech at CEDA
Unconventional economist on MacroBusiness, 24 February 2017: Australia can’t build its way out of population ponzi
Unconventional economist, 24 February 2017: Bigger cities are engines for inequality
Australian Productivity Commission, November 2013: An ageing Australia: Preparing for the future
Committee for Economic Development of Australia

Attribution: NAB, CEDA, MacroBusiness.

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Institute says Wheeler exit opportune for Reserve Bank policy review

Property Institute chief executive Ashley Church called today for Finance Minister Steven Joyce to renegotiate the Government’s target agreements with the Reserve Bank because of bank governor Graeme Wheeler’s convenient retirement 3 days after the election in September.

Mr Wheeler said he wouldn’t seek a second 5-year term. Deputy governor Graeme Spencer, who’s also retiring, will hang in as acting governor for 6 months after Mr Wheeler leaves.

Mr Church has been a strong critic of Reserve Bank policy for 2 years, and said Mr Wheeler’s resignation gave the Government a timely opportunity to review that policy & its effect on the housing market. He said many of the bank’s decisions had damaged the market and had slowed construction of new homes to a rate well short of catching up with demand.

“While the Government, the Auckland Council & the private sector have all been focused on addressing the supply issue in Auckland, the Reserve Bank has been unashamedly at odds with the market in its attempt to artificially cool demand. Sadly, it’s failed, and has only served to make the problems in Auckland even worse.”

Mr Church said he would like to see the Government add a ‘housing market supply’ clause to its contract with the Reserve Bank, which would require the bank to consider the effect its policies would have on overall supply: “If such a policy had been in place 2 years ago, the disastrous LVR (loan:value ratio) restrictions would have been much more carefully considered – and there would be no talk of debt:income limits on lending.”

Mr Church said he would also like to see the Government move to immediately modify existing Reserve Bank policy, particularly the LVR restrictions on first-homebuyers: “The decision to put LVR restrictions on first-homebuyers has been directly responsible for stopping thousands of Kiwis from buying a first home – and the longer they stay in place the worse the situation gets. We don’t have the luxury of waiting till September till those restrictions go – they need to be removed right now.”

Related story: On the move, February 2017, Wheeler sticks to one term at Reserve Bank, Spencer to fill in post-election

Attribution: Institute release.

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