Foss Craig: Reserve Bank of New Zealand Amendment Bill (No 3) — Second Reading In Committee Third Reading 
Text is incorporated into the Bound Volume 
Foss Craig: Reserve Bank of New Zealand Amendment Bill (No 3) — Second Reading In Committee Third Reading 
[Sitting date: 02 September 2008. Volume:649;Page:18217. Text is incorporated into the Bound Volume.] 
CRAIG FOSS (National—Tukituki) 
: 
 Further to what my two colleagues have said yes we are speaking on Part 1 of the Reserve Bank of New Zealand Amendment Bill (No 3). I will cover some specifics and I have some questions I would like to ask of the Minister in the chair Chris Carter about these matters. I look forward to his clarifying some of the issues.  
The principal Act is the Reserve Bank of New Zealand Act and I would particularly like to talk to clause 6 which substitutes a new section 16 “Dealing in foreign exchange by Bank”. Clause 7 then talks about foreign reserves. Another bill recently clarified that for the Reserve Bank; I cannot quite remember its correct title. This bill is a clarification actually of what the Reserve Bank does of what it is allowed to do and of which agents it can use or can use it.  
But I would be interested to ask the Minister if the Ministry of Education was ever dealing in foreign exchange for example whether it would deal in it via the Reserve Bank or the Debt Management Office or whether it would deal in it direct because that perhaps would give us a clue as to some of the efficiencies in the Public Service. There would not be any point in the Ministry of Education buying foreign exchange through a particular trading bank for example or the Ministry of Health selling foreign exchange through the same trading bank because the bank would be the winner there at the end of the day. So I would like the Minister in the chair to clarify that. I imagine he knows about the Ministry of Education; I would like to think so.  
Clauses 8B 8C and 8D just provide detail. They talk about the removal of the governor or the deputy governor and the disqualification of them—that is they cannot have a vested interest or shares or an equity holding in or be exposed to non-bank financial institutions. That obviously makes sense as suddenly the Reserve Bank will be the regulatory arm for those institutions. That is I think identical language to that used to describe what those individuals are able or not able to be or to have in relation to existing banks which is to be shareholders or to have substantial stakes in those banks—or at least they must declare any stakes that they may have in them. It is quite difficult in the very thin stock exchange and equity market that we have for those individuals to not have some investments in those banks but I am sure the investments are in blind trusts or something like that.  
I would ask the Minister in the chair whether he could expand a bit on new section 68B “Bank to have regard to directions about government policy objectives” inserted by clause 10. My colleague Chris Tremain spoke about this a little. The bill has gone through a few drafts to be fair but when it first came to the Finance and Expenditure Committee one interpretation of it—and again I alluded to this in my second reading speech—was that there was possible politicisation of monetary policy here. The extreme example of such politicisation was Robert Muldoon and the old reserve asset ratios. If he wanted to pump the economy up in an election year funnily enough he would change those ratios.  
In fact what we originally saw here was the ability of the Minister to virtually influence the Reserve Bank in a bit of a roundabout way to change the cost of capital to certain institutions. Now that is totally unacceptable and I covered the reasons why it is not acceptable in my earlier speech. But if it was an election year—as for example it is right now—and the Minister of Finance in an extreme example wanted to pump things up he could have got on the phone to ask for some policy advice from the Reserve Bank governor and said: “Hey this is a request for policy advice. We think the housing market needs to go up again. What do you think?”. The Reserve Bank governor was obliged to respond to that question and the Minister of Finance could have given him directions.  
Things are a lot tighter in this final version of this bill to be fair. However I would like the Minister in the chair to answer some of the questions about exactly how that process would work. If possible I ask him to give us an example of the policy questions that the Minister of Finance may ask the Reserve Bank governor and to describe the way that that process would work including the checks and balances in it with reference also to the banking side of the economy which is of course the larger one.  
Many people who are exposed to debt and who have borrowed from the many non-bank institutions are as a previous speaker alluded to actually very very vulnerable. We saw in the  
Dominion Post 
 today that a little finance company—I think it was in Porirua or Taita—is advertising interest rates of 8 percent per week. When compounded that 8 percent actually translates to something like 400 percent per annum—I think in that example the paper just used a blind and multiplied 8 by 52 and got a figure of 400-odd percent per annum. The finance company declares the rate per week on its board at the front of its office. The problem is that although the company has actually been up front about its hugely exorbitant interest rates many people do not see the distinction between the weekly rate and the rate when compounded per annum. That company because of its exorbitant pricing and because it is taking advantage of the vulnerable is up against the Commerce Commission. I also understand that there are some quite extreme collateral obligations around those companies which now they have been publicised will be investigated I am sure. 
Tim Groser 
: Hopefully. 
CRAIG FOSS 
: Yes hopefully.  
I will now talk to clause 11 which inserts a new Part 5D. I do not know why all this has happened. I guess it was to get the bill through more quickly with fewer parts to talk about. But there are many new parts of the principal Act in there that I would like to talk to—particularly the credit rating provisions set out in new sections 157I 157J and 157K. I would like the Minister to answer a few questions and give us his thoughts on who should be an approved credit rating agency how they should be reviewed and what criteria the Reserve Bank would look at when approving them. I would also like the Minister to step up and say whether that means that some existing credit rating institutions in New Zealand should be put out or at least blacklisted as some others should come in. As Chris Tremain mentioned earlier many of the failed institutions did actually have credit ratings but they were not worth the paper they were written on or the TV ads they were portrayed on.  
Again to be fair once the select committee went through various drafts of this bill that area was tightened up a lot. It was good practice all round and I would like to acknowledge the officials here too. I thank them for all of the work that they have done around this bill and many others.  
I would also like to speak to new section 157L which is about governance requirements. Many submitters had concerns regarding the cost of compliance to them and as I alluded to earlier there is a danger here that this is seen as an implied guarantee of deposits by the Reserve Bank—a deposit insurance. Another downside is that it is skewed against the smaller financial institutions which may be quite robust very conservative and below the radar but which now have to front up to all the costs of getting a credit rating managing the governance requirements and changing their deed to allow for the capital adequacy ratios etc. The larger institutions of course have a larger back office and plenty of lawyers to do that stuff for them and they have more depositors to spread the load over. There is a problem here with regard to the smaller ones and we have to be very careful that we are not skewing the playing field against some quite robust institutions.  
As we go through Part 1 I would also like to speak about risk management. As long as institutions declare what they are investing in and that is public and open—that is it is clear what the risk is—that should be fine for many of these institutions. The problem we have recently seen is that the risks were not put up front. So yes this bill provides a framework and the Reserve Bank will monitor the companies allowing them to invest in whatever they may like. The legislation is not very prescriptive on that as long as the risks are declared. That is the balance between full prescriptive parliamentary regulation and the belief in caveat emptor which we spoke about earlier and I think it is a pretty good fit down there. The good point—it is somewhere else in the bill; it might be in another part—is that it will be reviewed in 5 years. That is very good.  
I know many people do not understand the minimum capital requirement. It is quite technical but here is a simple example. If a bank or one of these institutions wants to lend to a business it has to have 8 percent of that capital sum allocated and put aside in case there is a default somehow. But if it is lending against a residential home it has to have only 4 percent of the same amount of capital put aside. When one looks at that one can understand why many people borrow against their own home in order to fund their business. New Zealand is a nation of small and medium sized enterprises and many business owners actually put their own home at risk in order to fund their business. One can see why they do that because the cost of borrowing against their own home is cheaper than if they were to borrow against the cash flows of the business. The monetary inquiry is looking at some of those issues at the moment. Many people approach this the wrong way. The point is that people are taking a risk with their own assets—be it their own home a second home or a third home—in order to invest in a business. So those people are taking much more of a risk than their bank whichever one it may be.