Transtasman banking regulation is a pressure point in our relations with Australia.
Listener: 18 June, 2005
Keywords: Macroeconomics & Money;
More than other overseas investors, banks can quickly withdraw their key assets. The foreign owner of a factory, farm, forest or beach-house can go off in a huff, but the physical entity remains. Financial assets are much more mobile.
Once we may have thought that banking regulation needed only transparent publication of each bank’s financial status, and the Basle rules – international requirements that set out minimum standards in a bank’s balance sheet. But, consider a big bank getting into a right proper muddle elsewhere, and desperately needing cash to shore up its position. So it raids its New Zealand branch, converting its assets into international currency, and leaving the branch calling in loans to rebalance its accounts. How are we to prevent an overseas mistake screwing up the New Zealand economy (as the collapse of the Bank of Glasgow in London did in 1878, precipitating our long depression)?
Of course, such an event is very unlikely to happen, but we can’t simply rely on the good sense and protocols of the banks, especially if many are overseas-owned. Some 85 percent of our banking assets are held by Australian banks. Local boards need to have duties to, and be accountable for, their bank in New Zealand. Not so long ago, Prime Minister and Minister of Finance Rob Muldoon would ring bank boards and bully them for his short-term political objectives. Would today’s boards be better able to withstand bullying from their overseas head offices? Without New Zealand regulation, there would be little to stand in the way.
The banks grumble that they face two sets of regulators – here and Australia. The two countries have different regulatory regimes. Australia addresses the same issue with much more restrictive regulation: foreign-ownership control of Australia’s major banks is banned altogether. More subtly, the Australian banks appear to be less politically effective with our government than Australia’s. Certainly, Australian Treasurer Peter Costello is taking a tougher line on a single transtasman regulator than our Minister of Finance Michael Cullen.
That was evident in their public presentation. A journalist asked them if it was a case of an ambitious Australia and a cautious New Zealand. Costello replied, “No, you’re facing two amorous friends who move and respond in the way good relationships operate.” Cullen shot back: “Everyone knows I am not quite as ambitious as Treasurer Costello” – a reference also to Costello’s hopes of replacing John Howard as Australian Prime Minister. “Not quite as amorous, either,” Costello said.
Costello’s ambitions extend to placing banking regulation at the top of the transtasman policy agenda. Unless it is resolved, there may be no progress made on other matters. Suppose we conclude that we need a local base for the regulation. Would it matter if we were obdurate?
We can overstate the importance of the Australian economy to us. (We are not very important to Australia. A recent London Economist supplement on Australia did not even mention the New Zealand economy.) Certainly, it is our largest single export market, but it is only a fifth of the total. (In some sectors, such as banking, the Australian investment penetration is somewhat greater.)
But as recently as five years ago, the European Union was our largest export market, and I shan’t be surprised if in 10 years’ time both are trumped by China. A little commented upon effect of a successful Doha Round is that the tariff preferences we give to one another will be diluted. That means that both countries will export less across the Tasman and import more from Asia. Of course we will export more there, too.
On many non-economic dimensions, such as international diplomacy, Australia and New Zealand need to work together – and play together: I am a fan for Closer Cultural Relations. But, as in military matters, we have quite different objectives. It may see itself as an American deputy sheriff – a little American economy in our part of the world. We will never be so big, and have to think small and act smarter. The transtasman relationship needs to be like two good friends, who, depending on circumstances and objectives, sometimes go together, sometimes go their different ways. Not amorous, but amiable.