Having steered New Zealand through the global financial crisis Reserve Bank Governor bids farewell to his ‘cool job,’ writes Brian Fallow.
For the past 10 years it has been his signature printed on our money and his job to ensure that when bank notes wear out they are still worth, near enough, what they were when they came fresh from the mint.
Being Governor of the Reserve Bank is a “cool job”, Alan Bollard said at a farewell reception on Thursday night.
“Not many people can say that they have billions of dollars in the basement.”
But the last thing a central banker wants to hear – as he did at one point at the height of the global financial crisis – is calls from banks to send them more cash, fast.
In the event, no bank run eventuated. New Zealand got through that scary period without a banking crisis.
Was that by good luck or good management?
Both, Bollard says.
“It was luck in the sense that Australasian banks had had periods when they had difficulties some decades before and they had learned from that.
“And at this time they were operating [in] a reasonably conservative way.”
But it was also good regulation.
The Reserve Bank and its transtasman regulatory counterpart, the Australian Prudential Regulation Authority (APRA), were “on top of what we needed to do as well”, assisted by the vanilla nature of banking in this part of the world.
The big lesson of the crisis, Bollard says, is that the vulnerability of the New Zealand banking system lies in its reliance on overseas funding.
Some of those funding markets froze during the GFC, requiring the Reserve Bank to open, in a discreet sort of way, its equivalent of a pawnbrokers’ window for the banks.
“It wasn’t about fancy instruments or bad governance. It wasn’t about off-balance-sheet stuff.
“It was about the potential vulnerability of that overseas funding, the medium-term secured and unsec-ured funding, especially out of Euro-pean markets, which are important.”
The Reserve Bank has responded by strengthening banks’ liquidity requirements and imposing a core funding ratio which requires them to get most of their funding from retail deposits and longer-term wholesale sources.
The height of the crisis four years ago coincided with an election and change of government – “a time when the convention is you don’t make big decisions when you can avoid them”.
But the leadership of both major parties behaved well, Bollard says.
It was not until the worst was over and he sat down to write a memoir, Crisis (recently updated and republished), that he came to understand the bigger picture, not apparent when dealing in real time with the flow of “nasty stuff” from the Northern Hemisphere.
“That was a cathartic exercise and also quite an explanatory one for me.”
The new edition ends on a sobering note: “We thought the plague of the global financial crisis had been defeated, only to see it mutate into a new form in Europe – the bacillus of sovereign debt. Could this in turn find its way back to the marketplaces of Asia?”
When Michael Cullen appointed him Governor in 2002, losing in the process his Secretary to the Treasury, there was a view fairly prevalent on the left of politics that too-stringent monetary policy had been hobbling economic growth and costing jobs.
It was time to collect the dividend from conquering inflation and “give growth a go”.
Bollard’s policy targets agreement redefined the inflation target as keeping future inflation in a one to three per cent band, on average over the medium term.
He has used all of the flexibility that gave him.
Annual Consumer Price Index inflation has been above 3 per cent on several occasions, in all for nearly four of his 10 years, and the average rate has been 2.6 per cent.
This is no heedless inflation hawk.
No one can expect to hold the helm of a central bank for 10 years and never put a foot wrong, especially when they have to contend with “an almighty world boom followed by an almighty global bust”.
“About 2006, we thought we were on top of the housing boom.
“It was a funny period because there was one soft year and then it belted away again.
“And so we had to go higher [with the official cash rate] and that was quite damaging,” he says.
“Should we have gone stronger earlier?
“Well, we were worried about the exchange rate and many of the people who are criticising us now were critical then that we were going too high too fast.”
It was a period when the kind of macro-financial tools officials are now working on could have been valuable.
“We weren’t really on to all of that. Nor was anyone else,” he said.
“But one other thing. We could have been more intrusive behind the scenes with banks, jawboning, if you could call it that.”
The Reserve Bank took that approach with the banks when it saw a bubble emerging in farm lending in 2007 and 2008.
“We got the response we needed. We possibly should have done it earlier.
“I was a bit surprised the Reserve Bank would need to do something that also looked to be in the banks’ own interest.”
Perhaps because he is a former chairman of the Commerce Commission, Bollard has seemed comfortable in a regulatory role, whose ambit has expanded from the banking system to finance companies (once they started dropping like flies) and insurance companies (just in time for the Christchurch earthquakes).
Earlier in his term, he had to fight off a pretty determined effort to outsource the regulation of the Australian-owned banks to APRA, when he set about strengthening the governance roles for their New Zealand boards and their operational resilience in the event of problems with their parents.
“That all produced a political reaction along the lines of, ‘Why can’t we regard New Zealanders as honorary Australians and treat bank problems under Australian law and regulate them purely from Australia and if there is a problem have the Australian Government work through a solution and then send New Zealand its share of the bill?”‘
Bollard stood fast against that one.
BOLLARD’S PARTING SHOTS
On the high dollar
“Ultimately a lot of the pressures on the exchange rate are because New Zealanders want to own their own homes and are happy to borrow from foreigners, thus requiring big inflows of capital.
“We shouldn’t complain about that while we are at least partly contributing to it.
“I say ‘we’ in the sense of we New Zealanders not we the Reserve Bank.
“The mates I would like to see [for monetary policy] are New Zealanders, saving.”
On the monetary policy framework
“The Reserve Bank Act is completely fit for purpose. We are flexible inflation targeters.
“That means we focus on inflation but we can take other things into account, and we do.”
On what can be done about the exchange rate
“We have always said that one of the tests for intervention is: can you make a difference?
“A lot of the drivers are actually international events, with huge flows as a result of quantitative easing, exchange rate policies of other large countries and the ‘risk on’ drivers around the eurozone.
“If those are the drivers there is not much New Zealand can do to influence things.
“Macro-financial instruments [temporary curbs on banks to lean against emerging asset or credit booms, so that interest rates don’t have to work as hard] could be useful under some circumstances.
“I don’t see the circumstances there at the moment.”
On what monetary policy can do
“People expect too much of monetary policy. I came in, and I leave, with less expectations than some.
“To me it should be about delivering price stability and financial stability.
“We have focused on the first in the first five years [of my term] and the second in the second five years.”
On being thistledown in a gale
“None of us likes being in a situation where New Zealand is bobbing around in volatile world and there is limited stuff we can do about it.
“Sometimes I get frustrated that people think we can do more than we believe is possible.”
On the near-term outlook
“There is stability in the latest forecasts and interest rate track. But stuff will happen. We know it won’t all be like that.”
On what he wishes for new governor Graeme Wheeler
“A bit of boredom and time to reflect is really helpful. I haven’t had enough of that.”