Saturday, 16 November 2013

Book excerpts - CRISIS - by New Zealand Reserve Bank Governor - Alan Bollard - published 2010

Excerpts from book - CRISIS - by New Zealand Reserve Bank Governor - Alan Bollard - published September 2010.

Part of review from New Zealand Press Association 4/9/2010
Bollard tells story of crisis while still in office Reserve Bank of New Zealand Governor Alan Bollard admits it is a risk writing about the global financial crisis while he is still in office and events are still unfolding.
But the process of creating his book, Crisis: One Central Bank Governor and the Global Financial Collapse, and oral history recordings that triggered were cathartic. They clarified "the fog of war" and how he felt about the biggest challenge of his career, he said.

"It was quite unusual and I had to think about it carefully. There were a few things I couldn't say," he said.

From book preface & pages;

Preface - I have also tried to be scrupulous to ensure that I have written nothing on New Zealand that could not have been made public under the Official Information Act; indeed, much of the official policy is already in the public arena. This means at times the book is less revealing than it might otherwise be. We hope its no less insightful and interesting.

*Pg 19-20 - “Banking practices differ around the world, but we ensure ours meet international standards. These are set by a somewhat shadowy group called the Basel Committee on Banking Supervision. Comprised of representatives of large countries( not including New Zealand ), the group meets in Switzerland at the Bank of International Settlements (BIS).”

*pg 98 - Agreed convention at the Bank of International Settlement means that what is said in the room stays in the room.

*pg 69 - We had lived through the biggest shock to the financial system since the Great Depression. But a financial shock of this magnitude was clearly also going to cause significant economic damage. This effect first showed in the large, northern, developed economies with the biggest financial sectors. The festering finance problems were flowing into the non-financial sectors, what we call the “real economy”.

*pg 186 - The worlds financial system and the worlds economy are inextricably linked; a banking crisis hurts growth in the “real economy”.

*pg 145 - For the first time as an economist, I started seriously to wonder about just how tenuous our Western market-based world might be.

*pg 44 - Many overseas bank regulators spend their time sitting inside their target banks, poring over customer accounts. We have a more light-handed touch. We rely on a deep understanding of bank processes and we require a considerable amount of information which must be signed off by their directors. So far this system has worked well.

*pg 148 - The New Zealand business sector had been suffering. Profits were down across the board, staff lay-offs were in progress, investment had halted and firms were finding it hard to get funding. This was worsened by the banks’ response to the crisis, which had been to cut lending, abandon committed lines of credit and impose onerous terms and conditions on banking covenants.

*pg 157 - Another governance worry related to the power and competence, or lack thereof, on the part of banks chief risk officers and risk committees. These officers assess the possible outcomes from any deal and decide whether the risks are acceptable under the banks mandated policies. We were now hearing about cases where risks had been miscalculated, procedures bypassed and officers overruled, all in the race for higher earnings.

*pg 165 - Bad debts had started to emerge on their lending books. Most of these concerned small businesses or farms where borrowers had over-committed themselves at a time of high property and farm prices. There were also residential mortgage defaults followed by evictions and mortgagee sales, but these were mercifully rare. Foreclosures attracted considerable media and political criticism.
In the case of some of the agricultural defaults, we felt that certain banks had been over-optimistic and under-analytical in their lending, and we moved to tighten some of the relevant capital requirements for the future.

*pg 183 - “In self-interest, banks may encourage New Zealander’s to take on more debt than is good for them individually or deliver more external liability than is good for the country.”

*Pg 120-1- Meanwhile, on 6 March a senior team from the Wellington made its three-monthly trek across Bowen Street, along the walkway above the Cenotaph, through security checks in the Beehive and across to the ornate old Parliament Building to Committee meeting rooms. Here, committees of parliamentarians from across all parties routinely advise on upcoming legislation and examine public bodies on their use of public funds. We are used to appearing before them as they regularly examine our Monetary and Financial Stability Reports. But this session was different. As was their duty on behalf of the taxpayer, they wanted to talk about the crisis, the steps we were taking and the costs and risks for government. The 2008-intake Finance and Expenditure Committee under the chairmanship of Craig Foss was seriously focused and prepared to put aside political differences during the crisis.
I was worried about what might happen at the session. Proceedings are on the record with journalists sitting in the back, television cameras rolling, digital recorders running and even media blogging live from the room. Select Committees have strong powers - they can require people to attend and answer questions. I knew that I might be asked questions about exchange rates, foreign reserves, bank liquidity and a whole range of topics on which straight-forward answers could upset financial markets. The day before the hearing I rang the chairman and explained my concern. Craig Foss has a background in financial markets; he readily understood the dangers and assured me that he would guide the Committee away from dangerous questions in public.
They treated us deferentially. (they even started calling me Sir:) I sat with Deputy Governor Grant Spencer and our head of financial Simon Tyler, at the front committee table, our desk almost beneath microphones and recorders. In carefully moderated terms, we told them about the crisis. We explained how, partly because of the new mortgage-backed security liquidity facility, the Reserve Bank balance sheet had grown hugely to $36 billion; this had increased risk to the government, but by a very manageable amount. Then they inquired about a small company called Mascot Finance, which was in the news because it was making losses. Though a very small player, we were soon to be hearing more about it.

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