It is well documented that in the build-up to the financial crisis a variety of risks were poorly understood, poorly managed and badly priced. Since then, transparency has become an increasingly important feature for central banks as a fundamental support for financial system stability.
“Although better market discipline may not be sufficient for financial stability, it is essential, and better transparency is a necessary condition for better market discipline,” said former US Federal Reserve vice-chairman Donald Kohn in a speech in 2011.
While adherence by central banks and regulators to the Basel Accord provides important levels of bank transparency in addition to stock exchange and company account disclosures, information can be hard to pull together in a meaningful manner. And very few central banks have opened up their financial system to public scrutiny to quite the same level as the Reserve Bank of New Zealand.
Public disclosure plays a particularly important role in New Zealand because of the central bank’s ‘light touch’ and comparatively ‘lower-intensity’ approach to prudential supervision, and because there is no explicit government guarantee for deposits, Tobias Irrcher, a policy adviser for the financial system policy and analysis department at the RBNZ, tells Central Banking.
“The sheer volume of disclosure had become very large, and there were some issues about how comprehensible it all was and the fact that it was all in different places. It was difficult to compare one bank with another, and thus banks didn’t come under widespread scrutiny,” adds his colleague Toby Fiennes, head of the financial system policy and analysis department. “We wanted to invent something that was accessible.”
In May 2018, the central bank launched its Financial Strength Dashboard to increase the accessibility of the disclosure information by banks to the public. The dashboard offers a graphical overview of all major banks’ capital positions, liquidity, asset quality, profitability, balance sheet composition and credit concentration. In all, it contains more than 100 individual metrics on the financial strength of New Zealand’s banks.
Along with graphic representations, the central bank provides simple descriptions of the data available to support financial literacy. The data is also provided in an Excel file for researchers to analyse in greater depth. “We had an internal mantra of ‘insights over information’. It’s not good enough to just put numbers in a table on a website and expect users to make sense of that,” says Irrcher.
By improving the accessibility of information and understanding of the risks and strengths of banks’ activities, the central bank believes it has created an incentive for banks to operate soundly. “The dashboard is aimed squarely at putting better information in the hands of all market participants – from sophisticated investors and rating agencies, through to financial journalists, academics and the general public – so that they can more effectively act as a disciplining force on banks,” says Irrcher.
Fiennes adds: “By keeping the public informed about the risks in the sector, the banks hold themselves to greater market discipline.”
The dashboard in practice
For the dashboard to be effective, people need to access and use the information. If this includes professional investors, retail depositors and rating agencies, its effectiveness as a disciplinary force will be greater still.
The dashboard currently receives more than 11,000 visits a quarter – a large increase compared with its predecessor, which typically received about six users a day and 500 in a quarter. More than 30% of the current users are repeat visitors, which suggests a number of people are using the dashboard as a reference tool. “Based on the user statistics to date, the dashboard has successfully broadened the audience for prudential disclosures far beyond the point where it was at before. This is probably the single best indication that the dashboard is having the desired impact,” says Irrcher.
Retail depositors can access this information either directly or through “super-users”, those who use the information for their own purposes or to help others understand risks, such as rating agencies, banking academics and financial journalists, says Fiennes. This improves their ability to make informed decisions on which they bank use.
“When you look at a graphical presentation, some relationships stand out that maybe you were not fully aware of before. For example, the extent of concentration in the banking sector or interesting variations in the opinions of credit rating agencies,” explains Irrcher.
The banks can also use the dashboard to benchmark themselves within the market. “We can now see more about our competitors,” Annis O’Brien, head of external reporting at ANZ New Zealand, tells Central Banking.
Increased usage should also ensure less errors are made, and if they are, they are quickly corrected.
If the rest of the world wants to move towards more transparency and financial literacy, this is one of the best examples I have ever seen
Martien Lubberink, former member of EBA groups and Netherlands Bank
When speaking to the banks, it’s clear that RBNZ data requirements have also improved. “RBNZ have introduced a lot more surveys. They are much more granular, so there is a lot more information in there, and they have improved the definitions of what they want in the surveys,” says O’Brien.
The increase in the amount of data collected means a greater reporting burden. But O’Brien adds: “We’ve had to undertake quite a lot of development to enable us to actually extract the information at the level of detail required, and to develop an automated process to do most of it.”
David Boyle, New Zealand’s former head of education at the Commission for Financial Capability, says the initiative is also more inclusive with the RBNZ’s consultations and discussions resulting in the central bank being “a little bit more inclusive about the activities”: “It has genuinely made a big difference, and it is starting to pay off.”
As a result, it could be an initiative others may want to emulate.
“If the rest of the world wants to move towards more transparency and financial literacy, this is one of the best examples I have ever seen,” says Martien Lubberink, a former member of the European Banking Authority’s transparency and accounting groups and the Netherlands Bank. “In many cases, particularly in Europe, the data is not well structured, not really available, and is a bit patchy or irregular. So it is nice to see that the RBNZ makes that data available on regular basis in a structured format and covering all the banks.”
The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Rachael King, Victor Mendez-Barreira, Joel Clark, William Towning and Tristan Carlyle