View from City Road: Supervisory winds swinging to Brash

Donald Brash, governor of the central bank of New Zealand, is about as far out in central banking terms as his country is geographically. Brash by name and deed, he appears inclined towards abolishing banking supervision altogether, but admits the conditions aren't ripe yet.

In the meantime, in an article in the Financial Times, he said he planned to trim the role of his own bank supervisors because he believed this should improve the soundness of New Zealand's banks.

In the world of bank supervision, the growth industry of the 1980s, this is being rude about motherhood. But Mr Brash makes several points.

He says most supervisory assessments are based on historical information. When the data come to the supervisors, it is probably a year too late to forestall the problem.

In any case, most banking disasters in the last 30 years have been because of fraud or sharp changes in asset prices. Banking supervision is impotent in the face of fraud and not the most effective way of dealing with asset price turbulence.

Mr Brash's most serious charge is that the more intensive central bank supervision, the less bank directors bother, so supervision might actually increase the risk of bank failure.

Throw in claims that the cost of supervision is as much as 14 per cent of a US bank's non-interest costs and Mr Brash sees a good case for cutting back on the whole exercise.

Of course, New Zealand is a small country that is now having a passionate affair with free market economics. (In monetary policy, Mr Brash has a payment-by-results contract with his government.) But the wind may be beginning to blow Mr Brash's way. For example, supervisors seem to be giving up on the idea of detailed regulation for derivatives, because they are so complex, and relying instead on greater disclosure to the market and checks on banks' internal controls.