Capital Review - Part 8 public workshops

2 Contents Executive Summary 3 Background, Objective and Methodology 6 Understanding the context of public sentiment 9 Perceptions of the Reserve Bank proposal 15 The public’s perceptions regarding different stakeholder groups 18 The public’s perceptions regarding different financial personas 21 Summary 24 Appendix One: Financial Scenarios 25

3 Executive Summary Introduction Tasked with exploring public sentiment towards the Reserve Bank of New Zealand’s (Reserve Bank) proposal to increase the amount of capital owners invest in their banks, Kantar New Zealand (NZ) undertook three deliberative workshops with members of the public in Auckland, Napier and Christchurch in August 2019. This exercise clearly displayed that the public are capable of understanding the issues and trade-offs resulting from the proposal, however will need considerable engagement to persuade them as to why they should connect with this topic. In addition to a range of observations regarding how to engage the public successfully, the project uncovered the key drivers of support and opposition to the proposal, as well as identifying the key features such as age and location by which this support can vary. Based on what is only a qualitative sample, New Zealanders over 30 years old were strongly supportive of the proposal and this was based predominantly upon the future safeguarding of families and children, and a desire for personal and social protection from a major event. Alongside this support, two specific groups commonly warranted specific understanding and prioritisation given their importance to the NZ economy and the potential negative impacts of increased debt servicing costs, i.e. small businesses and farmers. Research methodology A topic of this nature required a qualitative approach, as it is exploratory and used to gain an understanding of complex processes, decisions and drivers of behaviour and perceptions. This is in comparison to a quantitative approach which is better used to measure the same but with less depth and detail. A key challenge on this study was the ability to engage a cross-section of the NZ public with a topic that is both complex and polarising. To address these challenges, Kantar employed a deliberative approach – a type of qualitative method – to provide participants with enough time and resources to consider the proposal in-depth, including the costs, benefits, potential long-term consequences and the trade-offs they would be willing to make. A deliberative workshop has many of the characteristics of a qualitative focus group, however the emphasis is on participants’ viewpoints after they have had the opportunity to ‘deliberate’ the issues (compared to traditional qualitative methods that seek to understand current viewpoints). Taking participants through a deliberative process provides a different type of evidence: one based on informed and considered opinions derived through processes that explore the reasons that people feel the way they do. This makes the outcomes of deliberation particularly valuable for decision-makers interested in understanding what lies behind public attitudes and values. Ultimately, deliberative workshops were selected as a methodology because:  The proposal involves complex issues, and there is uncertainty and conflicting beliefs and values  The proposal requires trade-offs between differing options and, by working together, participants could explore in detail the implications of alternatives to result in a better-informed decision  The Reserve Bank recognised that it required informed input from members of the public to help inform final decisions in the Capital Review.

4 Deliberative workshop structure A deliberative approach can typically be broken down into three stages – information sharing, discussion to develop understanding, and deliberation – and these were broadly used across the three deliberative workshops, with the general public, held in Auckland, Napier and Christchurch. The workshops were four hours in length, double the time of a traditional focus group and, following an introduction, Kantar took the participants through five stages:

1. Decision Making Processes: this session was used to understand how participants inform themselves and work with the information they have regarding policy or issues of national interest
2. Educate: Kantar presentenced respondents with a range of necessary information to inform the discussion
3. Detailed Appraisal: to understand the public’s attitudes towards the issue, the key issues driving those attitudes and the trade-offs they prefer
4. Wellbeing: to understand perceptions of the physical, mental and social impact of banking crises
5. Conclusion: to bring together individual’s position on the issue and communicate this clearly and personally. The information was presented by Kantar’s facilitators who also led the discussions. More information on the stimulus that was employed across different stages of the sessions is provided in the following section. Key findings The baseline level of engagement on this topic is low One of the key findings of this study is that there are a number of contextual features which demonstrate why the baseline level of engagement on this topic is low among the NZ public. Firstly, the public do not readily understand the potential personal and broader social impacts of a potential bank failure i.e. a bank failure impacting a government’s ‘social’ spending and a bank failure impacting an individual’s financial wellbeing in terms of either lost savings or a foreclosed mortgage. This lack of understanding of impacts strongly limits the ‘How does this impact me?” driver of engagement. In the absence of this understanding it is difficult to see any general public majority support for the proposal. The public also don’t always see the bigger picture on this issue, most specifically the downstream impacts and trade-offs that exist across different groups in society. For example, the Auckland youth engaged with on the study could not relate to a long-term lifetime value perspective and could only focus upon the short-term negative impact of interest rate and price increases upon individuals. Across the workshops, there appeared to be little residual impact of the 2007/8 Global Financial Crisis (GFC) in the public domain. The belief that New Zealand came through the GFC “…in pretty good condition” was widespread and therefore had little impact on participants’ views on the proposal. A further feature that impacted engagement regarding the proposal was the number of significant issues that are currently vying for the NZ public’s attention. The cost of living, housing availability and affordability are taking significant mindshare, and more recently high-profile conscience issues

5 such as climate change, euthanasia, and medical marijuana are further crowding the market for issues of national concern. Perceptions of the Reserve Bank proposal do vary As noted in the introduction, New Zealanders over 30 years old were strongly supportive of the proposal and this was based predominantly upon the future safeguarding of families and children, and a desire for personal and social protection from a major event. A skew towards the younger demographic at the Auckland workshop appeared to lead to a strong focus upon the immediate costs from the proposal over any long-term effects. While concern about the impact upon farmers and SMEs was frequently mentioned, the dominant barrier was the high sensitivity that Auckland youth have around their ability to afford a house and anything that makes this more difficult. All but two participants in both Napier (mixed life stages) and Christchurch (an older demographic) supported the proposal. In Napier, there was a greater incidence of parents which impacted overall sentiment with a large number supporting the proposal as it was seen as worth incurring a small cost now for the future safeguarding of their families and children. Meanwhile, the financial and mental impact of a catastrophic event, and a desire for protection and safety weighed largely upon the perceptions of Christchurch participants, which is potentially connected to participants’ exposure to the 2010 and 2011 earthquakes. In both Napier and Christchurch there was also support for a staggered/gradual rollout of the increase in the amount of capital owners invest in their banks to minimise the impact upon at risk groups such as SMEs, farmers and low-income earners. The key reasons to support the proposal included: the trade-off being worth it, the pain being short￾lived and manageable (there was an incorrect assumption that there would only be five years of higher interest rates, but it is important to recognise this perception), the increase would become the norm very quickly, and now was the right time (with interest rates currently being low). The key reasons to oppose the proposal included: the downside in terms of sector risk and economic impact, there was some concern it wasn’t required in the first instance, the belief that bank profit meant bank strength, the objection to higher interest or downstream costs, and the belief that the future is so uncertain you could implement the proposal and there is still a risk.

6 Background, Objective and Methodology Background and Objective The Reserve Bank began a review of the capital adequacy framework applying to locally incorporated registered banks in 2017. The aim of the Capital Review is to identify the most appropriate framework for setting capital requirements for NZ banks, taking into account how the current framework operates and international developments in bank capital requirements. In December 2018, the Reserve Bank published a consultation paper seeking feedback on proposed higher capital requirements for locally incorporated banks. As part of the next stage of the Capital Review, the Reserve Bank commissioned Kantar NZ to carry out qualitative research with members of the public to get additional insights about public attitudes towards risk in the financial system, the pros and cons of reducing risk, and the capital proposal announced in December 2018. This will be used to help inform final decisions in the Reserve Bank’s Capital Review, alongside other information and analysis carried out during the Capital Review. The overall project objective can therefore be summarised as: To learn about the views of members of the public with respect to risk in the financial system, the potential trade-offs involved in reducing risk, and the capital proposal announced by the Reserve Bank in December 2018. Methodology Kantar NZ undertook three deliberative workshops with the general public in different NZ centres. A deliberative workshop has many of the characteristics of qualitative focus groups, but the focus is on participants’ viewpoints after they have had the opportunity to ‘deliberate’ the issues (compared to traditional qualitative methods that seek to understand current viewpoints). Beyond achieving deliberation, there were two further objectives that the design of these sessions had to achieve. Firstly, they needed to engage the public in a topic that is rarely considered, and secondly, they needed to ensure a consistent level of baseline technical understanding of the topic. For these reasons, three four-hour deliberative workshops were run which took 14-15 members of the public (44 in total) through a range of stages and activities, beginning with education regarding the issues and risks relevant to the proposal to increase the amount of capital owners invest in their banks, an introduction of a range of methods for working with trade-offs and then the roleplaying of a variety of impacted stakeholder groups and financial personas. At the conclusion of this, and the surrounding debate, each participant was in a position to express their preferences around the proposal from an informed and considered perspective. The participants across the project represented a mix of ethnicities, urban/rural and employment status. Each was recruited by a professional research recruitment agency and received a $300 cash incentive for their participation.

11 Contextual features impacting engagement regarding the proposal  The public do not readily understand the two different forms of potential personal and broader social impacts of a potential bank failure i.e.

• A bank failure impacting a government’s ‘social’ spending
• A bank failure impacting an individual’s financial wellbeing in terms of either lost savings or a foreclosed mortgage  This lack of understanding of impacts strongly limits the ‘How does this impact me?” driver of engagement. In the absence of this understanding it is difficult to see any general public majority support for the proposal  People don’t always see the bigger picture on this issue, most specifically the downstream impacts and trade-offs that exist across different groups in society. Similarly, possessing an understanding of both the long and the short-term is a key feature of understanding capital requirements as an issue, and it is a significant shift in thinking for many people to move to ‘200 years and the group’ as opposed to ‘…right now and me’  Auckland youth (and we see no reason to believe this would not apply to youth elsewhere) could not relate to a long-term lifetime value perspective and could only focus upon the short￾term negative impact of interest rates and price increases upon individuals. This hyperbolic discounting and more narrow interest were notably absent among older participants in the research  Based upon the qualitative sample in this study, there appears to be little residual impact of the GFC in the public domain. People don’t feel it or know people who suffered directly from it, or if they do cannot attribute it to the GFC in a way that they understand. Lastly the belief that NZ came through the GFC ‘…in pretty good condition’ is widespread “It was likely wealthy people who could afford to lose who lost…not us” This somewhat blunts the impact of the GFC as a reference point to justify these proposed changes.  Capturing the attention of New Zealanders on significant national issues is a crowded marketplace. Most commonly the environment or broader sustainability issues dominate people’s concerns and is an issue which connects powerfully on all of the engagement drivers mentioned above  The cost of living, housing availability and affordability also take significant mindshare, and more recently high-profile conscience issues such as climate change, euthanasia and medical marijuana are further crowding the market for issues of national concern.

12 Trade-offs as a barrier An inability to see a larger network of effects and/or to do so over a longer time period than an individual’s conventional horizon is a barrier to engagement with this topic. Central to this barrier is the challenge of understanding trade-offs, either:  Over time i.e. some cost incurred now for a future gain  Between groups i.e. increasing the risk exposure or cost for one group in society relative to another  Across different priorities for government spending, most pointedly providing financial support in the event of a bank crisis vs. ‘social’ spending None of these are in themselves beyond the general public’s ability to work with – and the examples and exercises used in the research strongly supported this conclusion. However, it is equally clear that this is far from a standard mode of analysis for people as it involves not only the initial effort of becoming informed but then further effort in structuring one’s opinion. The requirement for this ‘System 2’ processing (effortful, slow and controlled) is clearly a barrier to engaging with the general public. In comparison ‘System 1’ processing is automatic, intuitive, and often heuristic based. As such, it is in the interests of any stakeholder group to this debate to convert their point of view in this way. Insurance as a simile System 1 processing – automatic, intuitive, heuristic-based – occurs without the knowledge of the individual and offers people the ability to quickly process the information they require from their environment without unnecessary or burdensome cognitive effort. A notably successful example of this as it relates to the arguments for and against the proposal to increase the amount of capital owners invest in their banks is the simile of the proposal as a form of insurance. This is a common and understandable way of comprehending the trade-offs at an individual level i.e. is it worth it for me? The increased cost to the individual by means of higher interest charges or potentially lost savings returns are the equivalent to the premium, and increased protection from a major financial event is the outcome you are purchasing. All participants spontaneously and readily understood this comparison. What this doesn’t achieve is greater cognitive ease in terms of trade-offs across groups of society, or between different categories of government spending which is less well suited to this type of mental shortcutting.

13 Attitudes towards banks and the Reserve Bank There is some suspicion and cynicism regarding banks and their trustworthiness and motivations “They are pure capitalism” “Symbols of corporate largesse” “They represent power and control” “Everyone thinks that banks are there for us, but they are there to make money for their shareholders” “Why do we have to bail out the banks? Iceland jailed them” Also, the nature of their business practices that take on higher levels of risk than individuals or other businesses would do can cause discomfort among the public: “There are no consequences for the banks” “If I can go to jail in my job for getting it wrong…why can’t they?” “You don’t mortgage your house 3x over [but they do…]” Regarding the issue of local vs. Australian ownership of local banks, there is a strong sense of injustice or unfairness among some. This can take individuals away from an assessment of the case for or against the proposal by introducing an emotive overlay which can be a distraction. Trust in the independence and therefore competence of the Reserve Bank was strongly questioned in Christchurch. “I’m looking at their website right now….it is naïve to say that they are independent” “If the Reserve Bank is influenced in any way then I worry about them” “I trust the banks more than the government” “Their integrity is questionable” Common misperceptions in assessing the proposal

1. Increased capital requirements would result in an increase in money going overseas… “Aren’t we just taking a dollar off NZ and giving it to Australia?
2. The nature of bank confidence and the consequences of that… “So why don’t the banks have to tell the government when they are close to defaulting?”
3. The relationship between capital requirements and long-term insolvency risk “What about just making it 3% instead – then costs would go down?” Understanding influence channels An introduction to and understanding of an issue comes from sources such as TV coverage, the press and social media. Deciding upon where one stands on an issue however also draws from:

14  The moral compass and/or value set of the individual. Personal orientations such as self vs. group, a broadening of perspective with age, political persuasion and socio-economic status were all on display in responses to the proposed capital reforms  Someone's own experience. If an individual is in, or knows of, the key impacted stakeholder groups e.g. farmers, retirees, SME owners then this is key in forming opinions  The credibility of a source. There is a strong and widespread cynicism and awareness regarding the subtle influence and sway of media channels driven by their vested interests. Consequently, there is a strong suspicion of social media and the vested interest and control behind many media channels.

15 Perceptions of the Reserve Bank proposal Overall preferences by region and lifestage Auckland – younger The younger demographic skew in the group appeared to lead to a strong focus upon the immediate costs from the proposal over any long-term effects. While concern about the impact upon farmers and SMEs was frequently mentioned, the dominant barrier was the high sensitivity that Auckland youth have around their ability to afford a house and anything that makes this more difficult. As such this group was on balance opposed to the Reserve Bank’s proposal. Napier – mixed lifestages All but two participants in Napier supported the proposal. The greater incidence of parents within this group was notable and impacted overall sentiment with a large number supporting the proposal as it was seen as worth incurring a small cost now for the future safeguarding of their families and children. Also commonplace in this group was the belief that although there are short-term costs incurred, these were outweighed by the potential negative impact of a major financial event. Finally, the call for a staggered/gradual rollout of the increases was most frequently heard in Napier in order to minimise the impact upon at risk groups such as SMEs, farmers and low-income earners. Christchurch – older As in Napier, all but two participants were in support of the proposal. The financial and mental impact of a catastrophic event, and a desire for protection and safety weighed largely upon the perceptions of Christchurch participants, which is potentially connected to participants’ exposure to the 2010 and 2011 earthquakes. Again, there was some support expressed for a staggered rollout to minimise the impact upon some groups.

16 Key reasons to support the Reserve Bank proposal

1. The trade-off is worth it “A bailout would be worse than the costs”
2. The pain is short-lived. (Although this is incorrect, it is important to recognise the perception) “It’s only 5 years of higher interest rates for a lifetime of increased safety” “It will only cost banks for 5 years but it [a bailout or savings loss] will costs us forever – it is totally disproportionate” “This is a 5-year plan to protect our kids” “It’s a long-term plan for a short-term cost”
3. The increase becomes the norm very quickly
4. The pain is manageable “Yes, I could afford that type of increase, it’s a few cups of coffee a week”
5. The time is now “Right now is the best time to do it as interest rates are so low”
6. A discounting of the objections to the proposal, most commonly based in suspicion in the vested interests of the banks and the wealthy “If banks want a bigger return, they should take a bigger risk” “Wealthy people and shareholders don’t need protecting” Key reasons to oppose the Reserve Bank proposal The downside risk and the absence of a compelling need are the key reasons to oppose the proposal.
7. The downside in terms of sector risk and economic impact “As bad as a financial crisis can be, small businesses and farming are too big to lose in NZ” “Would impact our broader economic vitality”
8. A concern that it is not required “Why are we going further than others?” “Are we a test case?” “What’s pushed the button now when the GFC was 10 years ago?”
9. The belief that bank profit means bank strength “More profitable banks mean they are better able to protect themselves and customers will get better deals”
10. An objection to the personal costs incurred in terms of higher interest or downstream costs
11. The belief that the future is so uncertain / you can do all of this and there is still risk.

17 Key reasons to remain neutral the Reserve Bank proposal Individuals remaining neutral or undecided about the proposal were driven by both personal factors and arguments for or against the proposal.

1. A personal inability to decide “It affects us either way, but the question is short-term impact vs. potential future impact or a big loss vs. a slow drip-loss” “Either way it affects me”
2. A desire to avoid making a committed decision “So why is there only one solution? It’s too black and white...why can’t we move towards a scalable solution?”
3. A desire for more information “E.g. what is the impact upon shareholders and where do they sit? Are they New Zealanders or not?”
4. A recognition of the problem, but a belief that capital levels are not the answer “We need other tools to help SMEs and Pensioners [so they can withstand a crisis]” “Lots of different things impact interest rates [therefore impacts are unclear]”

18 The public’s perceptions regarding different stakeholder groups In this section, the public’s reaction to the concerns of different stakeholder groups are covered. This is based upon their appraisal of a selection of representative excerpts from the submissions to the proposal. These excerpts were the basis of a group exercise whereby 3-4 person teams would explain and argue for the merits of a selected stakeholder group. Upon presentation of the arguments the remaining members of the public would then discuss how convinced they were of the merits of the case. Reactions to stakeholder groups: The Public As would be expected, what was in the public interest was a powerful driver of the public’s perceptions regarding the proposed capital reforms. However, within the idea of ‘public interest’ there are two aspects that need to be defined as neither are consistent across the group. Firstly, what is in the public interest was not defined consistently:  Some groups focus more on the short-term costs, namely younger Aucklanders for whom living costs and housing affordability and access are major issues that determine their 'public interest’  Others meanwhile define the public interest as greater long–term security from the potential threats of losing their life savings or having government services and overall economic vitality compromised. Although both of these are viewed as significant, there is a stronger reaction regarding protecting people’s savings as opposed to their loss of government services  Defining the public interest in terms of minimising immediate living costs was restricted to younger respondents (students / under 25s). As this was the sample definition of the Auckland group, then they were strongly focused on cost minimisation  Based on the observations of this project, as people age, the time horizon of their consideration extends into long-term security and planning and this was the dominant perspective among older participants Secondly, who is the public? It must be recognised that while egalitarianism was widely observed in the attitudes of the research participants, not everyone puts the group first and the question of the public good therefore is less relevant. For a few, it is far more about the individual and their interest. For others, they either:  See themselves and project outwards (i.e. the public is everyone else like me…)  They define public in more explicitly class-based terms i.e. the majority who are not privileged or independently wealthy – “We’re at the bottom and worried about our futures and security”  Struggle with the definition as they may also be small business owners or some other member of the public who has their own reason to prioritise their interests over the broader population e.g. “Will the costs be put on me?”

19 Reactions to stakeholder groups: Small Businesses There is widespread understanding and respect for the significant role that small businesses play within New Zealand’s economy. Following from that, they are in the public’s eyes a priority stakeholder group to consider in assessing the net impact of the proposed capital reforms. Accentuating this awareness is the strong concern that small businesses do not have the ability to weather increased costs relative to larger businesses. “They are a major employer, so their welfare is key” “SMEs already suffer disproportionately…as day to day existence is their reality” “We start businesses with loans and so only the big boys survive” “We can’t afford higher risk” “Small Businesses in NZ are always vulnerable – we don’t have the advantages of larger businesses” “Once they’re down, they’re down” This level of respect and concern for the wellbeing of small businesses and their owners was found in all groups. It was even more pronounced in Napier where the incidence of small business owners was high. Reactions to stakeholder groups: Social Services There were two schools of thought regarding society’s most vulnerable. The first view is that lower income people and families are disproportionately impacted by any increasing rent and food prices that occur as a consequence of capital strengthening. This was seen as a more material and greater risk than the chances of their future government assistance funding being removed. The alternative view, as found more explicitly and consistently in Christchurch, was that any risk to government assistance and therefore the physical and mental health of the affected individuals and families, should be the priority issue, and that the Reserve Bank proposal was to be supported for that reason. While not widespread, the opinion was also expressed that social services would be far less affected than other government spending, so this is in effect an irrelevant group to consider in assessing the proposal. “Social Services are the last government spending to be cut so this is a lower risk group” “They would never lay off nurses – it would be political suicide. It would be the last thing they would ever do if they want to stay in power”

20 Reactions to stakeholder groups: Rural NZ As with small businesses, the argument that farming is New Zealand’s largest industry and should therefore be prioritised is strongly accepted on the whole. “They are the backbone of the country” Therefore, any measure that could threaten this was viewed with concern. Primarily this was a concern for the farmers themselves as mortgage repayments would directly be impacted. For these reasons, a gradual implementation of the capital requirements as proposed in some rural sector submissions was seen as level-headed and positive. The Napier group in particular was drawn to what they saw as the step by step pragmatism of this approach. Among Auckland youth however the concern was less for the financial health of the farm business and more for the downstream affordability impacts of higher prices for primary produce. Reactions to stakeholder groups: Banks / Corporate NZ Responses to the banks arguments as presented in the submissions was the most polarising of all of the stakeholder groups. Accordingly, perceptions fell into two broad areas:  That the banks’ arguments have merit in terms of the broader negative economic impact of the proposed changes, and this worries people  That the banks’ submissions simply reflect their vested interests and should not be trusted “The lack of economic sophistication of people’s understanding lends itself to banks’ arguments” “Just thinking about themselves and not the greater good” “This is very hypocritical of the banks to say this is a bad idea since they are the ones that are doing it” “It’s unreasonable and greedy to oppose this” ” The problem is that we can’t trust banks. I mean look at the ANZ saga going on at the moment” There was little regional variation found in the reaction to the banks’ submissions. It did however appear to vary significantly depending on an individual’s experiences or political persuasions which made them ‘anti-banks’.

21 The public’s perceptions regarding different financial personas In the final stage of the deliberative workshops, the public was exposed to a range of different financial scenarios This was based upon a number of personas that were constructed by the Reserve Bank and Kantar NZ. Each of these (as shown in Appendix One) described at a high level an individual’s key financial information and the basic information required to assess the key potential rewards or risks facing that individual from an increase in capital requirements. Upon presentation of these personas, the participants then discussed whether they felt that individual should oppose or support a proposed capital increase and why. Reactions to financial personas: The Student Responses to this scenario did differ notably by lifestage. Among current students, the immediate impact of an increase in rent was seen as excessive or unaffordable. “This is too much for me...a struggling student…it’s an increase of over 10%” “Plus, all of her food prices are increasing too so it’s a double-hit” Compounding this short-term focus on affordability is the absence of any long-term compensating benefit as commonly found among younger respondents. “As a young person I can’t see the future and so I don’t care” “I’m living life now” Importantly however, older New Zealanders took a different view – that the student should support the proposal – as she would still have options in life and taking a longer-term perspective is worth it over time. “Because it’s a worthwhile investment for her still” “If she can’t go to Uni it’s not the end of the world – not the end of options in her life” And while younger participants were generally opposed to this, a number were also quite pragmatic about its application. “A 5% increase would just become a new normal for us growing up with it. To be fair it’s a couple of coffees a week” This split between the cost sensitivity of students / under 25s and the longer-term view of older NZ was found consistently throughout the country.

22 Reactions to financial personas: The Small Business Owner For the public this was seen as a relatively straightforward choice. Given the significant contribution of the government towards Hone’s family – $1,000 monthly – then the increase in mortgage costs was seen as minimal and a wise investment. “The trade-off is very worth it” “It’s an easy decision – it’s a very positive move for him. His $1,000 payments from the government are too big a risk for him to lose” “…and having a combined mortgage increases his risk of loss. He loses everything if his bank forecloses on him” “Plus, another GFC would impact his salary also – that is another negative effect you have to recall” “So, it’s insurance on my benefits and my business future” The straightforward nature of the decision was seen consistently across the three centres. Reactions to financial personas: The Retiree The retiree potentially faces a loss of both bank income and National Superannuation in the case of a bank insolvency so for the public it was universally seen that all retirees should or would be in support of this. Informing this perspective is also the strongly held perception that even if the lost interest income was onerous, retirees have no opportunity to recover from a financial event which increases the importance of the couple supporting any reforms which offer them greater protection. “She gets $2500 per month which is now at risk vs. losing $90 per month. She should support it as she’ll lose all of her savings otherwise” “There is no time to recover from that – which younger people are removed from” “They should support it as they are far more screwed than the student…there is no recovery from that” “They could lose their retirement and their national super, so of course they would support it” There was a ready and consistent perception that retirees should support the change, and this was consistent across the general public in all centres. Reactions to financial personas: The Nurse For the public the main issues facing Stu were the mortgage impact but also the qualitative nature of how his role within the public health system would be impacted by a reduction in health spending “An increase in $30 per month on her mortgage – so he should support this because the immediate cost to him is less” “He should support it as a bailout has a greater impact upon the nurse than the student –he will be unemployed, working under stressful conditions with less equipment and supplies” “It’s political suicide to layoff nurses – they would never let it happen”

24 Summary Engagement and understanding regarding this topic are low among the NZ public. The positive impact of exposing the public to a technical understanding of the issues involved in a deliberative research process was clear in terms of the robust debate during the groups, and their ability to articulate an opinion on the topic that resulted from their participation. So, there is clearly benefit in greater levels of exposure or education, however the public will only go there if they have a reason to engage. To achieve this, one aspect of the exposure or education is imperative i.e. how the proposal to increase the amount of capital owners invest in their banks could impact them as individuals and as a society, positively and negatively, expressed in a personal and relatable manner. The other key aspect of any introduction to this debate is the feature of a short vs. long-term trade￾off and expressing that simply by a comparison to insurance. Among over 30-year olds, support was strong for the proposal. Reasons were centred upon the future safeguarding of families and children (found more explicitly among parents) and a desire for personal and social protection from a major event (found most explicitly in Christchurch). There was also a material level of support for a staggered rollout of any increase in capital so as to minimise the impact upon those groups most exposed to higher debt servicing costs i.e. small businesses and farmers. Among those under 30 (the majority of the Auckland group) their clear opposition to the proposal was based upon any negative impact upon housing affordability which is an issue of significant concern to them. There is also a timing aspect regarding support of the proposal. Firstly, the increases are for 5 years (relative to far longer-lasting protection) and secondly the current low level of interest rates make any increases less of a drain upon debt-servicing. Only a minority of New Zealanders over 30 were opposed to the proposal, and when they did it was based on concerns for those with debt who would be unfairly impacted, the broader impact upon economic vitality, or a concern that NZ is taking a risk by going further than other countries. While as expected the general public generally prioritise the broadest public good as a measure of this proposal, two specific groups did commonly warrant specific understanding and prioritisation given their importance to the NZ economy and the potential negative impacts of increased debt servicing costs i.e. small businesses and farmers. Low-income / vulnerable New Zealanders are also of specific concern to the public, however concern here is divided as in addition to the vulnerabilities they could face from a cut in government spending, it was also assessed that they can least afford any increase in living costs in the short-term. The amount of time available for an individual or group to recover from the impact of a financial event also has a strong impact upon how important that group’s concerns are when assessing the proposal.

25 Appendix One: Financial Scenarios Student Scenario Roz is in full time study, using a student loan and weekend work to cover her living expenses. She lives off $1,000 a month. Roz’s rented room costs $480 a month. Roz’s course fees are $6,000 a year and the government tops this up by paying $12,000 a year to the University, on behalf of Roz each year Roz is enrolled (this is the way all universities in NZ are funded). So, Roz relies on this tax-payer funded support, which could be subject to austerity measures in the event a bank fails. If interest rates go up, Roz’s rent will go up. Roz’s landlord has a mortgage and she will have to pay more to the bank if interest rates go up. For every 0.1% Roz’s landlord’s interest rate goes up (e.g. from 4% to 4.1%), she pays an extra $16 a month in rent. Small Business Scenario Hone is married with two kids. His plumbing business delivers the family a monthly gross income of $7,100 (annual salary of $85,280). Hone’s earnings are supplemented by Working for Families support from the government (tax rebates of $400 a month) and they receive childcare subsidies of $600 a month. Hone’s business is funded by a mortgage on their home. Assume the mortgage is $225,750. For every 0.1% his interest rate goes up, he pays an extra $10 a month approximately on the mortgage. On the other hand, the family relies on tax-payer funded support which could be subject to austerity measures in the event a bank fails. Retiree Scenario Married couple combined rate of NZ Super, after tax = $2,530 per month. Assume they own their home mortgage free and have savings held on term deposit at the bank of $350,000. Fixed term deposit rates are 3.4% for five years at the moment. If banks have to hold more capital they will need to rely less on deposits, so deposit rates might go down. For every 0.1% fall in the deposit rate (e.g. from 3.4% to 3.3%) they lose $29 a month Nurse Scenario Stu works full-time at the local public hospital and earns $4,665 a month after tax. He lives alone and has a mortgage of $225,750, paying it off over 15 years. He has an interest rate of 4% and pays $1,540 a month on his mortgage (36% of his take home pay).

26 For every 0.1% his interest rate goes up, he pays an extra $10 a month on the mortgage. Farmer Scenario Dave is a dairy farmer, with a wife and teenage son. The farm has a mortgage of $2.9 million. Gross revenue from the farm is $81,200 per month. Currently the farm is paying interest at the rate of 5% with a term of 30 years. The monthly mortgage bill is $14,364. For every 0.1% increase in the interest rate (e.g. from 5% to 5.1%) mortgage expenses go up by approximately $150 a month.

Understanding public sentiment towards raising bank capital in NZ Draft Report 6 th September 2019 s 9(2)(a)

Contents 2 1 Background and Methodology 03 2 Understanding the impact of the stimulus employed in the research 06 3 Understanding the context of public sentiment 10 4 Perceptions of the Reserve Bank proposal 22 5 The public’s perceptions regarding different stakeholder groups 27 6 The public’s perceptions regarding different financial personas 35 7 Summary 48 9 Appendix One – Stakeholder stimulus used in the research 52

Background and Methodology 1 s 9(2)(a)

The Reserve Bank began a review of the capital adequacy framework applying to locally incorporated registered banks in 2017. The aim of the Capital Review is to identify the most appropriate framework for setting capital requirements for New Zealand banks, taking into account how the current framework operates and international developments in bank capital requirements. In December 2018, the Reserve Bank published a consultation paper seeking feedback on proposed higher capital requirements for locally incorporated banks As part of the next stage of the Capital Review, the Reserve Bank commissioned Kantar NZ to carry out qualitative research with members of the public to get additional insights about public attitudes towards risk in the financial system, the pros and cons of reducing risk, and the capital proposal announced in December 2018. This will be used to help inform final decisions in the Reserve Bank’s Capital Review, alongside other information and analysis carried out during the Capital Review. The overall project objective can therefore be summarised as: To learn about the views of members of the public with respect to risk in the financial system, the potential trade-offs involved in reducing risk, and the capital proposal announced by the Reserve Bank in December 2018. The Reserve Bank wished to understand the views of the general public as it related to the Capital Review and related matters Background & Objectives 4

A deliberative workshop has many of the characteristics of qualitative focus groups, but the focus is on participants’ viewpoints after they have had the opportunity to ‘deliberate’ the issues (compared to traditional qualitative methods that seek to understand current viewpoints) Beyond achieving deliberation, there were two further objectives that the design of these sessions had to achieve. Firstly it needed to engage the public in a topic that is rarely considered, and secondly it needed to ensure a consistent level of baseline technical understanding of the topic For these reasons, three four-hour deliberative workshops were run which took 14-15 members of the public through a raof stages and activities, beginning with education regarding the issues and risks relevant to Capital Review, introduction of a nge method for working with trade-offs and then the roleplaying of a variety of impacted stakeholder groups and financial personas. At the conclusion of this, and the surrounding debate, each participant was in a position to express their preferences around the proposed Capital Review from an informed and considered perspective The participants across the project represented a mix of ethnicities, urban/rural and employment status. Each was recruited by a professional research recruitment agency and received a $300 cash incentive for their participation Auckland younger Mix of 18-25 and 26-40 year olds Saturday 17th August 14 participants Napier mixed age groups Sunday 18th August 15 participants Christchurch older Mix of 40-55 and 55+ year olds Saturday 24th August 15 participants To achieve this, Kantar NZ undertook three deliberative workshops with the general public in different New Zealand centres Methodology 5

Understanding the impact of the stimulus employed in the research 2 s 9(2)(a)

As the deliberative sessions progressed, the public was exposed to a range of different stimulus material designed to inform them regarding the technicalities of a Capital Review and the arguments for and against such a proposal This section provides an overview of the nature of this stimulus and the cumulative impact that these had upon the public’s understanding, engagement and sentiment 7

A range of different stimulus was used in the group sessions as outlined below Stimulus used within the group sessions Stage One Technical Information regarding bank operations and nature of insolvency Stage Two Linkage of bank insolvency to personal, social and fiscal risk Stage Three Reviewing conflicting perspectives on the issue Stage Four Reviewing the risk & return profile of different individuals Introductory slides as included in Appendix Two https://www.youtube.com/watch?v =D--q6OVHJbQ https://www.nzherald.co.nz/busine ss/news/article.cfm?c id=3&objec tid=12237913 https://www.youtube.com/watch?v =n3UJ6yMaM4A https://www.bbc.com/news/av/uk￾politics-45504585/why-the-shock￾of-2008-still-matters-today Tradeoff analysis as included in Appendix Two As included in Appendix Two As included on slides 33, 35, 37, 39, 41 8

Each of these impacted understanding, engagement and sentiment in different ways The impact of the stimulus presented Stage One Technical Information regarding bank operations and nature of insolvency Stage Two Linkage of bank insolvency to personal, social and fiscal risk Stage Three Reviewing conflicting perspectives on the issue Stage Four Reviewing the risk & return profile of different individuals Understanding Given the low baseline, there was a significant increase in technical knowledge or a welcome refresher of existing knowledge Extended to the link between bank and government finances and the nature of flow-on impacts across society and the economy Reaches it’s highest point for most here as potential impacts upon specific groups and the broader economy are introduced Some further increase here regarding the nature of government support for individuals but generally understanding has plateaued Engagement Low as the information provided was technical and detached Increased observably as social impact was introduced as a potential; impact of a bank failure Little progress in engagement as the information was interesting but still relatively detached Peaked here as personal impact was the most explicit and the most relatable Sentiment Mixed and based on incoming personal and political biases The nature of this stimulus drove an emotive response in majority support of the proposal Tempered people’s enthusiasm to some degree, usually by making more explicit the concerns of small businesses and farmers Little further change was seen at this stage 9

Understanding the context of public sentiment 2 s 9(2)(a )

There are a range of specific drivers that have been identified which have implications for increasing engagement among the public… 11 What gets the public engaged? Principles & concepts… Driver of Engagement Implication for creating engagement Can I recognise it i.e. is it apparent or tangible to me in an everyday context? If I can’t, it will be very hard to connect with this issue Does it need solving? i.e. what are the consequences of doing nothing or something else? This accelerates or delays the solution of an issue Is it disputed or disputable? Are there conflicting evidence & claims? This forces individuals to take a side Is there a tension regarding who is responsible for the issue and for the solution? How emotively charged is the topic? Emotions & passions have more impact than facts To what degree does it impact me? Nothing connects like self-interest so this is a primary and simple method to connect To what degree does it impact things that I value or care about? Invokes our sense of ‘otherism’ or a broader perspective The simplicity with which an issue can be understood and the baseline level of understanding among the public The public switches off when the language is too technical or emotionally distant.

..and each of these have specific implications for the Capital Review, most notably the value of simplified, informed exposure to the topic 12 Assessing the Capital Review against the drivers of engagement Driver of Engagement Implication for Capital Reviews Can I recognise it i.e. is it apparent or tangible to me in an everyday context? The public have a very low ingoing sense of relevance or everyday connection with this topic. Also, the future and intangible risk of an insolvency / bailout means the consequences are very difficult to connect to. Once led there they connected strongly however Does it need solving? i.e. what are consequences of doing nothing or something else? Is it disputed or disputable? Are there conflicting evidence & claims? Education and exposure is imperative. The change in opinions as the public was exposed to different perspectives provided clear evidence of this Is there a tension regarding who is responsible for the issue and for the solution? How emotively charged is the topic? Considering this topic was a largely intellectual exercise with little strong emotion on display, however trust in different institutions – mainly banks, the Government or social services – can be a significant force in understanding people’s views

..and each of these have specific implications for question of capital review, most notably the value of simplified, informed exposure to the topic (cont’d) 13 Assessing the Capital Review against the drivers of engagement (cont’d) Driver of Engagement Implication for Capital Reviews To what degree does it impact me? To what degree does it impact things that I value or care about? An informed or engaged debate around this topic only begins for the public once scenarios or impacts are shifted from the theoretical to the personal or relatable. Monthly mortgage repayments, increase in rents or food prices, job security or impacted government services are all things that impact people and that they can understand The simplicity with which an issue can be understood and the baseline level of understanding among the public Basic education regarding banks and their operation, sources of funding and attendant risks is key to a balanced debate. The impact of providing this information within the group sessions made a material difference to the confidence and clarity regarding this debate Another essential feature is to consistently convert technical and/or nuanced issues into people’s language “At the end of the day it’s about people, not the economy, debt or GDP…that was so simple” “Put it in ‘Kay’[respondent nickname] language…I am going to pay this much more for the benefit of avoiding this. That I can understand”

1. The public do not readily understand the two different forms of potential personal & broader social impacts of a potential bank failure a. A bank failure impacting a government’s ‘social’ spending b. A bank failure impacting an individual’s financial wellbeing in terms of either lost savings or a foreclosed mortgage This lack of understanding of impacts strongly limits the ‘How does this impact me?” driver of engagement. In the absence of this understanding it is difficult to see any general public majority support for the proposal

2. People don’t always see the bigger picture on this issue, most specifically the downstream impacts and trade-offs that exist across different groups in society. Similarly, possessing an understanding of both the long & the short-term is a key feature of understanding capital requirements as an issue, and it is a significant shift in thinking for many people to move to ‘200 years and the group’ as opposed to ‘…right now & me’. Auckland youth (and we see no reason to believe this would not apply to youth elsewhere) could not relate to a long-term lifetime value perspective and could only focus upon the short-term negative impact of interest rate and price increases upon individuals. This hyperbolic discounting and more narrow interest was notably absent among older participants in the research A number of contextual features further explain why the baseline level of engagement on this topic is low among the NZ public 14 Contextual features impacting engagement regarding the Capital Review

3. Based upon the qualitative sample in this study, there appears to be little residual impact of the GFC in the public domain. People don’t feel it or know people who suffered directly from it, or if they do cannot attribute it to the GFC in a way that they understand. Lastly the belief that New Zealand came through the GFC ‘…in pretty good condition’ is widespread “It was likely wealthy people who could afford to lose who lost…not us” This somewhat blunts the impact of the GFC as a reference point to justify these proposed changes

4. Capturing the attention of New Zealanders on significant national issues is a crowded marketplace. Most commonly the environment or broader sustainability issues dominate people’s concerns and is an issue which connects powerfully on all of the engagement drivers on slide 6. The cost of living, housing availability & affordability also take significant mindshare, and more recently high profile conscience issues such as euthanasia or medical marijuana are further crowding the market for issues of national concern A number of contextual features further explain why the baseline level of engagement on this topic is low among the NZ public (cont’d) 15 Contextual features impacting engagement regarding the Capital Review (cont’d)

On slide 10 it was described that an inability to see a larger network of effects and/or to do so over a longer time period than an individual’s conventional horizon is a barrier to engagement with this topic. Central to this barrier is the challenge of understanding trade-offs, either… a. Over time i.e. some cost incurred now for a future gain, or b. Between groups i.e. increasing the risk exposure or cost for one group in society relative to another c. Across different priorities for government spending, most pointedly providing financial support in the event of a bank crisis vs. ‘social’ spending None of these are in themselves beyond the general public’s ability to work with – and the examples and exercises used in the research strongly supported this conclusion. However it is equally clear that this is far from a standard mode of analysis for people as it involves not only the initial effort of becoming informed but then further effort in structuring one’s opinion The requirement for this ‘System 2’ processing (effortful, slow and controlled) is clearly a barrier to engaging with the general public. In comparison ‘System 1’ processing is automatic, intuitive, and often heuristic based. As such, it is in the interests of any stakeholder group to this debate to convert their point of view in this way Working with trade-offs and the cognitive effort this requires is also a barrier that needs to be considered 16 Understanding trade-offs (…and system 2 processing)

System 1 processing – automatic, intuitive, heuristic-based - occurs without the knowledge of the individual and offers people the ability to quickly process the information they require from their environment without unnecessary or burdensome cognitive effort A notably successful example of this as it relates to the arguments for and against Capital Review is the simile of Capital Review as a form of insurance This is a common and understandable way of comprehending the trade-offs at an individual level i.e. is it worth it for me? The increased cost to the individual by means of higher interest charges or potentially lost savings returns are the equivalent to the premium, and increased protection from a major financial event is the outcome you are purchasing. All participants spontaneously and readily understood this comparison What this doesn’t achieve is greater cognitive ease in terms of trade-offs across groups of society, or between different categories of government spending which is less well suited to this type of mental shortcutting In response to this, the most frequent and relatable way of understanding the proposal was to liken it to purchasing insurance 17 Insurance as a simile (…and system 1 processing)

There is some suspicion & cynicism regarding banks and their trustworthiness and motivations… “They are pure capitalism” “Symbols of corporate largesse” “They represent power & control” “Everyone thinks that banks are there for us but they are there to make money for their shareholders” “Why do we have to bail out the banks?...Iceland jailed them” …and also the nature of their business practices that take on higher levels of risk than individuals or other businesses would do “There are no consequences for the banks” “If I can go to jail in my job for getting it wrong…why can’t they?” “You don’t mortgage your house 3x over [but they do…]” Regarding the issue of local vs. Australian ownership of local banks, there is a strong sense of injustice or unfairness among some. This can take individuals away from an assessment of the case for or against Capital Review by introducing an emotive overlay which can be a distraction Ingoing assumptions of the ‘key players’ in the Capital Review issue can have a significant impact upon public perceptions Attitudes towards banks and the Reserve Bank 18

Trust in the independence and therefore competence of the Reserve Bank was strongly questioned in Christchurch. This appeared to be strongly linked to their experience regarding the Christchurch rebuild and also appeared intensified by perceptions of the current Labour Government, which was perceived as less credible in this area “Trust in the Govt? Look at Kiwibuild…so do we trust the Reserve Bank to get it right?” “I’m looking at their website right now…..it is naïve to say that they are independent” “If the Reserve Bank is influenced in any way then I worry about them” “I trust the banks more than the government – it’s full of globalists” “Their integrity is questionable” “We have a poor choice of politicians and people to choose from here” Ingoing assumptions of the ‘key players’ in the Capital Review issue can have a significant impact upon public perceptions (cont’d) Attitudes towards banks and the Reserve Bank (cont’d) 19

1. Increased capital requirements would result in an increase in money going overseas… “Aren’t we just taking a dollar off NZ and giving it to Australia?
2. The nature of bank confidence and the consequences of that… “So why don’t the banks have to tell the government when they are close to defaulting?”
3. The relationship between capital requirements and long-term insolvency risk “What about just making it 3% instead – then costs would go down?” Finally, technical understanding of this issue cannot be assumed among the general public 20 Common misperceptions in assessing the proposal

It is also key to understand perceptions of the channels via which the public’s opinions are formed on issues such as this Understanding influence channels 21 Introduction to and understanding of an issue comes from… TV coverage Press Social media Deciding upon an issue comes from… The moral compass and/or value set of the individual Personal orientations such as self vs. group, a broadening of perspective with age, political persuasion and socio-economic status were all on display in responses to the proposed capital reforms Someone's own experience If an individual is in, or knows of, the key impacted stakeholder groups e.g. farmers, retirees, SME owners then this is key in forming opinions. The credibility of a source There is a strong and widespread cynicism and awareness regarding the subtle influence & sway of media channels driven by their vested interests. Consequently there is a strong suspicion of social media and the vested interest & control behind many media channels

Perceptions of the Reserve Bank proposal 3 s 9(2)(a )

Auckland – younger The younger demographic skew in the group appeared to lead to a strong focus upon the immediate costs from a Capital Review over any long-term effects. While concern about the impact upon farmers & SMEs was frequently mentioned, the dominant barrier was the high sensitivity that Auckland youth have around their ability to afford a house and anything that makes this more difficult As such this group was on balance opposed to the Reserve Bank’s proposal Napier – mixed lifestages All but two participants in Napier supported the Capital Review proposal The greater incidence of parents within this group was notable and impacted overall sentiment with a large number supporting the proposal as it was seen as worth incurring a small cost now for the future safeguarding of their families & children Also commonplace in this group was the belief that although there are short-term costs incurred, these were outweighed by the potential negative impact of a major financial event Finally, the call for a staggered/gradual rollout of the increases was most frequently heard in Napier in order to minimise the impact upon at risk groups such as SMEs, farmers & low-income earners Christchurch – older As in Napier, all but two participants were in support of the proposal The financial and mental impact of a catastrophic event, and a desire for protection and safety weighed largely upon the perceptions of Christchurch participants, which is potentially connected to participants’ exposure to the 2010 and 2011 earthquakes Again there was some support expressed for a staggered rollout to minimise the impact upon some groups The majority of over 30s in the research supported the proposal Overall preferences by region & lifestage 23

1. The tradeoff is worth it A bailout would be worse than the costs

2. The pain is short-lived It’s only 5 years of higher interest rates for a lifetime of increased safety It will only cost banks for 5 years but it [a bailout or savings loss] will costs us forever – it is totally disproportionate This is a 5 year plan to protect our kids It’s a long term plan for a short-term cost

3. The increase becomes the norm very quickly

4. The pain is manageable Yes I could afford that type of increase, it’s a few cups of coffee a week

5. The time is now Right now is the best time to do it as interest rates are so low

6. A discounting of the objections to the proposal, most commonly based in suspicion in the vested interests of the banks and the wealthy If banks want a bigger return they should take a bigger risk Wealthy people and shareholders don’t need protecting Support for the proposal was based upon one or more of the following reasons 24 Key reasons to support the Reserve Bank proposal

7. The downside in terms of sector risk and economic impact “As bad as a financial crisis can be, small businesses and farming are too big to lose in NZ” “Would it impact our broader economic vitality”

8. A concern that it is not required “Why are we going further than others?” “Are we a test case?” “What’s pushed the button now when the GFC was 10 years ago?”

9. The belief that bank profit means bank strength “More profitable banks mean they are better able to protect themselves and customers will get better deals”

10. An objection to the personal costs incurred in terms of higher interest or downstream costs

11. The belief that the future is so uncertain / you can do all of this and there is still risk. The downside risk and the absence of a compelling need are the key reasons to oppose the proposal 25 Key reasons to oppose the Reserve Bank proposal

12. A personal inability to decide “It affects us either way but the question is short-term impact vs. potential future impact or a big loss vs. a slow drip-loss” “Either way it effects me”

13. A desire to avoid making a committed decision “So why is there only one solution? It’s too black & white...why can’t we move towards a scalable solution?”

14. A desire for more information “E.g. what is the impact upon shareholders & where do they sit? Are they NZ’ers or not?”

15. A recognition of the problem, but a belief that capital levels are not the answer “We need other tools to help SMEs & Pensioners [so they can withstand a crisis]” “Lots of different things impact interest rates [therefore impacts are unclear]” Individuals remaining neutral or undecided about the proposal were driven by both personal factors and arguments for or against the proposal 26 Key reasons to remain neutral or undecided on the Reserve Bank proposal

The public’s perceptions regarding different stakeholder groups 4 s 9(2)(a )

In this section the public’s reaction to the concerns of different stakeholder groups are covered This is based upon their appraisal of a selection of representative excerpts from the submissions to the proposal These excerpts – as displayed in Appendix Two – were the basis of a group exercise whereby different 3-4 person teams would explain and argue for the merits of a selected stakeholder group Upon presentation of the arguments the remaining members of the public would then discuss how convinced they were of the merits of the case 28

What is in the public interest resonates strongly with the public, but there are different interpretations of that principle Reactions to stakeholder groups: The Public 29 As would be expected, what was in the public interest was a powerful driver of the public’s perceptions regarding the proposed capital reforms However within that there are two aspects that need to be defined as neither are consistent across the group Firstly, what is in the public interest was not defined consistently… a. Some groups focus more on the short-term costs, namely younger Aucklanders for whom living costs and housing affordability & access are major issues that determine their 'public interest’ b. Others meanwhile define the public interest as greater long–term security from the potential threats of losing their life savings or having government services and overall economic vitality compromised. Although both of these are viewed as significant, there is a stronger reaction regarding protecting people’s savings as opposed to their loss of government services Defining the public interest in terms of minimising immediate living costs was restricted to younger respondents (students / under 25s). As this was the sample definition of the Auckland group then they were strongly focused on cost minimisation Based on the observations of this project as people age, the time horizon of their consideration extends into long￾term security and planning and this was the dominant perspective among older participants

What is in the public interest resonates strongly with the public, but there are different interpretations of that principle (cont’d) Reactions to stakeholder groups: The Public (cont’d) 30 Secondly, who is the public? It must be recognised that while egalitarianism was widely observed in the attitudes of the research participants, not everyone puts the group first and the question of the public good therefore is less relevant. For a few, it is far more about the individual and their interest For others, they either… a. See themselves and project outwards (i.e. the public is everyone else like me…) b. They define public in more explicitly class-based terms i.e. the majority who are not privileged or independently wealthy – “We’re at the bottom and worried about our futures & security” c. Struggle with the definition as they may also be small business owners or some other member of the public who has their own reason to prioritise their interests over the broader population i.e. “Will the costs be put on me?” While the ‘me-first’ mindset does exist it is clearly in the minority across the public The varying definitions of ‘public’ meanwhile were all found readily across the country

There is widespread understanding and respect for the significant role that small businesses play within New Zealand’s economy. Following from that, they are in the public’s eyes a priority stakeholder group to consider in assessing the net impact of the proposed capital reforms Accentuating this awareness is the strong concern that small businesses do not have the ability to weather increased costs relative to larger businesses “They are a major employer so their welfare is key” “SMEs already suffer disproportionately…as day to day existence is their reality” “We start businesses with loans and so only the big boys survive” “We can’t afford higher risk” “Small Businesses in NZ are always vulnerable – we don’t have the advantages of larger businesses” “Once they’re down, they’re down” Small businesses are a priority group for the public in assessing the proposal Reactions to stakeholder groups: Small Businesses 31 This level of respect and concern for the wellbeing of small businesses and their owners was found in all groups It was even more pronounced in Napier where the incidence of small business owners was high

There were two schools of thought regarding society’s most vulnerable… The first view is that lower income people and families are disproportionately impacted by any increasing rent and food prices that occur as a consequence of capital strengthening. This was seen as a more material and greater risk than the chances of their future government assistance funding being removed The alternative view, as found more explicitly and consistently in Christchurch, was that any risk to government assistance and therefore the physical and mental health of the affected individuals and families, should be the priority issue, and that the Reserve Bank proposal was to be supported for that reason While not widespread, the opinion was also expressed that social services would be far less affected than other government spending, so this is in effect an irrelevant group to consider in assessing the proposal Social Services are the last government spending to be cut so this is a lower risk group They would never lay off nurses – it would be political suicide. It would be the last thing they would ever do if they want to stay in power There was some debate regarding what is the greatest risk to society’s most vulnerable 32 Reactions to stakeholder groups: Social Services The view that the immediate negative outweighs the future protection dominated within the Auckland group who also largely adopted this view to the proposal more broadly Alternatively an observable level of sensitivity to the long-term physical and mental welfare of others was to be found among Christchurch participants

As with small businesses, the argument that farming is New Zealand’s largest industry and should therefore be prioritised is strongly accepted on the whole They are the backbone of the country Therefore any measure that could threaten this was viewed with concern. Primarily this was concern for the farmers themselves as mortgage repayments would directly be impacted For these reasons, a gradual implementation of the capital requirements as proposed in some rural sector submissions was seen as level headed and positive. The Napier group in particular was drawn to what they saw as the step by step pragmatism of this approach Like small businesses, farmers were seen as a priority group to consider 33 Reactions to stakeholder groups: Rural NZ Among Auckland youth however the concern was less for the financial health of the farm business and more for the downstream affordability impacts of higher prices for primary produce

Responses to the banks arguments as presented in the submissions was the most polarising of all of the stakeholder groups. Accordingly, perceptions fell into two broad areas a. That the banks’ arguments have merit in terms of the broader negative economic impact of the proposed changes, and this worries people b. That the banks’ submissions simply reflect their vested interests and should not be trusted The lack of economic sophistication of people’s understanding lends itself to banks’ arguments Just thinking about themselves and not the greater good This is very hypocritical of the banks to say this is a bad idea since they are the ones that are doing it It’s unreasonable and greedy to oppose this The problem is that we can’t trust banks. I mean look at the ANZ saga going on at the moment Bank feedback on the proposal was polarising to the public 34 Reactions to stakeholder groups: Banks / Corporate NZ There was little regional variation found in the reaction to the banks’ submissions. It did however appear to vary significantly depending on an individual’s experiences or political persuasions which made them ‘anti-banks’

The public’s perceptions regarding different financial personas 4 s 9(2)(a )

In this section the public was exposed to a range of different financial scenarios This was based upon a number of personas that were constructed by The Reserve Bank Each of these (as shown in this section) described at a high level an individual’s key financial information and the basic information required to assess the key potential rewards or risks facing that individual from an increase in capital requirements Upon presentation of these personas, the participants then discussed whether they felt that individual should oppose or support a proposed capital increase and why 36

Roz is in full time study, using a student loan and weekend work to cover her living expenses. She lives off $1,000 a month. Roz’s rented room costs $480 a month. Roz’s course fees are $6,000 a year and the government tops this up by paying $12,000 a year to the University, on behalf of Roz each year Roz is enrolled (this is the way all universities in NZ are funded). So Roz relies on this tax-payer funded support, which could be subject to austerity measures in the event a bank fails. If interest rates go up, Roz’s rent will go up. Roz’s landlord has a mortgage and she will have to pay more to the bank if interest rates go up. For every 0.1% Roz’s landlord’s interest rate goes up (e.g. from 4% to 4.1%), she pays an extra $16 a month in rent. Student Scenario 37

Responses to this scenario did differ notably by lifestage. Among current students, the immediate impact of an increase in rent was seen as excessive or unaffordable This is too much for me...a struggling student…it’s an increase of over 10% Plus all of her food prices are increasing too so it’s a double-hit Compounding this short-term focus on affordability is the absence of any long-term compensating benefit as commonly found among younger respondents As a young person I can’t see the future and so I don’t care I’m living life now Importantly however, older New Zealanders took a different view – that the student should support the proposal – as she would still have options in life and taking a longer-term perspective is worth it over time Because it’s a worthwhile investment for her still If she can’t go to Uni it’s not the end of the world – not the end of options in her life And while younger participants were generally opposed to this, a number were also quite pragmatic about it’s application A 5% increase would just become a new normal for us growing up with it. To be fair it’s a couple of coffees a week Students are likely to view with great hesitation any increase in living costs 38 Reactions to financial personas: The Student This split between the cost sensitivity of students / under 25s and the longer-term view of older New Zealand was found consistently throughout the country

Small Business Owner Scenario Hone is married with two kids. His plumbing business delivers the family a monthly gross income of $7,100 (annual salary of $85,280). Hone’s earnings are supplemented by Working for Families support from the government (tax rebates of $400 a month) and they receive childcare subsidies of $600 a month. Hone’s business is funded by a mortgage on their home. Assume the mortgage is $225,750. For every 0.1% his interest rate goes up, he pays an extra $10 a month approximately on the mortgage. On the other hand, the family relies on tax-payer funded support which could be subject to austerity measures in the event a bank fails. 39

For the public this was seen as a relatively straightforward choice. Given the significant contribution of the government towards Hone’s family - $1,000 monthly – then the increase in mortgage costs was seen as minimal and a wise investment “The tradeoff is very worth it” “It’s an easy decision – it’s a very positive move for him. His $1,000 payments from the government are too big a risk for him to lose” “…and having a combined mortgage increases his risk of loss. He loses everything if his bank forecloses on him” “Plus another GFC would impact his salary also – that is another negative effect you have to recall” “So it’s insurance on my benefits and my business future” For the public, supporting the proposal would be an easy decision for the small business owner considering the risk vs. return tradeoff 40 Reactions to financial personas: The Small Business Owner The straightforward nature of the decision was seen consistently across the 3 centres

Married couple combined rate of NZ Super, after tax = $2,530 per month. Assume they own their home mortgage free and have savings held on term deposit at the bank of $350,000. Fixed term deposit rates are 3.4% for five years at the moment. If banks have to hold more capital they will need to rely less on deposits, so deposit rates might go down. For every 0.1% fall in the deposit rate (e.g. from 3.4% to 3.3%) they lose $29 a month. Retiree Scenario 41

The retiree potentially faces a loss of both bank income and National Superannuation in the case of a bank insolvency so for the public it was universally seen that all retirees should or would be in support of this. Informing this perspective is also the strongly held perception that even if the lost interest income was onerous, retirees have no opportunity to recover from a financial event which increases the importance of the couple supporting any reforms which offer them greater protection She gets $2500 per month which is now at risk vs. losing $90 per month. She should support it as she’ll lose all of her savings otherwise There is no time to recover from that – which younger people are removed from They should support it as they are far more screwed than the student…there is no recovery from that They could lose their retirement and their national super, so of course they would support it Likewise, a decision to support the proposal would be simple for the retiree given what is potentially at risk and their inability to recover 42 Reactions to financial personas: The Retiree There was a ready and consistent perception that retirees should support the change and this was consistent across the general public in all centres

Stu works full-time at the local public hospital and earns $4,665 a month after tax. He lives alone and has a mortgage of $225,750, paying it off over 15 years. He has an interest rate of 4% and pays $1,540 a month on his mortgage (36% of his take home pay). For every 0.1% his interest rate goes up, he pays an extra $10 a month on the mortgage Nurse Scenario 43

For the public the main issues facing Stu were the mortgage impact but also the qualitative nature of how her role within the public health system would be impacted by a reduction in health spending An increase in $30 per month on her mortgage – so she should support this because the immediate cost to her is less (1) She should support it as a bailout has a greater impact upon the nurse than the student – she will be unemployed, working under stressful conditions with less equipment & supplies It’s political suicide to layoff nurses – they would never let it happen. The increased mortgage payments were seen as affordable relative to the potential employment conditions impact of a change in government spending 44 Reactions to financial personas: The Nurse Perceptions were consistent across centres on the Nurse scenario Note (1) Although in the scenario, the nurse Stu is male, the comments referring to ‘she’ were in reference to the research participants who were role playing the nurse at that time

Dave is a dairy farmer, with a wife and teenage son. The farm has a mortgage of $2.9 million. Gross revenue from the farm is $81,200 per month. Currently the farm is paying interest at the rate of 5% with a term of 30 years. The monthly mortgage bill is $14,364. For every 0.1% increase in the interest rate (e.g. from 5% to 5.1%) mortgage expenses go up by approximately $150 a month. Farmer Scenario 45

Feedback on this scenario was far less confident or consistent – particularly after the relative simplicity of the nurse or retiree personas. The actual financial impact upon the farmer was hard to gauge as the income figure was gross, whereas for others they were comfortable that any increased mortgage servicing would be affordable This increase is small for him now so he should support this He should support it to avoid foreclosure It’s hard to assess as it’s a gross figure so we can’t tell how close to the bone he is but if our anecdotal understanding of farmers finances are to be believed then he shouldn’t support it. If you’re running a $2.9m mortgage and looking at how much the milk solids price fluctuates, if you haven’t factored in an extra $750 then you shouldn’t be in business Well if the seasonality places too much risk on you then you don’t have to be a dairy farmer – you could be a different type of farmer Assessing the proposal from a farmer’s perspective relies heavily upon the public’s perception of the financial health or acumen of the sector 46 Considering financial personas: The Farmer This range of responses was found across all three centres, while there was a more detached response among Auckland youth

Summary 4 s 9(2)(a )

Engagement and understanding regarding this topic are low among the NZ public The positive impact of exposing the public to a technical understanding of the issues involved in a deliberative research process was clear in terms of the robust debate during the groups, and their ability to articulate an opinion on the topic that resulted from their participation So there is clearly benefit in greater levels of exposure or education, however the public will only go there if they have a reason to engage. To achieve this, one aspect of the exposure or education is imperative i.e. how a Capital Review could impact them as individuals and as a society, positively and negatively, expressed in a personal and relatable manner The other key aspect of any introduction to this debate is the feature of a short vs. long-term tradeoff and expressing that simply by a comparison to insurance Among over 30-year olds, support was strong for the Capital Review proposal. Reasons were centred upon the future safeguarding of families & children (found more explicitly among parents) and a desire for personal and social protection from a major event (found most explicitly in Christchurch). There was also a material level of support for a staggered rollout of any increase in capital so as to minimise the impact upon those groups most exposed to higher debt servicing costs i.e. small businesses and farmers Among those under 30 (the majority of the Auckland group) their clear opposition to the Capital Review proposal was based upon any negative impact upon housing affordability which is an issue of significant concern to them Summary 49

There is also a timing aspect regarding support of the proposal. Firstly, the increases are for 5 years (relative to far longer-lasting protection) and secondly the current low level of interest rates make any increases less of a drain upon debt-servicing Only a minority of New Zealanders over 30 were opposed to the proposal, and when they did it was based on concerns for those with debt who would be unfairly impacted, the broader impact upon economic vitality, or a concern that New Zealand is taking a risk by going further than other countries While as expected the general public generally prioritise the broadest public good as a measure of this proposal, two specific groups did commonly warrant specific understanding and prioritisation given their importance to the New Zealand economy and the potential negative impacts of increased debt servicing costs i.e. small businesses and farmers Low-income / vulnerable New Zealanders are also of specific concern to the public, however concern here is divided as in addition to the vulnerabilities they could face from a cut in government spending, it was also assessed that they can least afford any increase in living costs in the short-term The amount of time available for an individual or group to recover from the impact of a financial event also has a strong impact upon how important that group’s concerns are when assessing the proposal Summary 50

Appendix One Stimulus as presented in the research

Stage One Stimulus Technical Information regarding bank operations and nature of insolvency

Banks get their money from two places… their owners (often referred to as ‘shareholders’). The money that banks get from their owners is referred to as ‘capital’. people they borrow from, everyday depositors (like all of us…) Owners and creditors provide the money that banks’ lend out In NZ bank owners provide around …leaving depositors and creditors to provide BANK $100 of funding in $100 lent out $6 of bank funding… of equity for every $100 $94 for every $100 of bank funding…

Stage Two Stimulus Tradeoff Analysis

Tama is a cyclist. Tama is trying to decide how much to spend on high-vis gear. The cheaper the gear the more likely Tama is to have accident. If Tama has an accident, he can’t go to work and loses wages. So there are two ideas that are relevant for Tama… How well off Tama is – this is Tama’s total wages minus what he spends on high-vis gear How safe Tama is – his likelihood of having a crash 59

Which of Options A, B or C is associated with the cheapest high￾vis gear? Which of Options A, B or C is associated with the highest cost high-vis gear? Is Option A better than what Tama does today? Why Is Option B better than Option A? Why? Is Option C better than Option B? Why? What should Tama do? 61

Stage Three Stimulus Reviewing conflicting perspectives on the issue

Initial thoughts about the deliberative workshop structure and content 28 July 2019, Susan Guthrie (Financial Policy, the Reserve Bank of NZ) CONTENTS  Purpose of this paper  Executive Summary  Introduction: establishing a reason-based framework for thinking  Illustration of what might be required in ‘Stage 1’  Illustration of what might be required in ‘Stage 2’  Illustration of what might be required in ‘Stage 3’ Purpose of this paper The purpose of this informal paper is to share initial thoughts with Kantar about the potential content of the deliberative workshops due to be carried out in August 2019. Executive Summary o We think it is important to spend (potentially considerable) time at the beginning of the workshop developing the participants’ capacity to apply reason to a problem involving risk. We believe this is an essential first step (‘Stage 1’). o The alternative, screening such that only participants who have this capacity already can take part, would seem to risk biasing the results. o We propose a framework for thinking about risk that, when understood, will provide participants with the reason-based approach they will need to grapple with the risk problem being posed.1 o This capacity can be developed using personal examples unrelated to banking. o Only once participants have acquired the capacity to apply reason-based thinking to problems involving risk, is the bank capital ‘policy problem’ introduced. o The options available to NZ in the case of the bank capital policy problem can usefully be considered at a very high level initially. Without any further information the group will be able to be able to identify and eliminate inferior options (you can expect views on what is inferior to be unanimous). Participants’ views about remaining options can be usefully polled at this point. o In the next phase of the workshop (‘Stage 2’) information can be shared, with the aim of developing a deeper understanding about the problem to be solved and the options. Here participants are told what a banking crisis looks like, and what it costs to keep a banking system healthy. Uncertainty about the options, and debates between different perspectives, can be introduced. Participants’ deeper understanding about the policy problem augments and complements the high level understanding they acquired earlier.

1 If Kantar has had to develop this capacity within the context of deliberative workshops already, we are very happy to discuss the approach that was used (if different to the one proposed here).

2 2 o A second polling of views could be done here. o In the final phase (‘Stage 3’) the group grapples with the value judgements that are needed to decide collectively what to do. A third polling might be warranted at the end of this phase.

3 3 Introduction: establishing a reason-based framework for thinking

1. We believe the single most important thing to achieve is equipping participants with a capacity for reason-based thinking and decision-making for problems involving a trade-off between material well-being (e.g spending money, GDP or similar) and risk. We have a particular (conventional) framework in mind.
2. If the workshop doesn’t succeed in establishing such a framework for thinking among participants, all we will get will be gut reactions throughout the workshop, even at the end, not reasoned views, and so we will have had no value from the deliberative component of the project (so we could have just done a survey).
3. In our view, investing time with participants in developing the proposed reason-based framework for thinking about risk is more important than achieving a common understanding about how banks work, what the RBNZ does etc (although ideally we’ll achieve that too).
4. We believe what we are aiming for among participants is something akin to Daniel Kahneman’s ‘system 2’ thinking.2 We are not experts in behavioural economics and psychology, and understand Kantar may have access to those who are (if this is the case, we would be very keen to tap into that expertise).
5. We are happy to discuss our views about the need to equip participants with a reason-based framework, the way we see it being established in the workshop, and why we think it is important, with you.
6. The first session (as long as it has to be) should be working to give people this reason-based framework for thinking and making decisions where risk is involved. Illustration of what would be required in ‘Stage 1’: Developing a reason-based framework for thinking about risk
7. In our view the thinking framework we are proposing (see below) is conventional and objective. It is simply the application of reason to a problem people may more typically respond to using simple heuristic rules (such as “I don’t understanding finance, therefore I decide X”).
8. Our idea is to develop the participants’ capacity to apply reason by starting with an individual problem to solve, then a community problem.
9. Once that groundwork is done, and the participants’ ability to apply reason to a risk-based problem is tested and confirmed, the financial system policy decision can be presented at a high level and initially assessed by the group. Participants views can be subject to a poll at this point.
10. The financial system problem will be presented in the same framework as the examples, and it will reflect the real world but in a high level way.
11. The status of the various ‘options’ will not be declared at this point (i.e. what is status quo, what is being proposed, what banks want). In this way the problem is being considered and analysed using pure reason and no bias is introduced.

2 Daniel Kahneman (2011) Thinking, fast and slow. Published by Farrar, Straus and Giroux, 2011. Link to lecture by Professor Kahneman

4 4 Example 1: Thinking about individual risk – Holly’s Mum banging on about fruit and veg o Holly works in retail and flats with friends. If she’s sick and can’t get to work, her pay is deducted (her contract gives her neither sick leave nor annual leave). o Holly’s Mum is always telling her to spend more on nutritious food, so she doesn’t get sick. o Holly says she doesn’t want to spend more money on nutritious food. o Who’s right, Mum or Holly? This is a situation that is all about risk – the risk of getting sick and losing pay - and having options (that cost) to reduce risk. How do you decide what to do? Rather than have endless arguments, Holly and her Mum work through the issues with a bit of logic: o Holly takes home $100 for every day she works and (in a perfect world) would work 20 days a month. o At the moment Holly works 15 out of every 20 possible days, and so takes home $1,500 a month. o Right now Holly spends $50 a month on fruit and veg. o So right now, in any month, Holly has $1,450 to spend on everything other than fruit and veg. o Holly and her Mum agree that if Holly spent more on fruit and veg she’d be sick less often. o They agree that: o if she spent $200 a month on fruit and veg she’d likely work 17 days out of 20, and she’d have $1,500 each month left over to spend on everything else (Option A). o If she spent $300 a month on fruit and veg, she’d likely work 18 days out of 20, and she’d have $1,500 a month left to spend on other things. (Option B). o If she spent $410 a month on fruit and veg, she’d likely work 18.5 days out of 20, and have $1,440 to spend on things other than fruit and veg (Option C). o This is a problem involving risk (Holly’s health) and economic wellbeing (what Holly has left to spend once she has responded to the presence of risk). What should Holly do? o Option A means she buys more nutritious food and her take home pay increases by more than the increase in her food bill. So Option A is better than what she does now. o Option B leaves Holly with the same amount to spend on things other than fruit and veg as Option A but means she is well more often. Since Holly would rather be well than sick (being sick is awful quite apart from what it does to Holly’s pay), she likes Option B better than Option A. o Holly agrees that what she does today and Option A are both dumb options because Option B leaves her more healthy and leaves her with same amount to spend on things other than fruit and veg as Option A (and more than what she has if she carries on with her current approach). Per month: What Holly does today Option 'A' Option 'B' Option 'C' Spend on fruit and veg $ 50 $ 200 $ 300 $ 410 Number of days off work through sickness 5 3 2 1.5 Number of days Holly gets paid 15 17 18 18.5 What Holly receives from her employer ($100 $ 1,500 $ 1,700 $ 1,800 $ 1,850 Amount left over to spend on things other than fruit and veg ('net income') $ 1,450 $ 1,500 $ 1,500 $ 1,440

5 5 o Option C means Holly is even more likely to be well, but the increase in her food bill is larger than the increase in what she earns from work. If Holly really hates feeling sick, she might be willing to have $10 less per month to spend on things other than fruit and veg – so she’ll choose Option C. Otherwise she’ll decide Option B is best. First group task: o Tama is a cyclist. Tama is trying to decide how much to spend on high-vis gear. The cheaper the gear the more likely Tama is to have accident. If Tama has an accident, he can’t go to work and loses wages. Here ‘risk’ relates to Tama having an accident and ‘economic wellbeing’ is what Tama has to spend after he has responded to the presence of risk. o Using the graph below, answer the following questions: o Which of Options A, B or C is associated with the cheapest high-vis gear? (today) o Which of Options A, B or C is associated with the highest cost high-vis gear? (C) o Is Option A better than what Tama does today? Why o Is Option B better than Option A? Why? o Is Option C better than Option B? Explain your answer. o What should Tama do? what Holly does today Option A Option B Option C 1400 1420 1440 1460 1480 1500 1520 What Holly has left to spend $ per month 14 14 5 15 15.5 16 16.5 17 17.5 18 18.5 19 'Safety' (the number of possible working days Holly is likely to be well, per month) 'Economic welbeing' What should Holly do? what Tama does today Option A Option B Option C 1400 1420 1440 1460 1480 1500 1520 What Tama has left to spend $ per month 14 14.5 15 15.5 16 16.5 17 17 5 18 18 5 19 'Safety' (the number of possible working days Tama is accident-free, per month ) 'Economic wellbeing' What should Tama do?

6 6 Hoped for result from group activity: o Participants will all have a common framework for making decisions where risk is involved. o Participants can eliminate inferior options o Participants can identify when there is no clear answer and, instead, a value judgement has to be made (the value judgement is “what matters more - money or safety?”) Example 2: Applying the conceptual framework to community risk – how many town patrols to employ? o The small town of Matua has a vandalism problem. The townsfolk pay some of their members to be town ‘patrols’, walking the streets during the evening to keep vandalism down. o The more vandalism there is, the more the community has to spend doing post-vandalism repairs (and the more their youth are at risk of breaking the law). o But the more they spend on patrols, the less money the community has to spend on other things such as library books. o The townsfolk have to weigh up how many patrols they want to pay for. o Here the ‘risk’ is about whether or not the town’s youth will break the law (getting into dangerous habits) and ‘economic wellbeing’ is what the town has to spend after it has responded to the presence of risk (economic wellbeing in this case is measured by the library budget). o The options are: o If they keep doing what they do now, they have $100k a year to buy new library books and 10% of kids will break the law. o If they add one more patrol 5% of kids will break the law and the amount left to buy library books increases to $200k (repair costs go down by a large amount, patrol costs go up by a small amount). This is Option A. o Adding two more patrols reduces the amount left for library books to $80k, and 1% of youth will break the law. This is Option B. Second group task: o Illustrate the options for the town (table or graph). o Answer the question: does it make sense for the town to change what it does now? o What do you think the townsfolk with agree to do?

7 7 Hoped for result from group activity II: o Participants will see that the status quo is inferior to adding one patrol o Participants aren’t able to predict what the townsfolk will choose between the status quo and adding two patrols, because it depends on what matters more to the community: reducing risk for youth or library books. o There is an important decision to be made as a trade-off is involved and value judgements have to be made. This is a decision that the town has to make together so some sort of group process is needed to decide. Applying the conceptual framework to a society-wide risk – how far should NZ go to make its banking system crisis-free? o Economic and financial shocks can occur at any time, and can be very significant (e.g imagine the fallout for NZ of tourism terrorism). o There is often no advance warning (just like poor health or an accident). o When a shock hits, some of the things banks own can become worth nothing and banks can become bankrupt as a result (banks can’t pay their debts). If this happens it is a banking crisis. o When banks can’t pay their debts, the economy doesn’t work well and a large number of people can lose their jobs. o The risks of economic and financial shocks causing a banking crisis can be reduced by a rule but there is a cost to this – the rule impacts on interest rates. To get more safety you have to live with higher interest rates. o In this case ‘risk’ is the probability an unknowable shock causes a banking crisis in any given year (the banking system gets ‘sick’). ‘Economic wellbeing’ is the expected size of the economy in any given year taking into account the higher interest rates some people have to pay. ‘Economic wellbeing’ is measured as real output in the economy (real GDP). o Just as for Holly, Tama and the town of Matua, some options amount to spending more (e.g. on high-vis gear) but they allow you to earn more overall – you are sick less often, and being sick means you lose income. And some options mean you spend so much reducing risk your economic wellbeing is less than if you stick with the status quo or adopt another option. status quo adding one patrol adding two patrols 0 50 100 150 200 250 What the town has left to spend on library books 89 90 91 92 93 94 95 96 97 98 99 100 'Safety' (the percentage of youth prevented from making harmful choices) 'Economic wellbeing' What will the townsfolk do?

8 8 o Just as for Holly, Toma and the town of Matua, some options can be eliminated right away. Illustration of what would be required in ‘Stage 2’

1. Explain where banks get their funding and why interest rates might increase if bank owners increase the funding they provide. Discuss what might impact on who faces an increase and who doesn’t.
2. Explain how interest rates impact on the economy as a whole.
3. Describe banking crises and look at unemployment, related social harm and impacts on government spending. Describe what happens to GDP in a crisis.
4. Describe what the different options look like in terms of interest rates, GDP and economic and non-economic wellbeing.
5. Locate the options using the graphical tool.
6. Outline in detail what the banks say about the proposal (use quotes from the banks’ written submissions to the authorities). Ask participants to show what the banks are saying using the graphical tool (ans: the banks say the status quo is Option D and authorities are proposing Option ‘F’ below). Option A Option B Option C Option D Option E Option F 296 297 96.5% 97.0% 97.5% 98.0% 98.5% 99.0% 99.5% 100.0% Expected real GDP $bn per annum 'Safety' (the probability the banking system will not have a crisis in any given year) 'Economic welbeing' What should NZ do?

9 9 7. Ask the participants to discuss the banks’ view. Does Option F eliminate Options D or E (i.e. do any of these options become inferior as we used that label earlier)? (ans: no, because while output maybe lowest under ‘F’, safety is highest). Are the banks correct to say the authorities have gone too far? (ans: whether D, E or F is best depends on the value NZ society places on safety versus GDP). 8. Locate the authorities views on the graph. The authorities believe the status quo is Option C, and they have suggested a proposal that lies somewhere between C and D (central assumptions) or D and and E (if they make more optimistic assumptions). 9. Summarise what the external experts have said. 10. Share and discuss some of the media headlines (both in support and against). Have the options been well explained in the media? Do the commentators appear to have understood the issues correctly? Try and position the media views on the graph. 11. Revisit (and expect confirmation of) what the group agreed were inferior options in Stage 1 (Option A, B and C) 12. Re-poll on views about remaining options. Illustration of what would be required in ‘Stage 3’ 13. Discuss the various viewpoints and ask whether the differences matter and if so, to whom (e.g. people who have large debts might have different views to people with savings in the bank) 14. Can the group form a collective view on what the authorities should do? 15. Re-poll Concluding remarks 16. The ideas in this paper are intended as a starting point for discussions with Kantar, as the design of the workshops is being considered. We are happy to discuss any aspect of this paper with you. Option A Option B Option C Option D Option E Option F 296 297 96.5% 97.0% 97 5% 98 0% 98.5% 99.0% 99 5% 100.0% Expected real GDP $bn per annum 'Safety' (the probability the banking system will not have a crisis in any given year) 'Economic welbeing' What should NZ do?

How does an approach like this compare to the way we normally go about assessing a situation? Educate: Present respondents with all of the necessary information to inform the discussion to come 45 minutes Today we will be talking about the banking system in NZ. I’m sure that will produce a lot of different reactions across us as a group, because for many it’s not something we spend a lot of time thinking about, but what we’re going to do next is to start looking at a variety of videos and later we’ll have some material on the walls too so that we all feel like we can contribute. Basically, what we’ll be talking about is what it’s like today, how it impacts us, and what we want it to look like in the future Does anyone have any strong feelings about that -positive or negative? Good to get it out now… INTRODUCE STIMULUS 1 (STORYBOARD (ANNEX 1 OF RFQ) & MONEY IN / MONEY OUT) So, do we have any questions on that – did we all feel like we got it? Before we start doing this, let’s do a quick poll, which we’re going to do a few times today… INTRODUCE POLL TECHNOLOGY – CAHOOTS POLL: Should NZ be managing or reducing risk in the banking system? Now let’s look at some more material. This takes the last explanation further and starts to explore the idea of what can happen when a bank or a banking system faces certain stresses and some different perspectives on how to manage that INTRODUCE STIMULUS 2 (OPINION PIECES)  BBC VIDEO  LIAM DANN S&P  ABC from 5.30mins  LIAM DANN WITH ADRIAN ORR from 7.30 – 12.20 mins So, what did we learn from that? Was there anything that was discussed that we didn’t understand? Was there anything that we had a strong reaction to – positive or negative? What parts of what you just saw had the largest impact on you? Why? Let’s pair up with some one next to us now and I’d like you to explain to the other person… a. What you learned about… b. The things that we had any strong reactions to… Ok so let’s write it up in your words, not in theirs… REPORT BACK AND WHITEBOARD What is the problem or risk that is being discussed? How does that risk come about? Do all parties have the same viewpoint on what should be done or how? What are the differences? The information you had presented to you – was it fair & balanced? Was there anything missing that you felt should also have been explored? POLL: Let’s poll that question again. Should NZ be managing or reducing risk in the banking system? If so, how should we achieve this? Let’s quickly brainstorm some ways to do it WRITE DOWN THE KEY ACTIONS AVAILABLE FOR MANAGING RISK

Do we have any strongly held opinions at this point which are positive or negative towards any of these proposed ideas? Let’s get them out now… You may recall from one of those videos – when the Reserve Bank Governor was being interviewed that they are proposing requiring banks to hold more capital in NZ to protect them from insolvency in the case of a financial crisis As an idea – what do we think of this as an approach? POLL: IN FAVOUR / OPPOSED Is there much variety in how we feel about this across the room? Across NZ? What is it that makes our feelings on an issue like this differ? Is it different people’s personalities, background, culture, politics etc? 15min Break SETUP STIMULUS 3 Detailed Appraisal: to understand the public’s attitudes towards the issue, the key issues driving those attitudes and the trade-offs they prefer 60 minutes So, until now we’ve been talking generally about the economy as a whole and broad ideas, and we have introduced this one idea that the Reserve Bank has proposed – of banks holding more capital in NZ Now I’d like to bring it down to the level of the individual. Let’s start to bring these arguments to life as people and have a read of what some individuals & organisations have said about the idea of holding more capital in NZ. INTRODUCE STIMULUS 3 (PERSONA & STAKEHOLDER VIEWS) & WALKAROUND BREAK INTO TWO GROUPS & DISCUSS What part of this is cutting through / having an impact on you? Have you learned anything new? Do you have any unresolved questions or anything we don’t understand? Do we have any strong reactions positive or negative...? I’m going to ask you again now to see if anyone feels any differently? POLL: Should NZ be managing or reducing risk in the banking system? / Should banks be forced to hold more capital in NZ or not? Who are the main groups that are affected by this decision? Whose views should we be considering? PROMPT ON BANKS, SHAREHOLDERS, RBNZ, BUSINESSES WHO BORROW, PEOPLE WHO BORROW, PEOPLE WHO HAVE SAVINGS, TAXPAYERS, PEOPLE WHO RECEIVE GOVT ASSISTANCE ONE PERSON REPRESENTS EACH GROUP AT THE FRONT TABLE. EACH READS OUT THEIR CASE (+/-) FOR MANAGING BANKS How do we respond to each party? What are our thoughts & feelings about what each is saying? Whose views should take priority? Now, let’s apply the previous tradeoff approach we used before to talk about banking risk INTRODUCE BANKING TRADEOFF MODEL Which position does the RBNZ think we’re at? Which position do the banks think we’re at? Which one do you agree with & why?

Which one do you believe and why? Which position do we feel that NZ should take? Now let’s revisit this question of trade-offs and ask that question again by thinking about particular people who we’d have to think about and what kind of tradeoff is going to be best for them HANDOUT 5x PERSONAS SME OWNER / NURSE / STUDENT / RETIREE / FARMER How much of a tradeoff between the current and the future are we willing to make for each of these people DISCUSS EACH IN TURN & WHITEBOARD I’d take a safer banking system until you reach the point where…? Wellbeing To understand perceptions of the personal impact of banking crises 15 minutes You’ve heard some people talk today about what they feel are the potential downsides of banking risk that we’ve just been discussing, Do we agree with the idea that banking risk can impact people’s wellbeing? Does that seem credible? If so, how does the banking system impact our wellbeing as citizens? Maybe you can refer to some of the points raised at the start or you may have your own thoughts about this… Which parts of our wellbeing are most at risk? You can think about some of the personas on the wall to help you…PROMPT Personal finances, physical health, mental health, employment/income. How badly was NZ impacted by the GFC? Was our wellbeing impacted at all? Do we know of anyone who was? How did it affect them? Which of these areas is the most concerning? Conclusion To bring together individual’s position on the issue and communicate this clearly & personally 45 minutes Now we’re going to bring this all together by arguing for & against this policy. Let’s split everyone into two groups [GENERAL PUBLIC POSITIVE & NEGATIVE]. I’d like both groups to spend some time preparing for a debate where you are going to argue why this policy is what NZ should be or shouldn’t be adopting 3 ON EACH SIDE SPEAK Right, now we’ve listened to the arguments, let’s do our poll again as we did at the beginning. POLL: Should NZ be managing or reducing risk in the banking system? / Should banks be forced to hold more capital in NZ or not? Have our preferences changed at all across the conversation? What was it that has impacted our thoughts on the topic of managing banking risk? Now to finish off we’re going to ask everyone to give their personal view / answer to the question we’ve been discussing today. We’re going to invite everyone to say what they prefer and why. You’re going to be speaking directly to people who will have influence what happens so make your opinion heard. IF you were them what would you do? Should NZ require banks to hold more capital in NZ or not?

SETUP PHONE & TRIPOD OUTSIDE THE ROOM To each respondent…what would you do & why?

Request for Quote Focus groups with New Zealanders to discuss the Reserve Bank’s Capital Review proposals Reserve Bank of New Zealand 2 The Terrace Wellington SECTION 1: Key information 1.1 Context a. This Request for Quote (RFQ) is an invitation to suitably qualified suppliers to submit a Quote for the Focus groups with members of the public to discuss the Reserve Bank’s Capital Review proposals project. b. The Reserve Bank of New Zealand (RBNZ) is issuing this RFQ to selected panellists on the All of Government Consultancy Service Panel Contract. c. This RFQ is being used to seek quotes that will be evaluated and a successful Respondent identified. Information from this RFQ and the quote from the successful Respondent will be incorporated into the AoG Consultancy Service Order. 1.2 Our timeline a. Here is our timeline for this RFQ. RFQ released to Suppliers Tuesday, 4 June 2019 Deadline for Questions 5:00pm, Wednesday, 12 June 2019 Deadline for Quotes: 5:00pm, Wednesday 19 June 2019 Anticipated Contract start date: 1 July 2019 Anticipated Contract end date 30 August 2019 b. All dates and times are dates and times in New Zealand.

2 c. The RBNZ is available to meet with interested parties to clarify the scope of the proposed review prior to the submission of quotes. Please contact our Point of Contact to arrange. d. Interested parties are encouraged to submit questions and requests for clarification at any time between the released to suppliers date and the Deadline for Questions. 1.3 How to contact us a. All enquiries must be directed to our Point of Contact. We will manage all external communications through this Point of Contact. b. Our Point of Contact Name: Susan Guthrie Email address: susan.guthrie@rbnz.govt.nz 1.4 Developing and submitting your Quote a. You must use the Response Form provided. 1.5 Address for submitting your Quote a. Quotes must be submitted by email to the following address: Susan.Guthrie@rbnz.govt.nz b. Quotes sent by post or fax, or hard copy delivered to our office, will not be accepted. 1.6 Our RFQ Process, Terms and Conditions a. Offer Validity Period: In submitting a Quote the Respondent agrees that their Quote will remain open for acceptance by the Buyer for 3 calendar months from the Deadline for Quotes. b. The RFQ is subject to the RFQ Process, Terms and Conditions (shortened to RFQ￾Terms) available at www.procurement.govt/for agencies The RFQ-Terms are incorporated into this RFQ by reference. We have not made any variation to the RFQ-Terms. SECTION 2: Our Requirements 2.1 We are seeking a solution that will enable the Reserve Bank to meet the following objective: To learn about the views of members of the public with respect to: i) risk in the financial system; ii) the potential trade-offs involved in reducing risk; and iii) the capital proposal announced by the Reserve Bank in December 2018. The Reserve Bank began a review of the capital adequacy framework applying to locally incorporated registered banks in 2017. The aim of the Capital Review is to identify the most appropriate framework for setting capital requirements for New Zealand banks, taking into account how the current framework operates and international developments in bank capital requirements. In December 2018, the Reserve Bank published a consultation paper seeking feedback on proposed higher capital requirements for locally incorporated banks

3 As part of the next stage of the Capital Review, the Reserve Bank is commissioning a supplier to carry out focus group with members of the public to get some additional information about public attitudes towards risk in the financial system, the pros and cons of reducing risk, and the capital proposal announced in December 2018. This will be used to help inform final decisions in the Reserve Bank’s Capital Review, alongside other information and analysis carried out during the Capital Review. More information about the Capital Review is available here: https://www.rbnz.govt.nz/regulation-and-supervision/banks/consultations-and-policy￾initiatives/active-policy-development/review-of-the-capital-adequacy-framework￾registered-banks A non-technical summary of the Capital Review objectives is provided in Annex 1. 2.2 The supplier will be required to: i. Lead the design, with input from the RBNZ, of four focus groups with members of the public that explore aspects of prudential capital requirements in New Zealand. The primary focus will be seeking views about the bank capital proposal announced in December 2018, noting this will involve exploring participants’ views about the impact of financial system instability on wellbeing (for example, personal and household finances, physical and mental health and community connectedness) and the potential costs involved in making the financial system safer. ii. Provide the RBNZ a detailed draft overview of the agenda for each focus group, for approval by the Reserve Bank before focus groups are held. iii. Deliver all aspects of the focus groups, including identifying participants, conducting the focus groups and writing up meeting notes, noting that the Reserve Bank is available to provide input as needed (as detailed below). iv. Provide a final report to the RBNZ summarising the key themes identified during the focus groups, including any differences between different groups in the community, to the extent this is possible. v. To supplement the final report the supplier will also provide the RBNZ with anonymised direct quotes from focus group participants. 2.3 Additional information on requirements Section 2.2 specifies that the RBNZ wants a supplier to provide four focus groups to address the key topics described in section 2.1. The RBNZ anticipates that each focus group would involve 10-15 people. Where possible, the RBNZ would like the focus groups to include people from a range of different cultural and demographic backgrounds (eg. age and gender), and from different regions in New Zealand. The Reserve Bank is open to providers exploring innovative alternative ways to meet the objectives specified in section 2.1. If providers do wish to propose alternative approaches they should

4 demonstrate how the approach will generate the information the RBNZ needs to address the objectives of the project. The supplier will be required to design the focus groups with input from RBNZ staff. The input from RBNZ will cover:  Providing background information about the Capital Review to the supplier.  Providing guidance about the key topics that the Reserve Bank wants to be covered in the Focus Groups.  Assist in the preparation supporting material about the Capital Review to help inform the Focus Group participants about the topic. As part of the design of the focus groups, the supplier will be required to provide the RBNZ an agenda for the focus group meetings that sets out a ‘run sheet’ for the meetings, including a specification of the questions that participants will be asked to discuss. Once a preferred supplier has been selected the RBNZ will meet with the supplier to discuss these requirements in more detail. The RBNZ is available to provide more information to potential suppliers during the preparation of quotes. Quotes prepared in response to this Request for Quotes document should provide estimates of the costs of each component of the work discussed in this document. The RBNZ expects that the work will be of a high standard and that the successful supplier will have processes in place to provide quality assurance around both the provision of the focus groups and the final report produced for the project. 2.4 Deliverables Timeframe The Reserve Bank requires that the focus groups and final report are completed by 30 August 2019. 2.5 Payment Full payment for the contract will be made once the final report is provided to the Reserve Bank. 2.6 Contract Timeframes The contract end date will be Friday, 30 August 2019. 2.7 Conflicts of Interest Suppliers should declare any conflicts of interest, and how these will be managed, in their Quote. Quotes that the Reserve Bank considers do not adequately address any conflicts of interest will not be considered further. 2.8 Publication of information Suppliers should note that the RBNZ intends to publish the results on the focus group research on its website at the conclusion of the Capital Review. Capital Review final decisions are expected to be released publicly in the fourth quarter of 2019.

6 d. In preparing their Quote, Respondents are to consider all risks, contingencies and other circumstances relating to the delivery of the Requirements and include adequate provision in the Quote and pricing information to manage such risks and contingencies. e. Respondents are to document in their Quote all assumptions and qualifications made about the delivery of the Requirements, including in the financial pricing information. Any assumption that the Buyer or a third party will incur cost related to the delivery of the Requirements must be stated, and the cost estimated, if possible. f. Prices are to be tendered in NZ$ and exclusive of GST. Unless otherwise agreed, the Buyer will arrange contractual payments in NZ$. g. Price will receive a weighting of 10% in our evaluation process. SECTION 5: Our Proposed Contract 5.1 Proposed contract We intend to use the All-of-Government Consultancy Services Order for the purchase and delivery of the Requirements.

7 ANNEX 1: Non-technical summary of Capital Review Bank Capital: What is it? Banks get their money from two places – their owners (often referred to as ‘shareholders’) and people they borrow from, including depositors (often referred to as ‘creditors’). The money that banks get from their owners is referred to as ‘capital’. Banks in New Zealand, like banks around the world, are required to have minimum levels of capital. This means that a minimum percentage of all a bank’s money must come from its owners. This minimum requirement exists to ensure that the owners of a bank have a meaningful stake in the business, because the more the owners have to lose, the more carefully they’ll manage the bank. Another reason banks are required to have minimum levels of capital is in case the bank loses money. When a bank loses money, it is the owner’s investment in the business (the bank’s capital) that is lost first, not the money the bank borrowed.1 When the amount of a bank’s capital gets too low, and it can’t get any more capital, the bank is likely to fail. So the more capital a bank has, the more money it can stand to lose before going out of business. Higher levels of capital better protect depositors. Capital requirements are the most important component of our overall regulatory arrangements. In the absence of stronger capital requirements, other rules and monitoring of bank’s activities would need to be much tougher. The Capital Review It is important that the Reserve Bank’s banking regulations are up to date. There is also increasing evidence that the costs of bank failures – both economic and social (well-being) costs – are higher than previously understood. This is why we’re reviewing the capital rules for banks. The Reserve Bank has already consulted on how to measure the amount of a bank’s capital. The question we are asking now is: What minimum level (percent) of a bank’s money should come from its owners? Our Proposals Banks currently get the vast majority of their money by borrowing it (usually over 90 percent), with the rest coming from owners (usually less than 10 percent). The Reserve Bank is proposing to change this balance by requiring banks to use more of their own money. This proposal is consistent with steps taken by other banking regulators after the Global Financial Crisis. The Reserve Bank is proposing this change to reduce the chances of banks failing in New Zealand. If banks in New Zealand fail, some of us might lose money and some of us might lose jobs. However, there would also be indirect costs on all of society that may be harder to see that would negatively impact the well￾being of all New Zealanders. In the end, we would all bear the cost of bank failures, in one way or another.

1 The Reserve Bank’s ‘Bank Financial Strength Dashboard’ also provides some useful background information and relevant data on bank capital: https://bankdashboard.rbnz.govt.nz/summary

8 This is why we want to make the chances of this happening very small – so small that a banking crisis in New Zealand shouldn’t happen more than once every two hundred years. We are also making other proposals that would help ensure banks calculate how much capital they have more accurately. Extent of changes The proposal would see banks’ capital levels increase materially. We are proposing to almost double the required amount of high quality capital that banks will have to hold. In practice, actual changes to the amount that they hold will be less than double and will vary. The increase will depend on their current levels of capital, how much extra they choose to hold above the required minimum, and whether they are a large or small bank. Generally, it will be an increase of between 20 and 60 percent. This represents about 70 percent of the banking sector’s expected profits over the five-year transition period. We expect only a minor impact on borrowing rates for customers. Possible Impacts If banks increase their capital, they will be more resilient to economic shocks and downturns, which will strengthen New Zealand’s banking system and economy. What’s the downside? Because the level of a bank’s capital can have an impact on the interest rate it charges on its loans, it is possible that higher capital requirements could make it more expensive for New Zealanders to borrow money from a bank. While we certainly take this into account, we think this impact should be minimal. Another potential impact is that bank owners would earn less from their investment in the bank. While we agree that this is likely to be the case, we believe this cost would be more than offset by the benefits of a safer banking system for all.