Wednesday, 19 October 2011

RBNZ on seismic risk

Here's RBNZ Governor Alan Bollard on the Reserve Bank's activity during the Canterbury earthquake:
One of our most pressing concerns immediately following the earthquakes was the maintenance of payments systems. In the aftermath of events such as natural disasters, there is strong demand for food, water, petrol and other necessities. And with damage to power and telecommunications systems, access to cash is a key concern. Only two hours after the  February earthquake the Reserve Bank started receiving orders from banks for more cash for delivery to Christchurch. Ensuring cash was available required us to work closely with banks and Cash in Transit companies to meet the spike in demand. This task was complicated by damage to roads that meant travel, where possible in Christchurch, was taking about three times as long as normal.
The public also needed information about where cash was available. To ensure this, Bank staff used Google maps to provide a live feed of operational and accessible ATMs. Overall about $150 million of extra cash was sent to Christchurch in the week of the earthquake, representing about $350 per resident.  There was a big drop in electronic payments and increased demand for cash, initially in the form of $20 and $50 notes through the surviving ATM machines. We learned a lot about ATM configuration to ensure operability, and the internet was very useful to provide up to date information on ATM availability.
I saw a lot of non-functioning bank machines, but I didn't see any not working in places where the power was on and the phones were working. After the February quake, there wasn't really anything on my side of town on which money could be spent. But the precautionary motive for cash balance holding certainly has affected how much I keep on hand.

Bollard goes on to talk about balancing medium-term inflation risks coming from eventual Canterbury reconstruction against short term declines in economic activity. The costs in Wellington of a similar event would be far worse: more roading chokepoints through hills, dependence on the Cook Strait Cable, and an airport built on land that didn't exist prior to an earlier earthquake.

RBNZ is ready in case Wellington goes down:
But even though our building could be standing after an earthquake, there is a risk that damage to surrounding buildings could make the Wellington office  inaccessible. To ensure that the Bank's core functions can be maintained in such circumstances, an Auckland office has been set up that houses a dozen staff on a day-to-day basis. These staff are engaged in a number of business critical roles (including foreign reserves management, domestic liquidity, and payments and settlement systems) to ensure the economy of New Zealand would continue to function with some stability in the event of a major disaster. Furthermore,  provisions in the Reserve Bank Act provide for the delegation of key aspects of the Governor's role to the Auckland Office Manager, with appropriate safeguards.
They warn against over-reaction: guarding against downside risk imposes cost in states of the world where the risk doesn't obtain, and it's possible to overinsure against earthquake risk with building regulation. But they also warn about our potential isolation in the case of a big hit to Wellington. It's because of this latter risk that I've worried about EQC's being heavily invested in domestic government securities. Hopefully any future rebuilding of the fund will have more diversified asset holdings.

There will have to be a serious rethinking of EQC's role once the current disaster has played out; it will be interesting to see what changes RBNZ and Treasury recommend. The interplay between EQC and private insurers have been a complete mess. Whatever losses might obtain due to agency problems in a world where EQC simply covered the first $100k of property damage as assessed by the private insurer are likely less than the costs that we're currently seeing due to coordination failures between insurers and EQC.

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