RBNZ gives banks 7 years to comply with $23bn capital requirement
New Zealand is almost doubling the amount of capital that banks must to hold, but Australian investors are relieved.
New Zealand is almost doubling the amount of high-quality capital that banks are required to hold, aiming to limit the chance of a bank collapse to a one-in-200 year event.
However the longer-than-expected lead time for the introduction of the new rules helped spurred on a sharp jump in Australian bank shares. Australia’s big four banks dominate New Zealand’s banking market and are in line to feel the impact of the new capital charges.
New Zealand’s banks will need about $NZ24 billion ($23bn) in extra capital to meet the new rules that will be implemented over seven years, the Reserve Bank of New Zealand said on Thursday. The RBNZ had previously proposed a five-year implementation period.
At 1.20pm National Australia Bank was 1.8 per cent higher at $25.29, Commonwealth Bank was 1.3 per cent higher at $78.85, and Westpac rose 1.3 per cent $24.29. Shares in ANZ, which operates New Zealand’s biggest banking franchise, surged 2.6 per cent after coming off a trading halt.
ANZ on Thursday said it is confident of being able to meet the new capital rules without the need to raise additional capital. For ANZ, the net impact on its business is an increase of common equity Tier 1 capital of around $3 billion by July 2027 which includes a around $1 billion management buffer. ANZ noted it had set aside $NZ1.5 billion of profits in its New Zealand business during 2019 in anticipation of meeting higher requirements.
“We have been planning for these changes since the original consultation. Given the extended transition period and our strong capital position, we are confident we can meet the higher requirements without the need to raise additional capital,” ANZ chief executive Shayne Elliott said.
The central bank is requiring so called “Tier 1” capital at the four biggest banks - all Australian owned - to be 16 per cent of their assets on a risk weighted basis, up from 8.5 per cent. The total capital ratio will rise to 18 per cent from 10.5 per cent.
“Our decisions are not just about dollars and cents. More capital in the banking system better enables banks to weather economic volatility,” said RBNZ governor Adrian Orr.
“More capital also reduces the likelihood of a bank failure,” Mr Orr said.
“Banking crises cause not only harmful economic costs but also distressful social issues, such as the general decline in mental and physical health brought about by higher rates of unemployment,” he said. “These effects are felt for generations.”
The central bank said the changes would result in lending rates rising by 20.5 basis points over the long term. It called that forecast “conservative” and it is a reduction from the rise in lending rates it initially envisaged.
The central bank has estimated the additional capital is equal to about 70 per cent of the banking industry’s expected profits over five years.
The changes, the central bank says, are consistent with steps taken by other countries after the 2008 global financial crisis, and will reduce the chance of a bank failure to a 1-in-200-year event.
Shareholders will need to put up more money to achieve that greater protection against a bank failure. That will reduce their return on investment, but is justified by the benefits of a safer banking system, a central bank discussion paper says.
Of the $NZ24 billion of additional capital, some $NZ20 billion of that will need to be Tier 1 capital that is intended to absorb losses during a financial crisis or economic downturn.
Commonwealth Bank said its ASB business in New Zealand would require around $NZ3 billion in additional capital to meet the new requirements by July 2027.
“Under APRA’s proposed revisions to APS111, an equity injection of this additional capital into ASB over the transition period would eventually result in a reduction in CBA’s Level 1 CET1 ratio of approximately 30bps,” the bank said.
“CBA is well placed to meet the changes, noting that a significant increase in capital ultimately increases the cost of providing loans to customers.”
Westpac said it’s New Zealand business “is already strongly capitalised” with a Tier 1 capital ratio of 13.9 per cent.
On a pro forma basis and assuming a Tier 1 capital ratio of 16 per cent to 17 per cent, Westpac said its New Zealand business would require a further $NZ2.3bn to $NZ2.9bn of Tier 1 capital to meet the new requirements that by 2027.
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