RBNZ seeks safety in conservatism

New Zealand will have one of the safest financial systems in the world if controversial capital reforms are implemented.

The Reserve Bank of New Zealand headquarters in Wellington.

New Zealand will have one of the safest and most resilient ­financial systems in the world if controversial capital reforms are implemented, according to Reserve Bank of New Zealand deputy governor Geoff Bascand.

Mr Bascand said a Standard & Poor’s review last month had concluded that NZ faces a lower financial stability risk because of its slowing housing market.

This had reduced the prospect of a severe correction in prices and flow-on losses for the Australian-owned banks.

“Our capital review proposals will take us up to very much leading-edge in terms of capital conservatism,” Mr Bascand told a Citi investor conference in Sydney on Wednesday.

While the slowdown in the NZ housing market could be cyclical rather than permanent, the claim by the RBNZ that its capital ­reforms would be leading-edge in their conservatism was likely to fuel further criticism from the Australian parent banks.

ANZ Bank chief Shayne ­Elliott, who runs the biggest bank in NZ, has said in the past that the RBNZ was seeking a “very gold-plated insurance ­policy”.

“That’s OK, but somebody has to pay the premium, and we’re saying some of the payment will have to come from the NZ community — our customers,” Mr ­Elliott told The Australian.

ANZ’s large position in NZ meant it was also the most affected by capital proposals announced by the Australian Prudential Regulation Authority on Tuesday to require the big four to hold more capital against their NZ and insurance subsidiaries.

ANZ said the potential impact was 75 basis points of common ­equity tier one capital, or $2.5bn, although management action could mean the ultimate effect was minimal.

Mr Bascand acknowledged the increased equity funding in NZ over a five-year transition ­period might lead to lower ­returns per dollar invested, but the flip side was that the investment was safer.

The RBNZ, he said, was targeting a high level of resilience to external shocks — the capacity to withstand a one-in-200-year crisis — because the cost of a severe crisis was very high.

International evidence also showed the cost of buying ­extra insurance was modest.

The RBNZ expected a 20 to 40 basis point rise in bank margins as a result of the capital ­reforms, which would be ­unveiled in the first week of ­December.

The numbers were “relatively small” but ultimately there would be an impact on investment and spending in the NZ economy.

“Our approach from the outset has been to set capital requirements at a level where we can be confident that these costs are ­outweighed by the benefits of a safer financial system,” Mr Bascand said.

The benefits include easier ­access to funding than more leveraged peer banks during turbulent times.

This meant a weakly capitalised banking system could undermine monetary policy responses to economic downturns, as banks could struggle to pass on lower ­interest rates as their cheaper sources of funding dried up. A well-capitalised banking system would also be able to continue its access to funding in times of financial stress. Mr Bascand rated the current global risk as “high”.

In NZ, where household debt as a proportion of disposable ­income had spiked from 60 per cent in the 1990s to 166 per cent (and even higher for households with mortgages), the super-low interest rate environment was a recent phenomenon.

“The NZ economy has responded much more than Australia to downswings in the global economy,” he said. “In contrast to Australia, economic activity in NZ contracted during the Asian crisis in the late 1990s and the US subprime mortgage crisis of the late 2000s that snowballed into the global financial crisis.”