Reserve Bank of NZ’s plan to lift bank capital requirement questioned

An parliamentary panel has pushed back on an RBNZ plan to raise capital requirements for banks.

Adrian Orr, governor of the Reserve Bank of New Zealand. Picture: Bloomberg

A powerful New Zealand parliamentary committee has pushed back against a plan by central bank governor Adrian Orr to hit up the four major Australian banks for an extra $NZ25 billion ($23.6bn) in capital to shockproof the financial system.

Opposition finance spokesperson Amy Adams pressed Mr Orr on the Reserve Bank of New Zealand’s failure — at least so far — to conduct a cost-benefit analysis, and whether the capital reforms would mean an extra $NZ1.8bn-a-year burden for the economy, as forecast in expert’s report for the New Zealand Bankers Association lobby group.

An irritated RBNZ governor protested that the whole exercise was based on a “net benefits” framework, and that the Bankers Association report was being examined.

“I’m getting tired of hearing the same thing over and over again, and it’s just not true,” Mr Orr told the finance and expenditure committee. “We are bending over backwards to get the data and the areas we are missing into a sensible framework.”

Bankers Association chief executive Roger Beaumont said he was even more confused about the process for the capital review after Mr Orr’s remarks.

“Our argument is that the RBNZ should have undertaken a full cost-benefit analysis of their own proposal,” Mr Beaumont told The Australian.

“Instead, that work will occur after the proposal and we won’t be able to respond until the final decision is a fait accompli.”

The RBNZ has proposed hiking the minimum capital requirement for the country’s systemically important banks from the current level of 10.5 per cent to 18 per cent.

Higher-quality tier-one capital would be raised from 8.5 per cent to 16 per cent, in a bid to protect the financial system from a full-blown crisis that might only occur once in every 200 years.

The central bank has downplayed the impact of the changes, arguing that the major banks’ NZ subsidiaries were currently operating in NZ with an average of 12 per cent of tier-one capital.

The banks, it said, could meet the new requirements by retaining 70 per cent of their profits over the planned five-year transition period, without hitting the brakes on credit growth.

Final submissions on the reforms closed on May 17, with the central bank due to make a decision towards the end of this year.

So far, Westpac is the only bank to have released its final submission. It said the imposition of such high levels of regulatory capital on the banks would increase the cost to borrowers in NZ by more than 100 basis points, or $NZ6000 more on the interest bill for an average home loan in Auckland.

While the reforms referred to the benefits for NZ society, Westpac said there was little analysis of the quantity of the benefit or the costs. The bank said it was critical for the industry to participate in a full cost-benefit analysis.

Mr Orr told the committee he was asked yesterday what had changed since the financial crisis to make the system more resilient.

“My answer was not enough — our debt levels are higher, global financial concentration is as tight, and global interest rates are lower,” he said. “It’s not a superior position; it’s a position where we still need to put the roof on while the sun is shining.”

The governor also said it had been put to him that the banks had sailed through the financial crisis.

The truth, he said, was that the NZ Government had to “put on a $NZ133bn guarantee almost overnight”, official interest rates had to be cut by 575 basis points, there was a $NZ10bn wholesale lending guarantee, and the RBNZ had to buy $NZ8bn of debt from the banks to “give them liquidity just to survive”.

“That’s outside all of the economic chaos that went on in NZ, so it’s vitally important for the long-term health of a small economy that we have one of the best capitalised banking systems in the world.”