RBNZ move could lead to $ 20 billion increase for industry
The Reserve Bank of New Zealand (RBNZ) has made few concessions by forcing the country’s banks to hold more capital to bolster their finances in the event of a future crisis.
The central bank has confirmed that Australia’s big four banks – ANZ, ASB, BNZ and Westpac – will need to increase the amount of capital they hold from 10.5% of their loans to 18%.
Small banks, including Kiwibank, SBS, TSB and the Co-op Bank, will need to hold a minimum of 16% of the capital.
The average minimum for the industry right now is around $ 14.
The move was largely in line with the RBNZ’s initial proposals, aimed at strengthening banks to withstand a 200-year financial crisis and protecting depositors’ money.
“More capital also reduces the likelihood of bank failure. Our decisions are not just about dollars and cents. More capital in the banking system enables banks to better resist economic volatility and maintain good customer results over the long term, ”said RBNZ Governor Adrian Orr.
The new rules will force the industry to raise up to $ 20 billion to meet the new minimum capital levels.
The RBNZ said it could be done by banks that sell stocks, get more money from their parents, keep more of their profits and pay lower dividends, or through a mix of other financial instruments involving debt or different types of shares.
Banks have warned of higher borrowing costs, lower deposit rates and credit rationing.
The RBNZ has agreed that its decisions will increase borrowing costs, but said the increase is expected to be minimal. He gave an example of the cost of a 30-year, $ 100,000 mortgage at the current two-year rate of 3.45%, increasing by $ 5 per fortnight.
Finance Minister Grant Robertson said the original proposal was amended after public consultation.
“What I think is really important now is that the commercial banks and the Reserve Bank work together to get back to what it is really about, which is the safety of New Zealanders’ money in the bank, ”he said.
He did not believe it would slow down the economy or that it would be “a big blow” to rural communities.
“The New Zealand banks, especially the four Australian banks, are doing very well here, they are very profitable here, there is no need for any particular sector to bear the brunt of it,” Robertson said.
His message to the sector was that “no bank is using this as an opportunity to target a particular sector, it is not necessary, there is now a seven year time frame during which the banks are able to work with the Reserve bank on a plane … these are very profitable entities.
The RBNZ has made some concessions to mitigate the impact on the economy and improve the position of small New Zealand banks, including Kiwibank, SBS, TSB and the Co-op Bank.
It enabled a different combination of securities to be recorded as second level capital.
He said his new requirements would essentially mean that bank owners would have to contribute $ 12 of their own money to support $ 100 in loans over the previous $ 8.
The RBNZ also reduced the minimum amount that small banks should hold to 16% of the capital, from the proposed 17%.
The new requirements will take effect from July 2020, but the RBNZ has extended the deadline for making the changes from five to seven years.
“With seven years to transition to the new requirements, banks will be able to sustain loan growth, achieve higher capital ratios and continue to pay dividends,” Mr. Orr said.
The banks had said the proposals could cause them to raise interest rates to ensure they were able to continue paying dividends to shareholders.
They also said they could ration credit to risky sectors such as agriculture or small businesses, or cut back on their operations.
“Where some banks may choose to limit the growth of their loans, it is likely that others will be able to increase their loans to fill any gap in the market,” said the RBNZ.
The reaction of retail banks
Shortly after the RBNZ’s announcement, the New Zealand Bankers Association said it welcomed the review’s conclusion.
“The announcement gives our banks certainty on the amount and type of capital they will need to hold in the future, and ends a solid consultation,” said Chief Executive Officer Roger Beaumont.
“We are delighted that the Reserve Bank has engaged with a wide range of stakeholders and made some changes to its original proposal. In particular, we recognize the longer implementation timeframe of seven years instead of five, which begins in July 2020.
We are also delighted to see a recognition of the differences between large and small banks, ”he said.
Mr Beaumont said the announcement will have an economic impact and that each bank will now consider the implications for its business and customers, and develop its own business response.
Gyles Beckford is Business Writer at Radio New Zealand. The above story was published under a special agreement with www.rnz.co.nz
Reserve Bank Governor Adrian Orr (file photo)