Banks asked to take on bigger share of market risk

Friday, 14 December 2018

The Reserve Bank says banks must add capital to be able to survive a one in 200-year magnitude financial crisis.

One economist says a proposal to require banks to hold more capital could end up hurting borrowers.

The Reserve Bank has unveiled a plan that would require them to pump in fresh capital equivalent to 70 per cent of their next five years' profits.

It has begun consulting on a plan to have banks increase capital, saying it is intended to make New Zealand banks less susceptible to failure.

'Insisting that bank shareholders have a meaningful stake in their bank provides a greater incentive to ensure it is well managed,' said deputy governor and general manager of financial stability Geoff Bascand.

'Having shareholders able to absorb a greater share of losses if the company fails also provides stronger protection for depositors,' he said.

* Reserve Bank governor links huge bank profits to a lack of investment**

He predicted only a 'minor' rise in mortgage and other borrowing rates.

'Bank crises happen more often than many people care to remember, and the economic and social costs of bank failures can be very high and persistent.

'These proposals are designed to make bank failures less frequent. With these changes we estimate the banking system will be resilient to shocks that might occur only once every two hundred years,' Bascand said.

Deputy Governor Geoff Bascand says banks need to be more resilient to crisis.

But economist Cameron Bagrie, of Bagrie Economics, said that could hurt those who took loans from the banks.

He said it was a big jump, which could mean higher interest rates.

The Reserve Bank has been reviewing bank capital rules since early 2017, and in late November governor Adrian Orr signalled a shift was coming soon.

New Zealand currently requires banks to hold sufficient capital to survive a once-in-100 year banking crisis, but a once-in-200 year banking crisis is one of a far larger magnitude.

'We are proposing to almost double the required amount of high quality capital that banks will have to hold,' Bascand said.

This would likely involve banks having to reinvest a large proportion of their profits over a five-year 'transition' period

'This represents about 70 percent of the banking sector's expected profits over the transition period (of five years).'

'While borrowing costs may increase a little, and bank shareholders may earn a lower return on their investment, we believe these impacts will be more than offset by having a safer banking system for all New Zealanders,' Bascand said.

The magnitude of the new capital required by banks surprised former Reserve Bank head of financial markets, Michael Reddell, who now blogs on the central bank.

A policy move of this scale would have an impact on the value of New Zealand banks, though ASB, BNZ, Westpac and ANZ are all owned by Australian companies listed on the ASX sharemarket.

'If these were domestically listed companies, you would see the impact immediately,' Reddell said.

That would be through a fall in the price of their shares.

Many KiwiSaver funds own shares in the Australian banks.

Reserve Bank Governor Adrian Orr flagged the need to strengthen banks in a speech in November.

Reddell said: 'New Zealand capital ratios have been among the highest in the OECD anyway.'

The move would make them 'an international outlier.'

The New Zealand Bankers' Association hired PWC to study New Zealand bank capital ratios versus banks overseas, and found them to be strong.

The Reserve Bank plan is opposed by the banks, which have been preparing for over a year to be asked to inject capital into their operations.

New Zealand Bankers' Association acting chief executive Antony Buick-Constable said: 'New Zealand's banks are currently very well capitalised and among the most stable and secure in the world.'

'Reserve Bank stress tests show banks can withstand a 40 per cent fall in house prices,' he said.

'Buffers ensure banks have sufficient capital to get through a serious economic downturn. However, too large a buffer limits banks' ability to innovate and enhance customer outcomes.'

'The industry will work closely with the Reserve Bank and stakeholders during this consultation period to achieve the best outcome for customers,' he said.