Economist: Bank capital changes would add thousands to borrowers' bills

Tuesday, 12 March 2019

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Borrowers could see their home loans become $1000 or more dearer every year if Reserve Bank plans to require banks to hold more capital come to fruition.

The Reserve Bank released a discussion document before Christmas that proposed requiring banks to hold more money against their lending.

It wants to increase the minium common equity tier one capital ratio to 16 per cent - from about 11 per cent at present.

The amount of extra money they would be required to have on hand is equal to 70 per cent of the banking sector's expected profits over the next five years.

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The move is designed to improve the strength of the banking system and make bank failures less frequent.

Economist Ian Harrison, of Tailrisk Economics, said there had been little attention paid to the costs of the policy.

Cameron Bagrie, of Bagrie Economics, said $1000 a year on a $400,000 mortgage was not a lot.

'It is admitted that the higher capital requirements could make it more expensive for New Zealanders to borrow, but the bank claims that the impact will be 'minimal' and that they have taken it into account,' he said.

'However, even on the bank's own assessment … the cost to New Zealand will not be minimal. It is likely to cost around $1.5 billion per year, and possibly more.

'The present value of the cost of the policy could reasonably be assessed at $30 billion. A medium size business with a loan of $5 million could be paying $50,000 additional interest a year. A homeowner with a $400,000 mortgage could be paying an additional $1000 or more a year. The Reserve Bank has not taken borrowers' direct costs into account.'

He said the benefits of requiring that extra capital were minimal.

'Most of the costs of a banking failure are due to borrowing decisions made before the downturn. This will impose costs regardless of the amount of capital held,' he said.

'With current levels of bank capital failures will be rare, with the main cost likely to be a government capital injection. The experience with most banking crises, in countries most like New Zealand, is that governments have recovered most of their costs when the bank shares are subsequently sold.'

But Cameron Bagrie, of Bagrie Economics, said $1000 a year on a $400,000 mortgage was not a lot.

The other factor to be considered was what the Reserve Bank did to the official cash rate. Higher capital ratios would probably mean a lower cash rate, he said.

That could also mean a lower dollar. 'The export sector has the potential to come out on the other side of the ledger.'

He said, in an environment where New Zealand was striving for less focus on the housing market and more on the export sector, a proposal such as this could 'help around the edges'.

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