Reserve Bank plan could add thousands to mortgage repayments: Westpac

Friday, 24 May 2019

Westpac New Zealand chief executive David McLean. The bank has published 'scenarios' which suggest the Reserve Bank's plan to force banks to hold more capital could add more than $6000 a year in repayment costs to the 'average home loan in Auckland'.

A plan to require banks to hold more cash to help withstand future financial shocks could add $6000 a year to the average Auckland mortgage, Westpac is claiming.

On Friday morning the bank published its submission on the Reserve Bank's capital consultation which suggested borrowers would be hit hard by the plan.

The central bank is proposing that banks should be required to hold more capital on the balance sheet in to ensure the lenders can withstand a one in 200 year financial crisis.

New Zealand's four largest banks, ASB, ANZ, BNZ and Westpac - all Australian owned - would be required to increase tier one capital of 16 per cent, which it said represented an increase of 20-60 per cent.

It is estimated the plan will require the banks to raise an additional $20 billion under the Reserve Bank's proposals, although Westpac said it expected the figure would be higher.

Westpac's submission claims the Reserve Bank's proposals could add 100 basis points (1 percentage point) to borrowing costs in New Zealand.

It published a chart of 'scenarios' of what this could mean for borrows in different parts of New Zealand, from an extra $6008 a year in borrowing costs in Auckland, $3251 in the Bay of Plenty, $3773 in Wellington, $2742 in Canterbury and $3208 in Otago.

According to the submission the calculations are based on average prices in each region, with a 20 per cent deposit on a 30 year mortgage with a starting rate of 4 per cent.

The Westpac submission, written by regulatory affairs general manager Mark Weenink, said the plan would require banks to raise $25b at current lending levels, including $4.5b for Westpac alone.

But Westpac said the amount needed to be raised would grow in line with any increasing in lending.

'In order to fund growth at a rate of 3 per cent over the proposed five-year transition period, [Westpac] would be required to raise additional [core tier one] capital of $6.5b,' Weenink wrote.

The Reserve Bank said it was currently analysing 164 submissions it had received on its proposals.

Former New Zealand prime minister Bill English reportedly told a conference in Sydney on Thursday that he believed the Australian-owned banks were 'bluffing' in their warnings about the impact of the Reserve Bank plan.

'We will respond to the issues, evidence and views in those responses when we've completed our analysis of all the responses sent to us,' a spokesman said.

Previously, when asked about warnings of what its plans could do for borrowing costs, Reserve Bank governor Adrian Orr has said he expected competitive forces to play out if the banks were forced to hold more capital.

They're all talk - former PM

Yesterday, former prime minister Bill English told a conference in Sydney that he believed the Australian-owned banks were bluffing when they warned they could pull back from lending in New Zealand as a result of the plan.

'[Threats] to withdraw capital is, to a large extent, bluff. Australian shareholders and Australian banks do very well out of New Zealand. They generate good returns. I think they will stick around,' English said, according to the Australian Financial Review.

'So far, for all the bluster over the last 15 years, no Australian bank has taken its capital away. What does that tell me? What should it tell you? Don't believe what they say – watch what they do.'

Too conservative

Westpac's submission said it supported the Reserve Bank's plan to ensure New Zealand banks were well-capitalised, but claimed the proposals were 'unnecessarily conservative'.

'The proposals … go significantly further than is required to meet these objectives, go well beyond international norms and would create a productivity drag,' Westpac said.

'Given the complexity of the combination of untested inputs and likely wide ranging impact of the Proposals, a comprehensive independent cost-benefit analysis is required.'

On Monday the Reserve Bank revealed it was 'in the process of appointing external experts to independently review the analysis and advice underpinning the proposals'.

It expects to publish a summary of the submissions in June make a final decision on the announcement by the end of November.