ANZ warns Reserve Bank capital proposals will push banks towards housing

Monday, 1 July 2019

ANZ has warned the Reserve Bank's plan for capital could push more money into housing.

New Zealand's largest lender says the Reserve Bank may push more money into housing, Kiwibank says it will give a bigger advantage to its Australian rivals, while members of the public say bank shareholders' fears should be ignored.

On Monday the Reserve Bank released 170 submissions on its proposals, which would require banks to keep more capital to enable them to withstand a one in 200 year financial crisis.

The proposals, which could require the New Zealand banking sector to raise more than an additional $20 billion in capital to comply with the requirements, have met stiff opposition from the banks which represent the bulk of lending in New Zealand.

The Reserve Bank has proposed increasing the amount of capital banks are required to hold to ensure they can withstand major banking crisis. However ANZ has warned that the proposals could ultimately tilt the scales towards lending to housing, increasing exposure to the sector 'potentially increasing financialstability risks'.

A number of the submissions had been made public already, but hundreds are revealed for the first time.

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ANZ's submission questioned the Reserve Bank's lack of cost benefit analysis in the consultation so far, predicting that the impact of the proposals would be a smaller economy, chairman Sir John Key wrote.

The Reserve Bank says its capital proposals would reduce the gap in calculating requirements between the four Australian-owned banks which dominate the sector and their domestic rivals. However Kiwibank, the largest New Zealand-owned bank argued that as proposed, the Reserve Bank's plan would increase the advantage to the Australian banks.

Key, who has been in the headlines over the hasty departure of chief executive David Hisco, wrote that in the long term, the present value of the impact of the capital proposals would be around 20 per cent of New Zealand's gross domestic product, far higher than the Reserve Bank's 4-12 per cent estimate.

'The Reserve Bank has not estimated the transitional impacts of the proposals, which [ANZ New Zealand] estimates at GDP being 1 per cent - 3 per cent lower over 10 years,' Key wrote.

ANZ New Zealand chairman, Sir John Key, wrote to the Reserve Bank warning that the central bank had under estimated how much its capital proposals would slow economic growth.

'For customers, [ANZ] believes potential increases in loan pricing and reductions in loan capital would particularly affect the agricultural and commercial sectors, and potential reductions in deposit pricing would adversely affect savers,' Key wrote.

'The potential reallocation of bank capital towards the housing sector would increase the concentration risk on this sector and leave banks more exposed to any sharp correction in residential property prices, potentially increasing financial stability risks.'

ANZ New Zealand warned the impact would be felt by groups far wider than just bank shareholders.

'The costs of the proposed changes would be borne by bank shareholders, borrowers, and depositors (since the [official cash rate] would need to be lower). It would result in lower GDP and tilt the structure of the economy away from business investment and agriculture towards housing, to the detriment of productive activity generally.'

Kiwibank chief executive Steve Jurkovich said that while the Reserve Bank has claimed the proposals would take away some of the advantages the large Australian-owned banks enjoy over smaller rivals, the opposite were the case.

'To adopt the proposals in the Consultation Paper and the in-principle decisions made to date in the Review would result in a widening, not lessening, of the regulatory advantages enjoyed by the Australian banks.'

It warned it needed to make significant investments over the period in which the higher capital plans could be in place, and in the short term returns to shareholders were expected to be below the cost of capital.

'This creates a substantial risk for Kiwibank that its shareholders may be unwilling to contribute further capital due to a regulatory environment more favourable to Australian banks than New Zealand-owned ones,' Kiwibank's submission said.

'Our contingency modelling suggests that if our shareholders find further investment is not supportable, then Kiwibank would be required to make credit rationing and pricing decisions that would be detrimental to our ability to serve New Zealanders and would weaken competition.'

In a summary of the proposals, the Reserve Bank said overall the submissions 'support the Reserve Bank's objective to ensure that New Zealand's financial system is safe' and understood that higher bank capital could reduce the chances of bank crises.

Others, meanwhile, argued the bank had not made the case for the changes.

'Some submitters believe that the Reserve Bank has not adequately presented its case for change and noted the absence of a full cost-benefit analysis of the proposals at this stage of the policy process,' the Reserve Bank said.

'The proposals would require New Zealand's banks to have levels of capital well above other jurisdictions and that the Reserve Bank's own stress tests (hypothetical tests of how banks would perform if economic conditions worsened) show that New Zealand's banking system is already safe enough.'

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