Kiwibank warns it could be starved under Reserve Bank plans

Monday, 1 July 2019

Kiwibank has said that rather than remove the advantages enjoyed by Australian banks under the current regime, the Reserve Bank's proposals to require banks to hold more capital made the situation worse for smaller banks.

Kiwibank is warning that its investors may not be willing to give it the investment it needs if the central bank forces the sector to hold more capital.

On Monday the Reserve Bank released the 170 submissions it has received on its proposals to require the New Zealand banks to hold more capital on the balance sheet in order for the sector to be in a position to withstand a major financial crisis.

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

The Reserve Bank has said it expects the proposals would have only a minimal impact on customers. But some analysts have warned the plan, which would require the New Zealand banking sector to increase capital holdings by more than $20 billion, will push up borrowing costs generally, especially to small business and farms.

While the Reserve Bank has argued that the plans would remove some of the advantages of the major Australian-owned banks, ANZ, ASB, BNZ and Westpac, the sector presented a united front in a submission by the New Zealand Bankers' Associate released in May.

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* Reserve Bank plan could add thousands to mortgage repayments: Westpac

* Reserve Bank plan 'has significant negative consequences for our country': banks

* The price of safety: Reserve Bank capital plans could put handbrake on the economy**

Kiwibank, owned jointly by the NZ Post, the New Zealand Superannuation Fund and ACC (all of which are owned by the Government) said in its submission that rather than removing the advantages of the Australian banks, the plan as the Reserve Bank currently proposed would do the opposite.

Kiwibank chief executive Steve Jurkovich said the outlook for short to medium term returns for its shareholders 'appear low and below any reasonable estimation of the cost of capital'.

Adrian Orr, the governor of the Reserve Bank, was chief executive of the Super Fund when it bought a partial stake in Kiwibank, which was until that point owned 100 per cent by the Government.

Since then, the bank has had a dispute with the Reserve Bank over its capital instruments and confirmed the extent of problems with its long-running IT upgrade.

It warned the Reserve Bank's plans may mean it has less money to lend.

'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,' Kiwibank chief executive Steve Jurkovich wrote in a covering letter on the submission.

The Wellington-headquartered bank said the Reserve Bank 'will be aware' that the company would require significant investment over the next three to five years, which would coincide with the implementation of the Reserve Bank's capital requirements if they were to go ahead.

'On the current outlook the short to medium term returns to shareholders appear low and below any reasonable estimation of the cost of capital.'

Its investors 'have many opportunities to invest their capital' with requirements that these generate a return.

'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,' Jurkovich wrote.

'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.'

The Reserve Bank released summary of the submissions which said where was 'broad support for the Reserve Bank's aim to reduce the gap in calculating capital requirements between the models approach, used by ANZ, ASB, BNZ, and Westpac, compared with the standardised approach used by domestic and other banks'.