Experts reject claims bank capital proposals will be expensive for customers

Tuesday, 1 October 2019

The Reserve Bank estimated the proposal could add one percentage point to borrowing costs but banks said it could be even higher.

An increase to the amount of capital banks are required to hold might not be as expensive for their customers as has been predicted, experts say.

The Reserve Bank has released the three reports from external experts it asked to independently review its capital proposals.

It wants to increase the amount of risk-weighted capital retail banks hold to offset their loans by between 20 per cent and 60 per cent, to a level sufficient to cover a one-in-200-year financial crisis.

The Reserve Bank said it estimated that could add 20 to 40 basis points to borrowing costs but banks said it could be even higher.

* ANZ warns Reserve Bank capital proposals will push banks towards housing

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

Westpac said it could add $6000 a year to the average Auckland mortgage.

But two of the three experts said that could have been overstated, and the third said the impact could be mitigated.

James Cummings, of Macquarie University, said the four main banks could source equity from their Australian parent banks or listed on the share market.

'A cost-effective response of the four large New Zealand banks will be to raise additional equity financing by listing their common shares in New Zealand. The Australian parent banks need not relinquish their controlling stakes in the banks for the listings to occur,' Cummings said.

'The raising of the additional equity financing in the New Zealand market will reduce the risk for the Australian parent banks that they potentially violate limits set by the Australian regulator on exposures to related parties. This response will allow the large New Zealand banks to distribute a substantially greater amount of imputation credits to New Zealand resident taxpayers. The value that investors attribute to the imputation credits for reducing their personal taxation liabilities will reduce the impact of increased equity financing on bank funding costs.'

David Miles, of the Imperial College of London agreed that the cost of equity funding to banks in the Reserve Bank's analysis was too high, the cost of higher capital would be overstated, and the impact on interest rates will be smaller than Reserve Bank estimates.

Ross Levine, of the University of California, Berkeley, said the proposals would lift the cost of banking but the overall impact would depend on how much non-banks stepped in to provide competition.

He said more attention should be paid to the extent to which there were impediments to entry in the market.

'The Government subsidises banks in the form of implicit guarantees on bank debts, which currently tilts the financial system in favour of highly-levered banks with excessive risk-taking incentives and away from other financial service providers,' Levine said.

'To the extent that capital regulations reduce this subsidy for banks, the regulations will increase the cost of banking in New Zealand. The overall impact on the economy, therefore, depends on the degree to which new financial institutions can arise and compete with incumbent banks in financing households and firms.'

All three of the experts said the said the proposals were robust and considered.

Massey University banking expert Claire Matthews said the Reserve Bank had framed the findings in a particular way.

She said Cummings had noted that even if the costs had been over-stated, there was likely to be an increased cost for borrowers and an impact on the economy.

'Similarly, Miles acknowledges it is reasonable to assume 'for the purposes of the estimation of the impact on GDP it is taken that all of the rise in funding costs feeds through into higher lending rates', and he notes the sensitivity of rates in New Zealand may be greater than in other countries.

'My reading of the reports is that there is agreement that the increased capital requirement will result in higher borrowing costs and a negative impact on the economy. There is disagreement about the extent of the increase in cost, and we simply won't know who is right until the increased capital requirements are in place.'

Roger Beaumont, chief executive of the New Zealand Bankers' Association said the banks agreed a strong and stable banking system was needed.

'We differ on the costs of the proposal compared to the benefits. Our banks are already well-capitalised and strong by international comparisons.

'The independent economic analysis we commissioned from Sapere in May, and led by former Treasury Secretary Dr Graham Scott, found that the Reserve Bank proposals will cost households, businesses and our economy around $1.8 billion a year. That's a conservative estimate of costs based on the Reserve Bank's assumptions. The cost to our economy could be higher.'