Bank capital plans hitting markets

WELLINGTON: Final decisions on the Reserve Bank’s proposed capital requirements for banks will not be made until the September quarter but they are already having an impact on capital markets.

They are one reason New Zealand 10year wholesale interest rates fell to a record low on Wednesday.

The day before the central bank announced its proposals on December 14, the 10year swap rate ended trading at 2.78%. It was down to 2.31% on Wednesday and was recently quoted at 2.335%.

The Reserve Bank proposes to double the minimum amount of tier 1 capital the four major banks have to hold from 8.5% to 16% of riskweighted assets with a phasein period of five years.

Fergus McDonald, head of fixed interest at Nikko Asset Management, said part of the impact of the new policy proposal was the uncertainty it had introduced.

‘‘If it goes through, and I think the Reserve Bank is pretty ada mant, it will have a number of effects. Banks will want to maintain their return on equity, so lending margins will probably rise somewhat and deposit rates may fall somewhat.’’

The banks would also look at cutting costs wherever possible.

The Reserve Bank has said it expects the policy will have little impact on lending rates, but if it does, it would react by cutting its official cash rate. It has also said safer banks should mean investors will be content with lower returns.

Mr McDonald said a rise in mortgage rates, for example, in response to the policy would probably take the place of any increase in the OCR.

Vicky HydeSmith, head of fixed interest at AMP Capital New Zealand, said many other factors were driving longerterm interest rates lower, not least increasingly gloomy stances from the Federal Reserve, the European Central Bank and the Reserve Bank of Australia on the global growth outlook.

Another of the Reserve Bank’s proposals is that banks’ tier 1 capital should be made up solely of common equity.

The central bank made it clear during the fiasco in 2017 over Kiwibank’s quasiequity, or hybrid securities, it did not like such instruments, which usually act as debt but can be converted into equity as required.

The Reserve Bank had preapproved Kiwibank’s hybrid securities years before but then suddenly changed its mind about whether they counted as capital in March 2017, before reverting to accepting they did count as equity in August that year. — BusinessDesk