Banks face obligation to reinvest 70pc profit
Bank shareholders will need to dig deep to comply with a Reserve Bank plan requiring them to pump in fresh capital equivalent to 70 per cent of their next five years’ profits.
The Reserve Bank has begun consulting on a plan to have banks increase capital, saying the plan is intended to make New Zealand banks less susceptible to failure.
‘‘Insisting that bank shareholders have a meaningful stake in their bank provides a greater incentive to ensure it is well managed,’’ said the central bank’s deputy governor and general manager of financial stability, Geoff Bascand.
‘‘Having shareholders able to absorb a greater share of losses if the company fails also provides stronger protection for depositors.’’
He predicted a ‘‘minor’’ rise in mortgage and other lending rates.
‘‘With these changes we estimate the banking system will be resilient to shocks that might occur only once every 200 years.’’
The Reserve Bank has been reviewing bank capital rules since early 2017, and in late November governor Adrian Orr signalled a shift was coming soon.
New Zealand currently requires banks to hold sufficient capital to survive a once-in-100-year banking crisis, but a once-in-200-year crisis is one of a far larger magnitude.
‘‘We are proposing to almost double the required amount of highquality capital that banks will have to hold,’’ Bascand said.
This would likely involve banks reinvesting a large proportion of their profits over a five-year ‘‘transition’’ period.
‘‘This represents about 70 per cent of the banking sector’s expected profits over the transition period [of five years],’’ Bascand said.
‘‘While borrowing costs may increase a little, and bank shareholders may earn a lower return on their investment, we believe these impacts will be more than offset by having a safer banking system.’’
The magnitude of the new capital required by banks surprised a former Reserve Bank head of financial markets, Michael Reddell, who now blogs about the central bank.
A policy move of this scale would have an impact on the value of New Zealand banks, though ASB, Bank of New Zealand, Westpac and ANZ are all owned by Australian companies listed on the ASX.
‘‘If these were domestically listed companies, you would see the impact immediately,’’ Reddell said.
That would be through a fall in the price of their shares.
The Reserve Bank plan is opposed by the banks, which have been preparing for more than a year to be asked to inject capital into their operations.
New Zealand Bankers’ Association acting chief executive Antony Buick-Constable said: ‘‘New Zealand’s banks are currently very well capitalised and among the most stable and secure in the world.
‘‘Reserve Bank stress tests show banks can withstand a 40 per cent fall in house prices.
‘‘Buffers ensure banks have sufficient capital to get through a serious economic downturn. However, too large a buffer limits banks’ ability to innovate and enhance customer outcomes.
‘‘The industry will work closely with the Reserve Bank and stakeholders during this consultation period to achieve the best outcome for customers.’’
‘‘We are proposing to almost double the required amount of high-quality capital that banks will have to hold.’’ Geoff Bascand, Reserve Bank