Reserve Bank open to persuasion on capital requirements

WELLINGTON: Reserve Bank governor Adrian Orr says a proposed doubling of capital that banks have to hold is not fixed in stone.

‘‘We are and will be openminded to the submissions that come back,’’ he said at Wednesday’s monetary policy statement press conference.

The underlying message the central bank was sending the banking sector with its capital proposals was that more equity was better and more quality capital was better, he said.

‘‘More capital means sounder financial institutions.’’

The Reserve Bank had been making it clear for some time it was going to require banks to hold more capital.

But most were shocked when late last year its formal proposal was that the big four banks, which account for about 88% of the banking system, would have to hold at least 16% of their riskweighted assets as tier 1 capital.

That is far more than any other country requires their banks to hold and compares with the current minimum of 6% plus a 2.5% buffer.

Not only that, but the Reserve Bank wants only equity, and not any form of quasiequity, to count as tier 1 capital.

Yet another impost on the big four will be limiting the advantage they gain from using internal models to calculate capital to 90% of the level of capital required using the standard rules.

KPMG has calculated that for loans requiring $100 million of capital using the standard rules, the big banks need to hold only $76 million, giving them a significant advantage over the smaller banks.

All the smaller banks will be required to hold minimum tier 1 capital of 15% of riskweighted assets, which should also help level the playing field.

Yesterday, after Mr Orr and Finance Minister Grant Robertson signed the Reserve Bank’s new remit to replace the Policy Targets Agreement as monetary policy moves from being the purview of the governor alone to being decided by committee, Mr Robertson was asked his opinion of the proposed new capital levels.

He said he had been ‘‘listening carefully’’ to what the banks and Mr Orr had been saying. It was a matter for the Reserve Bank to decide, he said.

Asked whether was on board with such high levels of capital being required, he said: ‘‘No, it’s not my role to be on board with them.

‘‘It’s unwise for ministers of finance to go down that path. We have rules about the Reserve Bank’s independence for a reason.’’

The monetary policy statement argues that the actual amount of additional capital the banks will have to find is much less than the increase in minimum requirements. The current industry average of tier 1 capital is about 12% of riskweighted assets.

Mr Orr said that if the proposals went ahead, it would be up to individual banks how much additional capital they held.

However, since banks went out of their way to hold more capital than was statutorily required, it seemed safe to assume they would not hug the 16% tier 1 requirement if that was the Reserve Bank’s final decision, he said.

He acknowledged that banks would want to avoid getting a phone call from the central bank if their tier 1 capital was falling and near the minimum requirement.

He also said the proposal was ‘‘still well within the range’’ of global norms, and while other countries might set their minimum capital requirements lower, different countries had a range of ‘‘opaque’’ requirements that overlaid the formal minimums.

Deciding an optimum level of bank capital was a balancing act and ‘‘we think there’s safe zone where you can have a safer bank without the loss of efficiency’’.

Some commentators and economists have estimated the additional capital will lead to the banks paying less for deposits and charging higher interest rates, to maintain their return on equity.

UBS has estimated the extra impost on loans would be 80125 basis points, meaning a twoyear fixedrate mortgage on 4% could rise to as much as 5.25%.

The Reserve Bank’s view is that the level of interest rates banks will charge ‘‘will settle in the range of around 20 to 40 basis points’’.

In Mr Orr’s words, any impact will be ‘‘lost in the wash’’ of the many other factors that impact interest rates and the economy.

‘‘We seriously struggle with the analysis’’ of UBS, he said.

He dismissed the suggestion that banks could simply stop lending.

‘‘In a competitive market, that will be their judgement,’’ he said.

Deputy governor Geoff Bascand said New Zealand banks were among the most profitable in the world and questioned why they would want to abandon such a market.

KPMG says the banking sector’s annual net profit in the year ended September last year rose 11.2%, or $580 million, to $5.77 billion. The big four banks accounted for $482 million of that increase. — BusinessDesk

❛ . . . we think there’s safe zone where

you can have a safer bank without the loss of

efficiency

Reserve bank governor Adrian Orr