Call for delay of higher capital requirements to be extended
WELLINGTON: The Reserve Bank should extend the delay to introducing higher capital requirements for banks, ANZ New Zealand chairman Sir John Key has told a conference for finance professionals.
The new bank capital rules, which will require the four major banks to lift minimum tier 1 capital from 8.5% to 16% over seven years from July 1 this year, were deferred until July 1 next year because of Covid19.
The four major banks account for about 88% of the banking system and are likely to need to raise about $20 billion between them.
Capital requirements have been a source of tension between the Reserve Bank and banks in recent years, banks warning the increase will push up the cost of borrowing and make it harder to access capital.
At an online conference held by INFINZ, four of the top bank heads were asked about the relationship now with regulators and what effect the Covid19 response had had on it.
While the bank chiefs were largely complimentary about the Government and regulators’ responses to the pandemic, there was a call to ease up on more regulatory change.
Sir John said the response from the regulators so far had been necessary and bold.
‘‘There will always be some constructive tension in the relationship because we have the same agenda, which is a strong New Zealand, but we come at it from different angles.’’
But he would encourage the Reserve Bank to extend the holiday on the capital requirements, Sir John said.
‘‘The biggest sector that is going to be affected is agriculture. But what is going to happen if those requirements start in 2021 — then you have got this counterproductive thing happening.
‘‘You have got a lot of pressure on farms, lots of onfarm costs coming around sustainability. But the only area where the banks can easily reprice is agriculture because, bluntly, we are all pretty full on agriculture risk. It is difficult.’’
Westpac chief executive David McLean backed Sir John, saying now was the time to be using capital not building it up.
‘‘For the next few years we have got a lot of regulatory change coming — quite a bit was deferred for a while through Covid. Now there is a bit of a cliff of regulatory change looming and we are going to be applying all of our resources to helping customers. So . . . the extent we can smooth that wave of regulatory change will be quite important.’’
The bank chiefs were also asked how well prepared they were for the official cash rate to go negative, a move the Reserve Bank has signalled could happen next year.
Mr McLean said Westpac would meet the December 1 deadline but he believed it would be counterproductive and negatively affect sentiment.
‘‘Other QE [quantitative easing] tools are probably more effective for the Reserve Bank to use.’’
BNZ chief executive Angie Mentis said the bank had just tested a bond that was negative to test its systems.
‘‘I speak to a lot of people offshore in other jurisdictions and I think there are other ways around fiscal policy and QE that can be the tools first. And I do worry about going in there and coming out.
‘‘And I do think it is going to be counterproductive to what Reserve Bank is going to do.’’
Sir John said it had to be asked what it was the Reserve Bank was trying to achieve.
‘‘Ultimately, what you are really talking about is dropping interest rates, which is what the Reserve Bank has done.’’
Using negative interest rates had not helped Japan, he said.
‘‘None of us are going to be paying people to take a mortgage,’’ Sir John said.
He said it meant banks would be giving less to deposit holders, many of whom were retirees and needed the money.
‘‘You do get to the point where if you really needed it you would go there. But the general view — like everything in life — it is in the nuclear option but I personally wouldn’t go there.’’
Mr McLean said central banks faced a dilemma in that QE was needed to stimulate economies but it had the effect of pushing up asset prices.
‘‘And we see that in New Zealand where already house prices were at very high levels relative to income compared to rest of world are now getting astronomically out of control. This a problem for central banks.
Sir John said he was also concerned about the asset bubble and ANZ was being more conservative with its lending because of concerns about it.’’
‘‘It is a difficult one. On the one hand, we know we want people to get on the property ladder — there are lots of reasons why they want to do that. In times of very low interest rates it allows them to own a home as opposed to renting a home and the outcomes are better for them.’’
But as asset prices went up it became tremendously difficult to save enough for a deposit.
‘‘Actually getting a loan is probably the easy bit and paying the loan is easy but it is amassing the 10 or 20% they need.
‘‘But I do think we have got to be careful . . . we are servicing the sector, not feeding a bubble.’’
Sir John said the big challenges were partly about the changing demands of customers and how that intersected with unregulated industries.
‘‘One of the things that could be a real worry here is that if you start seeing the nonbank deposit sector really growing . . . that it starts advertising higher interest rates under the illusion they look like banks when they are really mezzanine finance providers for property developers. Well, hello and welcome to all the problems I dealt with when I was prime minister.’’
‘‘There is a reason we wrote a billion dollars off to South Canterbury Finance and all these kinds of people. I do worry it is a space where customers don’t walk through door, they use brokers.’’
Ms Shortt said Covid had really shown up a lack of financial resilience in both individuals and businesses.
‘‘Whether natural disaster or pandemic we don’t really have the level of financial resilience in New Zealand. I would love the banking sector to really shift that and lift that.’’ — The New Zealand Herald