If the looming crack down on investor property lending in Australia isn’t enough, investors in the big four Australian banks face more pressure from an international source – the Reserve Bank of NZ (RBNZ) is planning a comprehensive review of capital requirements for the country’s banking system.
After being forced to sell assets and raise more capital in Australia in the past two years (with a bit more to come), it will could see more unwanted calls to boost their capital levels just when their finances come under pressure from a weakening home lending boom in NZ and Australia.
A warning yesterday of the dangers f high levels of household debt and rising property prices in NZ from the International Monetary Fund will strengthen the RBNZ’s hand as it starts its review with an issues paper to be revealed next month.
Seeing the big four Aussie banks dominate the NZ financial system and the economy – Westpac, ANZ (National), Commonwealth (ASB) and NAB (Bank of NZ), the burden of any capital boost will fall heaviest on them.
With APRA yesterday revealing its disquiet at a fall in lending standards for investors in apartments and other commercial property, and weakening standards for lending to developers, on top of renewed concerns about investor lending for housing, the move in NZ could very well crunch the banks returns on equity and increase capital costs just when it wasn’t needed.
While the NZ dairy sector (the biggest worry area for a while) is recovering as prices slowly rise and returns to companies and farmers improve, the property boom, especially in Auckland, Queenstown and parts of Wellington, remains a big worry.
The RBNZ revealed the forthcoming review in a speech in Auckland by Reserve Bank Deputy Governor Grant Spencer. he told his bankers association audience that the review of banks’ capital requirements will continue to ensure confidence in the solvency of the New Zealand banking system, while encouraging efficiency,
The RBNZ will conduct the review over the next year and it will aim for what mr Spencer said would be simplicity and conservatism.
He said in the wake of the global financial crisis, banks and regulators around the world have been reviewing capital buffers for banks to maintain to guard against the risk of losses. He said it is a very complex area which is full of trade-offs, and the Bank plans to comprehensively assess whether New Zealand’s capital framework remains fit for purpose.
“In broad terms, higher levels of capital will improve the soundness of the financial system as the likelihood of bank failures is reduced. However, the capital regime may reduce the efficiency of financial intermediation if ratios are pushed too high or standards are made overly complex.
"An appropriate capital regime will ensure a very high level of confidence in the solvency of the banking system, while avoiding unnecessary inefficiencies.”
Mr Spencer said the Reserve Bank will outline the broad areas of the capital framework that will be examined in the capital review in an issues paper released in April. The capital review will explore the definition of capital, how banks measure the risks they face (e.g.: risk weights) and the minimum capital ratios and buffers.
“The issues paper will provide the opportunity for stakeholders to give preliminary views on the areas we intend to cover in the review, as well as identify any other issues in the capital framework that could be examined. Any detailed policy positions and options for changes to the capital framework would be outlined in consultation papers later this year. We aim to conclude the review by the first quarter of 2018.”
And to drive home the need for more capital, the International Monetary Fund yesterday warned that high levels of household debt and high property prices were a major threat to the Kiwi economy. Echoing the OECD’s warning about Australian house prices and the IMF.
"Rising household debt remains a risk to financial stability. It would amplify a high-impact downside shock -which would likely be external – through household deleveraging and a housing correction.
The IMF said that the Reserve Bank of New Zealand should be allowed to include debt-to-income limits in its toolkit, a measure the central bank has requested.
"Household debt vulnerabilities are expected to stabilise in the medium term but will remain high," the IMF said. "Tighter macroprudential policies, higher interest rates, moderating net migration, and easing housing supply constraints should result in lower house price increases."
And part of that will be bigger capital buffers, just as the big four have been forced to do in Australia.
