Australia’s big four banks, already reeling from a stagnant home loan market and revenues, the fallout from the Hayne Royal Commission and censure from upset shareholders, now face more financial problems in their most profitable offshore market – New Zealand.
In a long-awaited discussion paper, the Reserve Bank of NZ of proposed boosting the capital requirements of the country’s banks – which are dominated by our big four – the Commonwealth, Westpac, NAB, and ANZ – by 50% and more.
It won’t happen immediately – the RBNZ is proposing a five year transition period, but the banks will have to lift their capital buffers, just as the Reserve Bank has made them do in Australia where the 10.5% minimum starts next year (all four giants are at or very close to the minimum).
The NZ arms of the big four all earned record profits in the 2017-18 financial year – all topped the $NZ1 billion level and the ANZ’s operation saw earnings closer to $NZ2 billion.
“The proposal would see banks’ capital levels increase materially,” Deputy Governor and General Manager of Financial Stability Geoff Bascand said in Friday’s statement
“We are proposing to almost double the required amount of high-quality capital that banks will have to hold. In practice, actual changes to the amount that they hold will be less than double and will vary.
“The increase will depend on their current levels of capital, how much extra they choose to hold above the required minimum, and whether they are a large or small bank. Generally, it will be an increase of between 20 and 60 percent.
“This represents about 70 percent of the banking sector’s expected profits over the transition period. We expect only a minor impact on borrowing rates for customers.
“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 for all New Zealanders,” Mr. Bascand said.
“Insisting that bank shareholders have a meaningful stake in their bank provides a greater incentive to ensure it is well managed. Having shareholders able to absorb a greater share of losses if the company fails also provides stronger protection for depositors,” Deputy Governor and General Manager of Financial Stability Geoff Bascand said today.
The RBNZ Bank has been reviewing bank capital rules for almost two years and Friday’s release is the basis for which the last round of discussions and submissions will be based on. The deadline for feedback is 22 March 22 next year.
The discussion paper says “The focus of this paper is on Tier 1 (going-concern) capital, both because of our focus on the highest quality of capital, but also because we are not proposing to change the regulatory requirements for Tier 2 capital at this time, although we are open to discussing whether Tier 2 should continue to play a role in the capital framework.
“We are also proposing to have a significantly enhanced role for capital buffers in the capital framework, both in terms of the size of the total buffer, the composition of the buffer, and the operation of the buffer, including the supervisory response as banks, enter into the buffer.”
“It is our view that the level of capital required of the banking sector should be sufficient to ensure banks can retain creditor confidence when subject to an extreme shock. Generally speaking, this means banks can pay their debts – remain solvent in other words – when faced with large unexpected losses.”
