Tuesday 2nd July 2019
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Heartland Bank expects to see a more competitive landscape if the Reserve Bank goes ahead with plans restricting the big four Australian-owned banks' use of internal models to calculate how much capital they need to hold.
The minnow lender, which operates with the fattest margins among licensed banks, also expects the increased capital requirements from a higher buffer will reduce the advantage the Australian-owned lenders - ANZ Bank New Zealand, Bank of New Zealand, ASB Bank and Westpac New Zealand - have over their smaller rivals.
"An observation has also been made in the context of the proposal that, if the burden of increased capital requirements was to materially flow through to lending and/or deposit rates, it could be indicative of insufficient competition in the market," Heartland chair Bruce Irvine said in a submission on the Reserve Bank's proposals.
"In Heartland’s view, both of the Reserve Bank’s above-mentioned initiatives help to mitigate the competitive advantage that the larger banks have in New Zealand, which is ultimately good for the financial system and New Zealand as a whole."
Heartland wants the central bank to undertake a cost-benefit analysis, saying it's important that the playing field isn't raised too high.
The Reserve Bank yesterday released almost all of the 161 written submissions on proposals requiring lenders to hold more high-quality capital to mitigate the impact of a severe financial crisis. The central bank wants to set a tier 1 capital requirement equal to 16 percent of a lender's risk-weighted assets for the big four and 15 percent for all other lenders. The current requirement is for a 6 percent minimum plus a 2.5 percent buffer, although the banks' current equity is around 12 percent.
Heartland said it doesn't agree with the Reserve Bank's view on tier 2 capital that it's a 'gone concern', saying it's much cheaper than tier 1 capital and provides more options when raising capital.
It said it would like to see tier 2 capital able to contribute up to 2 percentage points of the 15/16 percent requirement proposal.
The bank's NZX-listed parent, Heartland Group Holdings, carved out its Australian reverse mortgage operations into a separate unit to access wholesale funding across the Tasman without the constraints of central bank prudential rules.
The parent today said it completed a A$250 million committed reverse mortgage funding facility, taking its Australian funding to A$850 million.
Kiwibank differed from Heartland Bank, saying the proposed changes would still keep New Zealand banks at a regulatory disadvantage to the big four. It said local lenders would find it hard to issue hybrid capital in the way proposed, and said the Reserve Bank could allow more market-friendly instruments without compromising its desire for high quality capital tools.
The state-owned bank said it has a significant investment profile over the next three-to-five years, which coincides with the transition phase for the proposed capital changes.
"On the current outlook the short to medium term returns to shareholders appear low and below any reasonable estimation of the cost of capital. Kiwibank’s shareholders have many opportunities to invest their capital and overriding investment mandates to pursue them," it said.
"This creates a substantial risk for Kiwibank that its shareholders may be unwilling to contribute further capital due to a regulatory environment more favourable to Australian banks than New Zealand-owned ones. "
Kiwibank said if its shareholders - New Zealand Post, ACC, and the NZ Superannuation Fund - find they can't support further investment then the lender will need to decide on whether to ration its credit or change pricing "that would be detrimental to our ability to serve New Zealanders and would weaken competition."
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