Thursday 23rd May 2019
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New Zealand’s smaller, locally-owned banks want the Reserve Bank to go further in leveling the competitive playing field between them and the big four Australian-owned banks.
They say the central bank’s current bank capital proposals could give the large banks even more of a competitive advantage than what they currently enjoy.
And they want to be allowed access to different types of capital.
In a joint submission on the Reserve Bank’s bank capital proposals, the government-owned Kiwibank, the community trust-owned TSB Bank and the mutually-owned SBS Bank and Co-operative Bank are also seeking in a longer phase-in period than the five-year transition the central bank has suggested.
“While not the RBNZ’s intention, we have concerns that the proposed changes will widen rather than reduce the competitive gap between large and small banks,” the submission says.
The Reserve Bank is proposing to near double minimum tier 1 capital from 8.5 percent currently to 16 percent for the big four banks and 15 percent for the smaller banks.
The biggest advantage the big four banks - ANZ, ASB, BNZ and Westpac - currently have is that they are allowed to use their own internal models for calculating how much capital they need to hold against risk-weighted assets.
The Reserve Bank illustrated that advantage in February by showing that ANZ needs to hold slightly more than half as much capital as Kiwibank does for each $100 of mortgage lending.
The central bank is proposing to reduce that advantage to no more than 90 percent of the capital required by the standardised models all four of the smaller banks are required to use.
The smaller banks’ submission says that in the parts of the market in which they primarily operate, they have to hold 45 percent more capital than the average of the big four against residential mortgages and 64 percent more capital against lending to small-to-medium sized businesses.
“This illogical outcome is most difficult to justify in relation to residential mortgages where a loan to the same borrower secured by the same house in the same street requires 45 percent more capital to be held by a standardised bank.”
Note that while on Friday the Reserve Bank said it had revoked ANZ’s accreditation to use its internal models to calculate capital requirements for operational risk “due to a persistent failure in its controls and attestation process,” that was just one of 45 models ANZ currently uses.
The submission says another advantage the big four have is that they are all listed public companies on the ASX and that the current regime favours listed and foreign-owned banks over the New Zealand-owned banks.
“The NZ-owned banks already have challenges accessing further CET1 – common equity tier 1 capital – and those challenges are likely to be exacerbated,” it says.
“The range of capital instruments for NZ-owned banks is already too limited. Proposals to further restrict the amount and type of non-CET1 will continue to advantage the Australian banks and make it harder for the NZ-owned banks to meet the increased capital targets.”
Apart from getting equity from owners – much more difficult for mutual organisations – the only other possible sources of tier 1 capital are retained earnings or some form of quasi-equity.
The submission says the NZ-owned banks pay modest dividends and already heavily reinvest their profits in balance sheet growth.
“The challenges for small banks arising from the proposed changes extend well beyond the transition issues” and threaten the outlook for small banks whose future growth will be considerably constrained, particularly if they pay any dividends.
“Given the constraints on access to CET1 capital, an alternative source of capital is imperative for the smaller banks,” the submission says.
Allowing only 10 percent of tier 1 capital to be made up of quasi-equity, much less than is currently allowed, is too small an amount and the types of quasi-equity the Reserve Bank is proposing to allow “are unattractive to the capital markets,” it says.
A paper by former Treasury Secretary Graham Scott that accompanied the New Zealand Bankers' Association submission also criticises the Reserve Bank’s focus on equity, “the most costly form of capital.”
The NZ banks’ submission says they have grown at 8.6 percent a year over the past 10 years compared with the 4.1 percent growth in the banking system but that their balance sheets are more conservative than the major banks and they hold more capital.
Aggregate common equity of the NZ banks ranges from 11.3-14.7 percent compared with 10.3-11.8 percent for the big four, it says.
“The New Zealand-owned banks have shown considerable market leadership. Importantly, they provide an alternative to the large Australian banks” and are able to step into the market “if the foreign-owned banks ration credit.”
A number of commentators have said the big four are likely to ration credit as a result of the bank capital proposals, particularly to the small business, construction and farming sectors.
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