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S&P says RBNZ bank capital proposals will 'burden' Australian-owned banks

Tuesday 26th February 2019

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Another international ratings agency, Standard & Poor’s, has weighed in to call the Reserve Bank’s proposed new bank capital requirements a “burden” on the Australian parents of New Zealand’s four major banks.

The higher capital requirements for the Australian-owned banks, which include almost doubling tier 1 capital from 8.5 percent of risk-weighted assets currently to 16 percent, “could create significant imposts for their Australian parents,” S&P says.

“We estimate that the higher Tier 1 capital requirement would be an increase of about 43 percent of the existing capital base for the system and 47 percent for the four major New Zealand banks and the potential implications for their Australia-based parents are material and complex, given cross-border regulatory issues,” the ratings agency says.

It estimates the banks in New Zealand will need to raise tier 1 capital by about $13.7 billion, or about one-third more from current levels, just to meet the new minimum if that is the Reserve Bank’s final decision.

“We estimate the capital requirement for the increase in risk-weighted assets for internal ratings based banks at the proposed capital standards to be about $6.6 billion for the four New Zealand major banks,” S&P says.

It also estimates the big four and Kiwibank will need to replace about $6.3 billion of additional tier 1 capital because the Reserve Bank wants to exclude quasi-equity instruments, usually fixed interest securities that can be converted to equity if a bank gets into difficulties, from qualifying as tier 1 capital.

That’s still a lot less than the Reserve Bank’s own calculations – on Friday, it said the big four banks would need to increase their capital by about $20 billion.

Indeed, ANZ Bank said in December that by its calculations it alone would need to raise between $6-8 billion to satisfy the new rules if they’re imposed.

But while S&P’s calculations are on the light side, it says the additional capital won’t improve the big four banks’ credit ratings.

“We equalise our ratings on the New Zealand major banks with the credit profiles of their respective parent groups because we consider each of the New Zealand major banks to be an integral part of their respective group,” S&P says.

“Consequently, we expect that the parents are highly likely to provide timely financial support for the New Zealand major banks, if needed,” it says.

“Furthermore, we consider that the RBNZ proposal, if implemented, is also unlikely to cause a change in our rating on the parents of the four major New Zealand banks; although the parents are likely to need to strengthen their consolidated group capital to meet RBNZ requirements.”

The Reserve Bank has argued that because of the additional capital, New Zealand banks will be safer and “so will likely get cheaper credit.”

If the banks receive no uplift to their credit ratings, that appears unlikely.

The central bank is currently consulting on its proposals, a process set to close on May 3.   

In December, Fitch Ratings said the proposals were “radical” and “highly conservative relative to international peers” but that the result will ultimately be “significantly stronger buffers” against financial system shocks.

While that is a widely-held view, the Reserve Bank kicked back on this on Friday, with deputy governor Geoff Bascand insisting that the proposed requirements are no outliers.

The new minimums will take New Zealand to “the high end of international norms, but it’s not extreme,” he says.

The Reserve Bank cited Basel Committee estimates that will put New Zealand in the third quartile.

It also cites S&P’s risk-adjusted calculations showing that New Zealand’s current capital requirements are well below average compared with other countries and that the new requirements will put them below those of Finland, Norway and the Czech Republic.


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