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Chapman Tripp pleads for more time on bank capital proposals

Wednesday 31st July 2019

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Law firm Chapman Tripp is urging the Reserve Bank to delay its final decision on increasing the minimum amounts of bank capital because of its critical importance to both the banks themselves and to the wider economy.

“It is therefore vital that sufficient time and resources are devoted to getting the right outcome and that decisions are made only after all the relevant issues have been thoroughly analysed,” Chapman Tripp says in its submission on the capital proposals.

“However, we sense from the tone of the consultation paper and the timeframes for responses that the Reserve Bank is focused on concluding this process quickly,” it says.

“We question the Reserve Bank’s apparent urgency,” given that the banks have consistently passed RBNZ’s stress tests and that neither the credit rating agencies nor the IMF have raised issues on New Zealand banks’ ability to weather economic downturns.

RBNZ has proposed lifting the minimum amount of tier 1 common equity capital required by the four Australian-owned banks, which account for about 88 percent of New Zealand’s banking system, from 8.5 percent to 16 percent and to 15 percent for the smaller banks.

When it released the 161 submissions earlier this month, RBNZ said it will publish its response and final decisions in November versus the September quarter it had previously indicated. The implementation of any new rules will start from April next year with a transition period of “a number of years.” That’s a relaxation from its previous suggestion of a five-year phase in period.

Chapman Tripp criticises RBNZ’s intention to conduct its legislatively required cost-benefit analysis just before the final decisions.

“This will not give stakeholders any meaningful opportunity on the factors the Reserve Bank has taken into account when making its assessment,” the law firm says.

A number of other submitters have said RBNZ should have started its review of bank capital requirements with a cost-benefit analysis.

“There have been historic concerns about how the Reserve Bank conducts and tests the cost-benefit analysis in respect of its preferred policy option and whether this is exposed to the same rigour as the cost-benefit analysis provided by stakeholders in support of alternative options,” Chapman Tripp says.

It cites the example of the cost-benefit analysis RBNZ did on its outsourcing policy review – as with the bank capital proposals, the RBNZ’s outsourcing cost-benefit analysis came at the end, not the beginning, of the process.

RBNZ estimated the cost to the banking industry of its outsourcing policy would be $550 million, a figure arrived at by taking one bank’s view of its costs and multiplying by five. Paragraph 221 of that regulatory impact statement said the chosen bank “is fairly representative of the sector.”

RBNZ expected the net benefits of the policy would be $2.2 billion, although it warned that its figures were “an indication only.”

However, the banks themselves estimated the costs at $870 million and the net benefits at $1.9 billion.

Chapman Tripp says market participants have commented that RBNZ “is overly optimistic about the benefits of its proposal and may have underestimated the potential costs.”

For example, RBNZ has estimated the capital proposals would lift the interest rate charged on mortgages by 20-40 basis points and has specifically dismissed as an “outlier” UBS’ calculation that they would raise mortgage rates by 80-125 basis points.

“While there may be a self-serving element to some of these criticisms and there is rarely agreement among economists, we think that, for proposals of this significance, it is important that the Reserve Bank is transparent and has an open mind to feedback,” the law firm says.

“Without this, we question whether stakeholders will have confidence in the Reserve Bank’s final decisions on the matter.”


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