Tuesday 1st October 2019
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The Reserve Bank is reviewing all its key proposals in light of the critique by the three independent reviewers and the submissions before announcing its final decisions in early December, says deputy governor Geoff Bascand.
"We are revisiting all of our in-principle decisions," Bascand told BusinessDesk.
"What we've got here is a lot of support for the direction of travel. We are going to increase capital requirements – we've made no bones about that," but the amount of capital, what form it takes and how long the transition period should be will all be reviewed before the final decisions are made, he says.
RBNZ has proposed raising the minimum tier 1 common equity capital banks have to hold from 8.5 percent currently to 16 percent for the big four banks and to 15 percent for the smaller banks.
It has also proposed limiting the advantage the four major banks gain from using their own internal models for calculating capital to no less than 90 percent of the outcome from using the standardised models that all the other banks have to use.
And it has proposed phasing the changes in over a five-year period.
Bascand says after reading the three independent reviews, RBNZ was "very pleased that the reports endorsed the overall methodology and quality of the work that we undertook. It was very reassuring they found that was sound and of good quality.
"They gave us a few areas to look at and some technical areas to review more thoroughly but the big message was that they were comfortable" with RBNZ's proposals.
The three reviewers, James Cummings of Macquarie University, Ross Levine from University of California, Berkeley and David Miles of Imperial College, had "free rein" to look at whatever they wished and to talk to whoever they wished, Bascand says.
"Obviously, we gave them a terms of reference to look at the overall approach we took, but they were able to look beyond that as they chose, including speaking to people within the major banks and to the authors of the independent review by Sapere that the New Zealand Bankers' Association commissioned.
"They were then free to write their own reports on what they regarded as important and given normal academic freedom. It was their reputations on the line from the quality of their reviews."
Cummings recommended that the Australian-owned big four banks should look at listing their New Zealand subsidiaries on NZX – the ANZ Bank and Westpac parent company shares are already listed on NZX.
RBNZ has previously looked at requiring banks to list locally but then decided not to.
"We weren't convinced that the costs exceeded the benefits of doing it," Bascand says, but adds that RBNZ would support such a move, should any of the banks decide to list their NZ subsidiaries.
None of the experts focused on how RBNZ rules compare with the rules imposed on the owners of the four major banks by the Australian Prudential Regulation Authority.
"It's a consideration they were aware of but they haven't chosen to regard it or treat it" as being important enough to focus on, Bascand says.
Similarly, while RBNZ's stress testing was mentioned, none of the experts appeared to have reviewed the outcomes, though Bascand said they had access to all the relevant papers.
"The reviewers themselves chose to highlight what they regarded as the significant features of the proposals."
One aspect Levine focused on was the incentives of bank owners and executives running banks, commenting that if incentive payments to executives were based on return on equity, that might encourage them to take greater risks to increase returns.
RBNZ, in conjunction with the Financial Markets Authority, has been conducting a conduct and culture review of financial institutions which included focusing on how incentives influence behaviour.
"You have to be careful to ensure they're not just paid to drive ROE. All these sorts of issues we will work through again and satisfy ourselves" that nothing RBNZ does will create perverse incentives.
As for looking at how capital requirements might influence how banks allocate credit, "banks themselves make those decisions" and it's up to them to decide where their competitive advantage lies, Bascand says.
"What we try to do is set the risk weights in such a way that they properly reflect the risks of different types of lending."
For example, lending to businesses is more risky than providing residential mortgages.
Bascand says some banks have already moved to change their lending behaviour – he agreed that ANZ Bank's communication with its agricultural customers is an example of this.
In May, ANZ warned its farming customers they face higher borrowing costs as a result of banks having to increase the amount of capital they hold.
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