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Bascand says RBNZ will consider changing bank capital proposals

Wednesday 16th October 2019

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Deputy Reserve Bank governor Geoff Bascand says the central bank will consider making adjustments to its bank capital proposals in light of the submissions and the reviews by three independent experts.

"Of course, we are listening to what others are saying about our proposals," Bascand said in a speech to a Citi Australia conference in Sydney on New Zealand investment.

"We've been consulting with the public and many of our stakeholders to fully understand the impacts they believe an increase to capital requirements will have," he said.

The RBNZ is proposing to near double the minimum common equity tier 1 capital the four major banks have to hold from 8.5 percent of risk-weighted assets to 16 percent, with the lesser banks needing 15 percent, and for the changes to be phased in over a five-year period.

There have been indications the central bank is considering increasing the phase-in period.

It is scheduled to announce its final decisions in early December.

"All of these views have been captured and are being considered and, if we've got it wrong, we'll make adjustments to reflect that because it's important that we get this right," Bascand told the conference today.

In February, the RBNZ used the methodology of international ratings agency Standard & Poor's Corp that purported to show bank capital requirements in New Zealand are very low by international standards.

The RBNZ used the S&P assessment as proof its view that bank capital needed to increase markedly was justified.

The S&P assessment was at odds with a PricewaterhouseCoopers paper published in 2017 and updated in May this year on behalf of the NZ Bankers' Association.

That showed the way New Zealand measures bank capital is very conservative and that, if bank capital was measured on an internationally comparable basis, the current common equity tier 1 capital of the four major banks would rise from the published levels by 520 basis points to 15.5 percent.

PwC concluded that the country’s major banks already hold more capital than Australian, Canadian, Austrian, Irish and Singaporean banks.

If the RBNZ's proposals were implemented, PwC said the NZ banks' tier 1 ratio would rise to 27.1 percent.

Bascand presented an updated S&P graph showing that current New Zealand bank capital levels now rank above banks in the Netherlands, Australia, Israel, Austria and Singapore.

If the RBNZ proposals were implemented without alteration, New Zealand bank capital levels would rank second highest after Iceland, ahead of countries such as Norway, Ireland and Hong Kong.

Bascand explained the improved position of NZ banks by saying that S&P's assessment of the country's economic risks has improved.

"They viewed that the moderation of house prices since 2017 has reduced the likelihood of a severe house price correction and with it, the potential losses banks may face in such a scenario," he said.

"This is good news. Our financial stability risks have reduced due to a slowing housing market."

Bascand said the slowdown in the local housing market "may be a cyclical rather than a structural change. In the longer term, we remain vulnerable, especially if household indebtedness continues to grow."

Earlier in his speech, Bascand presented a slide showing household debt-to-income ratio has risen from less than 60 percent in 1991 to well above 150 percent and that the ratio for households with mortgages had increased from a little above 100 percent to about 325 percent.

"This is why we need policies that aim to ensure enduring resilience in the financial system. Indeed, in their assessment, S&P note that NZ's economic imbalances remain somewhat elevated because of persistent current account deficits, high external debts, and an economy that is exposed to fluctuations in commodity prices."

More capital is a key part of building the country's resilience for when severe shocks occur.

"We are in the process of weighing up the costs and benefits of how much more and what type of capital that is appropriate for the desired level of resilience and the time frame to achieve it."


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