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Westpac, BNZ see sense in RBNZ's capital review, less convinced on outsourcing policy

Tuesday 9th May 2017

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Westpac New Zealand and Bank of New Zealand are relatively sanguine about the need for the Reserve Bank's review of required capital levels to boost confidence in the solvency of the banking system, but see the regulator's planned outsourcing policy as simply adding unnecessary costs. 

The local units of Australia & New Zealand Banking Group, Westpac Banking Corp and National Australia Bank had total quality capital ratios of 13.8 percent, 12.8 percent and 13.3 percent respectively, comfortably above the Reserve Bank's 10.5 percent minimum, which includes a buffer. Three of Australia's four-pillar banks reported first-half earnings over the past week, all of which saw stronger asset quality as a result of the dairy sector's recovery through the tail end of last year. 

Westpac New Zealand chief executive David McLean said his bank's asset quality had probably never been stronger since the turnaround in the dairy sector, which makes it harder to see where issues would crop up. 

"When times are really good and all the asset classes are performing very well, that's when I think you should be really worried because it's harder to see problem loans because everything looks good," McLean told BusinessDesk. 

The Reserve Bank is taking another look at the current capital adequacy settings as lenders around the world face growing demands to preserve their solvency since the global financial crisis crippled much of the system almost a decade ago. New Zealand and Australia were somewhat insulated from the global credit crunch due to their domestic focus. 

McLean said the global trend was for rising regulation "driven by the failure of the banking system to deal with a lot of the issues, particularly in Europe and the US", and while New Zealand's economy was small and exposed to the rest of the world, the Australian ownership of much of the system provided strong support. 

BNZ chief Anthony Healy said he was supportive of the capital review, which he said will need to work in tandem with similar efforts across the Tasman by the Australian Prudential Regulation Authority.

"We have very strong capital levels and we're continuing to build them because our expectation is that globally, capital levels and expectations of capital levels are going up," Healy said. 

However, both bank CEOs have concerns about the prospective costs they each face if the Reserve Bank goes ahead with its planned outsourcing rules, which would define what functions lenders have to operate internally. 

The new rules for outsourcing are integral to the RBNZ's open bank resolution policy, designed to ensure an orderly management when a lender collapses because third-party arrangements could undermine the efficacy of the regime. Central bank analysis estimates a net benefit of about $2.2 billion by having the open banking resolution policy in place, or $1.9 billion using the higher cost projection, by reducing the need for a government bail-out and lowering the impact of a banking crisis on the wider economy.

Westpac's McLean said there was a "philosophical difference" with the RBNZ, with Westpac's view the outsourcing policy will add a lot of cost to New Zealand's economy without adding any value. 

BNZ's Healy said they're working closely with the regulator about the outsourcing guidance, and what the implications of it would be on the bank. 

"There's no question it's going to be pretty expensive for the banks, and that's going to be investment we don't make in cyber security, or in our technology platforms or digital platforms," Healy said. "It's a tough trade-off for us. We want to try and address concerns the Reserve Bank's got without diverting all capital expenditure for the next three-to-five years into replicating systems that already work perfectly well here."

The banks have estimated the cost of introducing the outsourcing policy to be about $870 million, of which $670 million was a capital bill and $200 million ongoing expenses.



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