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RBNZ used a 'net benefits framework' in devising its bank capital proposals

Wednesday 29th May 2019

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The Reserve Bank has used a “net benefits framework” in devising its bank capital proposals, governor Adrian Orr told parliament’s finance and expenditure select committee.

National Party finance spokeswoman Amy Adams had been quizzing the RBNZ officials on why the central bank hadn’t conducted a cost benefit analysis of its proposals.

“I’ve said on the record many times, but it doesn’t land on ears that want to hear it,” Orr said. “I’m getting tired of hearing the same thing over and over again and it just isn’t true,” he said.

“We’ve used a net benefits framework” in framing the bank capital proposals and RBNZ will include a cost-benefit analysis in its regulatory impact statement, "which you could call a cost-benefit framework in anyone else's language".

The central bank said explicitly in a paper released in April that it wouldn’t produce a cost-benefit analysis until its regulatory impact statement, but many critics have said that such analysis should have been RBNZ’s starting point, but Orr said "people are feeding off loose language in one document" when there were "hundreds of pages on net benefit".

The Reserve Bank is proposing to near double minimum tier 1 capital requirements from 8.5 percent currently to 16 percent for the big four banks and 15 percent for the smaller banks.

It has also proposed limiting the advantages the big four Australian-owned banks get from using their own internal models for calculating capital to no more than 90 percent of the results from the standardised models the other New Zealand-owned banks have to use.

“We are open-minded and we’ve said this right from the start although that hasn’t been the reaction from the industry,” Orr said earlier at a media conference on his latest Financial Stability Report.

“If we see sufficient reason to be changing any of the parameters, then we will and we will make it clear why,” he said.

He later told the select committee that RBNZ has been “bending over backwards” to take submissions from its critics. The central bank extended the deadline twice and submissions finally closed on May 17.

Adams asked about the joint submission from the four smaller New Zealand-owned banks, Kiwibank, TSB Bank, SBS Bank and Cooperative Bank, which said that far from levelling the playing field, as the central bank has said its proposals should do, they could make it even harder for them to compete.

“I will say that was a very small sentence in a largely endorsing submission. It was around a specific issue,” Orr said.

Deputy governor Geoff Bascand said that he agrees there are some issues for the smaller banks in raising capital.

“Some of them have more limited capital raising capacity” and RBNZ is already working on, for example, how a mutual bank can raise capital.

Kiwibank is owned by New Zealand Post, the New Zealand Superannuation Fund and ACC while TSB is owned by a community trust and both SBS and Cooperative are mutuals owned by their depositors.

“We’ve got to look at all of those issues” but he won’t accept any blanket assertion that the proposals will be bad for the New Zealand banks, Bascand said.

Asked at the media conference what had changed in the last three or four years to convince RBNZ that banks need more capital, Orr answered: “Not enough has changed. What has changed is not sufficient.”

There have been a number of “very good changes,” such as the banks now having much better liquidity, having much longer duration of debt and relying more on domestic deposits.

But the banking sector is still exposed to the same risks it faced in the 2008 global financial crisis and RBNZ has since learned more about problems with bank conduct and culture.

Orr rejected some of the criticism of the proposals but said RBNZ will be working through all the submissions and that “the devil’s in the details of the assumptions” that the critics have been making.

Possibly in answer to those critics, RBNZ announced yesterday that it has appointed three experts with both academic and central bank experience in Britain, the United States and Australia to independently assess the capital proposals.

The independent experts have been asked to decide a wide variety things, including whether RBNZ has calibrated its proposals correctly and whether it is missing anything – “there’s absolutely kitchen sink and all” in the experts’ terms of reference, Orr said.

“I strongly disagree with the assertion that we’re opinion shopping” and the three people chosen to review the central bank’s proposals are “global experts,” he said in answer to questions from National's Amy Adams.

Each will issue their own report and those reports will be publicly released: “All will be transparent.”

Orr repeatedly stressed that whatever the final decisions on capital, the policies will be phased in over time.

Although banks often implement new rules, such as changes in loan-to-valuation restrictions, immediately rather than waiting for the actual implementation date, Orr said bank customers need to be talking to their banks if they try to implement any capital changes overnight.

“It will not be the regulatory impost that’s making them move.”


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