The Reserve Bank is proposing to lower the amount of capital banks should hold, but immediately downplayed the broader economic and financial impact of the changes.
It’s started consultation on a review on how much money banks should be required to holding to back their lending, but also maintain a high level of security against financial turmoil.
The banking sector, politicians and the Commerce Commission complained the capital requirements, which were devised in 2019 and were being progressively increased, were too much and were stifling competition, modernisation and innovation.
The RBNZ paper said its board had decided it could relax the requirements, because they were generally more strict than overseas, and there were also other policies coming in to effect which would add a new type of discipline and security, such as the Deposit Takers Act.
Options on offer
It’s offered two options: one based on the amount of share capital a bank had, or the amount of share capital and extra finance assets acting like a shock absorber. Either way the savings were described as “material”.
“Both options are expected to result in lower average funding costs for deposit takers than under the 2019 Capital Review outcomes,” the RBNZ briefing document said.
The options would reduce the amount needed to be held by the industry by billions of dollars and also allow cheaper buffer finance options.
RBNZ assistant governor Angus McGregor said the changes might look significant but the impact might not be.
“We know capital settings can influence competition and economic activity, but we expect any impact from the proposals we are consulting on to be modest.”
Under the proposals different types of lending – residential mortgages, business loans, farm finance – would continue to be assessed with differing levels of risk, but the amount of capital needed to back them would be reduced.
The RBNZ would also drop its approach to risk from seeking to protect from a 1-in-200 year financial crisis, which is not used overseas.
The proposals also suggested reducing the amount of capital needed to be a deposit taker to $5m from the current $30m, which had been claimed as a barrier to new entrants into the banking sector.
Although RBNZ director of prudential policy Jess Rowe also played down the effect of change.
“We don’t expect this to set the world on fire, this is not the thing driving economic growth, it’s important to point out there are different distributional effects we have thought quite carefully about competition, not so much for new entrants, because we don’t think the capital rules are a barrier to new entrants.”
Finance Minister says cheaper lending
Finance Minister Nicola Willis said the proposals would reduce excessive restrictions and costs on borrowers, which had been creating headwinds for economic growth.
“In particular, I note proposals to better align granular capital requirements with actual risk, which the Bank says could result in better lending terms for some residential mortgages, small to medium-sized businesses, agricultural lending and lending to community housing providers and housing co-operatives.
“These measures would also help even the playing field between larger banks and their smaller competitors,” she said.
Victoria University finance expert Martien Lubberink said the changes were sensible and would bring New Zealand banks closer to overseas practice.
“The RBNZ is offering banks a choice: Simpler but higher equity; or lower equity with a new safety net.”
He said changing the risk weighting on different types of loans would mean less capital needed to back lending, which would work to major banks’ advantage.
He said the pendulum had swung back to less regulation.
“The RBNZ’s proposal can be read as a response to populist calls of the Minister of Finance.
“On the other hand, none of the changes are disproportionate, and many make good sense. In all, this is not an unreasonable proposal.”
Speaking in central Auckland this afternoon, Prime Minister Christopher Luxon welcomed the review’s consultation period.
“Granular risk assessments are important so it’s not one size fits all, it’s actually a much more discretionary risk assessment that’s taking place, coupled with… capital rules being… lessened or loosened as the proposals are from the RBNZ.
“I think that’s all good. It puts downward pressure on the cost of lending. That’s a good thing.”
Willis said the Reserve Bank’s proposals reflected the Government’s direction on its own legislative instrument, the financial policy remit.
“We made clear that in protecting financial stability, we also wish the Reserve Bank to do what it can to support both competition and efficiency.
“It’s been of note for several years that commentators have looked at the Reserve Bank’s credential regulations and noted that they are at the conservative end of the spectrum, potentially hindering competition and acting as a headwind to economic growth.”
By Gyles Beckford of rnz.co.nz
