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RBNZ says don't believe what banks say about capital

Don’t believe what banks say about how much capital they should have to hold, Reserve Bank deputy governor Geoff Bascand told the New Zealand Shareholders’ Association.

Friday, September 6th 2019, 6:31AM 2 Comments

by BusinessDesk

“Shareholders’ view of capital will always be lower in the banking sector than is good for the country,” Bascand told NZSA’s annual conference in Christchurch at the weekend.

“If a bank says it should be this much, know it should be more than that.”

Nevertheless, Bascand acknowledged that how much more capital than banks think they ought to have is a fair matter for debate.

RBNZ has proposed to near double the minimum amount of tier 1 common equity capital the four major banks have to hold, from 8.5 percent of risk-weighted assets currently to 16 percent. Smaller banks will have to hold 15 percent.

“Broadly speaking, they borrow 93 percent” of the money they lend and only about 7 percent is their own money and “you might be a little bit worried about that,” Bascand said.

“We want that level to go up to about 10 or 11 percent.”

That will mean about $20 billion of additional capital for banks that lend in the order of $550 billion.

If one of the banks were to fail, particularly one of the four major banks, the repercussions for the economy would be far worse than the collapse of insurance company CBL, Bascand said.

RBNZ is also proposing changes that will allow a more level playing field for the smaller banks.

Currently, the larger banks are allowed to use their own internal models to calculate how much capital they should hold while the smaller banks are required to use standardised models.

In practice, that greatly reduces the amount of capital the large banks have to hold in comparison with the smaller banks.

For example, in February, Bascand released information showing that ANZ Bank, New Zealand’s largest bank, needs to hold just below $3 of capital for every $100 of mortgages on its books while the government-owned Kiwibank has to hold about $5.70.

Bascand told the NZSA that one benefit of holding more capital will be that banks will be able to continue operating in a crisis.

He acknowledged more capital will also lower returns to bank shareholders but said those investors should expect a lower return from a safer investment.

In addition to reviewing the absolute levels of bank capital, RBNZ is having another look at whether hybrid securities - those which normally behave like debt but which can be converted into equity - should be allowed to count towards tier 1 capital. It is also looking at the timeframe for introducing the changes, he said.

Originally, RBNZ had proposed a five-year phase-in period.

The RBNZ is making the proposals in spite of New Zealand’s banks have sailed through a succession of stress tests as well as having proved among the safest through the 2008 global financial crisis. The central bank said in April that it came up with its proposals without completing a cost-benefit analysis, although governor Adrian Orr has argued since that it had effectively done a cost-benefit analysis without calling it that.

Nevertheless, RBNZ will produce an actual cost-benefit analysis when it announces its final decisions, expected in November.

Bascand said ahead of those final decisions, RBNZ will release reports later this month from the three independent reviewers it has engaged.

Tags: RBNZ

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Comments from our readers

On 6 September 2019 at 8:55 am JPHale said:
The one thing we should have learnt by now is those that are standing at the trough have no credibility on the issue of capital adequacy, and you some degree conduct.

When the banks, insurers, traders, and ratings houses all screwed it up in 2008, there is a fundamental level of trust that can never be restored.

Sure it happened in the US and not here, however, we are talking humans, money, banking, and capital.

To say it won't happen here is akin to saying the sun won't rise tomorrow. Both very unlikely given normal circumstances.
On 16 September 2019 at 10:37 pm Winka said:
When any cycle of nature is meddled with, nature has a way of winning, at the sufferage of the multitudes.

If you try and mask off winter with a bunch of exterior heaters and inside heaters, eventually the gas runs out and suddenly you are hit with something you are not 'conditioned' for.

As i have stated in various on-line forums during the last couple of years, we have been "lulled" and 'conditioned' into believing we have enjoyed a booming economy during the last few years, beginning after the last effects of the GFC were felt.

Much of this "conditioning" has been in the display of huge numbers of existing & new buildings with new scaffold and white plastic wrap....all in the name of a scandalous regime of mostly unnecessary new regulations.

The question needs to be asked "what will the situation be when all the new regulation is completed?"

We walk past thousands of people in the street who just cannot imagine life without that new scaffold and white plastic wrap.

Zero hour is nearly upon us (as was predicted in writing nearly two years ago!)

Zero interest rates are going to just be the beginning.
A well-proven phenomenon clearly evidenced already in some other countries, where the banks thrust mortgage with zero interest on their people.

The outcome of this is not as appealing as it may appear to the unknowing hordes of the populations of those countries.

Stormy times ahead, you can be assured.
Especially for those unprepared...with their heads in the sand so to speak!

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Lender Flt 1yr 2yr 3yr
ANZ 5.19 4.15 4.09 4.49
ANZ Special - 3.65 3.59 3.99
ASB Bank 5.20 4.15 4.09 4.39
ASB Bank Special - 3.65 3.59 3.89
BNZ - Classic - 3.65 ▼3.54 3.99
BNZ - Mortgage One 5.90 - - -
BNZ - Rapid Repay 5.35 - - -
BNZ - Std, FlyBuys 5.30 4.45 4.35 4.55
BNZ - TotalMoney 5.30 - - -
China Construction Bank 5.50 4.70 4.80 4.95
China Construction Bank Special - 3.19 3.19 3.19
Lender Flt 1yr 2yr 3yr
Credit Union Auckland 5.95 - - -
Credit Union Baywide 6.15 4.95 4.95 -
Credit Union North 6.45 - - -
Credit Union South 6.45 - - -
Finance Direct - - - -
First Credit Union 5.85 - - -
Heartland 6.70 7.00 7.25 7.85
Heartland Bank - Online - - - -
Heretaunga Building Society 5.75 4.80 4.95 -
Housing NZ Corp 5.19 ▼4.15 ▼4.09 ▼4.39
HSBC Premier 5.24 3.35 3.35 3.35
Lender Flt 1yr 2yr 3yr
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 5.65 3.85 3.95 3.89
Kiwibank 5.80 4.30 4.34 4.74
Kiwibank - Capped - - - -
Kiwibank - Offset 5.15 - - -
Kiwibank Special - 3.55 3.59 3.99
Liberty 5.69 - - -
Napier Building Society - - - -
Nelson Building Society 5.70 4.69 4.79 -
Resimac 5.30 4.86 4.14 4.19
Lender Flt 1yr 2yr 3yr
RESIMAC Special - - - -
SBS Bank 5.29 4.85 5.05 5.49
SBS Bank Special - 3.69 3.69 3.99
Sovereign 5.30 4.15 4.29 4.55
Sovereign Special - 3.65 3.75 4.05
The Co-operative Bank - Owner Occ 5.15 3.65 3.59 3.99
The Co-operative Bank - Standard 5.15 4.15 4.09 4.49
TSB Bank 6.09 4.65 4.59 4.85
TSB Special 5.29 3.85 3.79 4.05
Wairarapa Building Society 5.70 4.85 4.99 -
Westpac 5.34 4.15 4.09 4.49
Lender Flt 1yr 2yr 3yr
Westpac - Offset 5.34 - - -
Westpac Special - 3.65 3.59 3.99
Median 5.35 4.15 4.09 4.19

Last updated: 16 September 2019 10:03am

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