Warning on borrowing rates

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The Reserve Bank's new capital regime will lead to greater increases in borrowing rates than its estimate, economists have warned.

Monday, December 9th 2019, 9:30AM 1 Comment

ASB economists believe the new regime will result in larger increases in bank funding costs and customer borrowing rates than the 20.5 basis points assumed by the RBNZ.

The benefits of the regime assumed by the Reserve Bank "may not be as strong and could even turn into a net cost", the economists warned.

Westpac economists expect rates to increase by twice the RBNZ estimate.

The bank's team of economists, including Dominick Stephens, said: "Like any insurance policy, this [regime] comes with an ongoing cost during normal times. Higher required levels of capital will increase banks’ overall cost of funding, resulting in higher interest rates on loans, reduced lending, and a lower level of economic activity than otherwise."

The Westpac team added: "The RBNZ has estimated that the effects of the new bank capital requirements would increase bank lending rates by 0.2ppts relative to the OCR. Our own analysis suggests that the impact could be twice that much."

Banks welcomed the outcome of the capital review last week, as lenders were given seven, rather than five years, to comply with new guidelines. Banks will also be allowed to use debt instruments as part of their required capital buffer. 

ANZ NZ chief executive Antonia Watson said the final rules were a "result of the consultation process" and would give lenders "clarity".

Watson said: “We agree with the RBNZ that having a sound and efficient financial system is critical to the economic well-being of all Kiwis – the debate was always about how far that went and how that cost would be shared.”

ANZ said changes would be implemented gradually, "bearing in mind the market was competitive for lending".

Tags: ANZ ASB Dominick Stephens Lending mortgages RBNZ Reserve Bank Westpac

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