Standard & Poor's says benefits from RBNZ's macro-prudential tools outweigh risks but no credit rating impacts likely

Standard & Poor's says any Reserve Bank use of its so-called macro-prudential tools is unlikely to have any immediate impact on banks' credit ratings, and none at all on the country's big four banks given their ratings are equalised with those of their Australian parents.

"Given the discretionary and (proposed) short-term nature of the macro-prudential instruments, we consider the application of this type of policy as being unlikely to have any immediate (credit) rating impact, either upward or downward," S&P says in a report on the Reserve Bank's macro-prudential policy.

"We also note that because the ratings on the major banks (ANZ, ASB, BNZ and Westpac) are equalised with their respective Australian parents', macro-prudential policy would not likely register a rating impact on the big four."

Banks are required by the Reserve Bank to have a credit rating as a condition of their registration. S&P has the big four banks at AA- with stable outlooks. It has Kiwibank at A+ with a negative outlook, TSB at BBB+ with a negative outlook, and both the Co-operative Bank and Heartland Bank at BBB- with negative outlooks. See credit ratings explained here.

Finance Minister Bill English and Reserve Bank Governor Graeme Wheeler announced a memorandum of understanding last month clearing the way for the Reserve Bank to use its macro-prudential tools, if it chooses to, on a temporary basis. It's hoped use of the tools would help dampen excessive growth in credit and asset prices and strengthen the financial system.

The four tools are;

Adjustments to the Core Funding Ratio - altering the amount of equity, retail funds and longer-term wholesale funding banks have to hold.

A Countercyclical Capital Buffer - effectively banks holding more capital during credit booms.

Adjustments to sectoral capital requirements - increasing the amount of capital banks must hold in response to risks specific to certain sectors such as housing or farming.

Quantitative restrictions on the share of high loan-to-value ratio lending to the residential property sector.

Benefits outweigh risks

S&P says despite uncertainties about the potential effectiveness of macro-prudential policy given its fledgling status globally, the benefits have the potential to outweigh downside risks, especially given financial stability is the end goal.

"Indeed, we believe that at the very least its application will prompt a reassessment of both pricing and risk appetite, which may filter through the system in the form of higher borrowing costs and slower credit growth, thus having the potential to limit excessive asset price inflation," S&P says.

"However, while the end goal is to promote financial stability, which could improve the credit profile of banks in New Zealand if policies translate into more structurally sound balance sheets, we believe the impact could be adverse for some banks, particularly those largely associated with housing lending if policies lead to a structural decline in the total pool of lending opportunities available."

S&P suggests adjustments to banks' capital requirements, either through the introduction of a counter-cyclical capital buffer or sectoral capital requirements, could be the most effective of the macro-prudential tools in the first instance. Sectoral capital requirements could be "more favoured".

Meanwhile, S&P says the prolonged and effective use of macro-prudential policy could contribute to improvements in economic risks, including economic imbalances and credit risk within the economy, and industry-wide risks including funding.

"Together these form our analysis for the entire financial system by considering the relationship of the banking industry to the financial system as a whole. As a result, any improved assessment of New Zealand's economic and industry risks could have positive rating implications for the stand-alone credit profile assessment of some of the banks."