Proposed requirements for banks to hold more capital won't cause KiwiBuild catastrophe or economic slowdown, according to Twyford and Robertson

Proposed requirements for banks to hold more capital won't cause KiwiBuild catastrophe or economic slowdown, according to Twyford and Robertson
Grant Robertson by Jacky Carpenter.

The Government is subtly nailing its colours to the Reserve Bank’s (RBNZ) mast in the face of banks protesting over the regulator’s proposal to make them hold more capital.

Meanwhile the Opposition is yet to be convinced the RBNZ is taking the right approach; both it and the Government at the same time underlining their respect for the regulator’s independence – of course.

Asked whether he was concerned the economy could take a hit if tougher capital requirements put banks under so much pressure that they restricted lending and/or inflated borrowers' interest rates, Finance Minister Grant Robertson said: “Obviously I look at the health of the overall economy, and I’ll continue to monitor it.

“But I don’t have any advice that would suggest to me that there is a significant issue to worry about here.”

Robertson also quoted RBNZ Deputy Governor Geoff Bascand saying: “While borrowing costs may increase a little, and bank shareholders may earn a lower return on their investment, we believe these impacts will be more than offset by having a safer banking system for all New Zealanders.”

Asked whether this reference signalled his support for the regulator’s proposals, Robertson said: “I want to make sure we’ve got a stable banking system; one that consumers have the absolute level of confidence in.

“They [the RBNZ] make the decision [on the amount of capital banks have to hold] and I can only go on the advice that I get.

“But as I say, I continue to monitor the situation.”

Twyford not predicting a KiwiBuild catastrophe 

The RBNZ in consulting on a document it released in December, proposing banks be made to hold around 40% more “high quality” capital. The value of this is equivalent to about 70% of the banking sector’s expected profits over a five-year transition period.

While it believes its proposals will only have a “minor” effect on borrowing rates, UBS is among critics to have cautioned the effect could be much greater.

It said in a note released as a part of a public relations push that mortgage rates could go up by between 80 to 125 basis points. In other words, increase from say 4.00% to between 4.80% and 5.25%.

Put to Housing and Urban Development Minister Phil Twyford, he said higher interest rates could be one factor among many to affect KiwiBuild, so he “wouldn’t be predicting catastrophe on the basis of that”.

He also pointed out interest rates were at a historic low, and in a similar vein to the RBNZ statement Robertson quoted, said the bigger issue was the integrity of the banking system.

Neither Twyford nor Robertson saw need, at this stage, for Government intervention to help borrowers potentially lumped with the cost of a beefed-up banking system.

Adams unconvinced by the RBNZ’s 50 bank capital papers

National’s Finance spokesperson, Amy Adams, wouldn’t commit to intervening either if she was in government.

Yet unlike Robertson and Twyford, she believed there was a real risk of a bank credit crunch that could affect the economy.

She said the RBNZ proposing a “massive jump” in the amount of capital it’ll require banks to hold, along with banks becoming more cautious in the wake of the Australian financial services royal commission, could be a “double hit”.

Adams wouldn’t say whether she would explicitly tell the RBNZ she thought its proposals were going too far if she was in Robertson’s shoes.

Rather she’d be asking more questions of the RBNZ.

“There is no clear issue that he [RBNZ Governor Adrian Orr] seems to be wanting to address,” Adams said, noting the resilience of New Zealand’s banking sector during the 2008 global financial crisis.

“Bank stability is incredibly important… but simply a ‘more is better’ approach I don’t think is adequate.

“And I certainly haven’t seen them do clear modelling about how they expect to impact… the availability of capital and the cost of capital.”

Adams wasn’t convinced the 49 papers the RBNZ released on bank capital as background to its main 59-page consultation document, included a compelling enough case for the need for tougher capital requirements and outlined the effect this would have on the economy.

The deadline for submissions to the RBNZ’s proposal has been extended from March 29 to May 3. The regulator expects to publish its final decision in the third quarter of 2019. (You can read interest.co.nz's three part series on the Reserve Bank capital proposals herehere, and here).

Backdrop of RBNZ ceding some power to central government

Politicians commenting on matters before the RBNZ isn’t anything new.

John Key for example took a very brazen approach when he was Prime Minister in 2016, telling the RBNZ to “get on with it” and tighten loan-to-value ratio (LVRs) restrictions for property investors.

Then in 2017, Bill English as Prime Minister and Jacinda Ardern as the Labour Party Leader, hinted at dissatisfaction over how these LVRs were impacting first home buyers.

While Robertson’s commentary has been coy and cautious, the key difference is that under the revised Reserve Bank Act, he has more of a say over the way the RBNZ operates.

As Finance Minister, he will be able to appoint the members of the soon-to-be-established Monetary Policy Committee, tasked with making monetary policy decisions that previously sat solely with the RBNZ Governor.

Four of these members will be from the RBNZ. These will include the Governor, Deputy Governor and two others nominated by the RBNZ board. Three members will be external appointees.

A Treasury representative will also sit in on meetings. They won’t be able to vote, but will be allowed to provide advice on fiscal policy, or government spending.

The external appointments are going through the Cabinet process, which is expected to be competed by mid-March.

The RBNZ plans to have the Committee in place for the May 8 Official Cash Rate review.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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36 Comments

All this does is highlight how lightweight Robertson is to his predecessors. Key, English, Cullen, Richardson, Douglas, Birch all had their own view of what the RBNZ were up to.. they didn't sit and wait for someone to provide some advice on whether the RBNZ's proposals warranted 'having something to worry about'.

Best summed by " I can only go on the advice that I get"... um, no, you are meant to be suitably qualified to have your own opinion.

Its a Labour party problem, none of them have any real world experience in the industry sectors they are supposed to be in control of.

I wonder how they divvied up the portfolios? I heard they played Heads Up Charades, where they stick a card with a portfolio written on it to their forehead and they have to guess what it is from the visual clues the other members give.

The Reserve Bank is supposed to be independent.

Would be good to see more politicians leave it to do its job.

I agree. Robertson does seem lightweight on these issues, at least on evidence so far. I hope he lifts his game and puts the RBNZ under close scrutiny.

It’s not the capital requirements that will cause a credit crunch, a slowdown, and a rethink on KiwiBuild, it’s the inevitable decline of the overall property market, following what is happening in Australia. I would not be surprised if the current -7.4% in parts of Auckland is not -17.4 by this time next year.

Its already -17.4% mate.

Lalaland, Down 17.4% In Auckland? Where?

He(?) lives up to his name. Does driveby with random statements like that and I've never seen anything posted to backup the statement, not even a cherry picked example.

https://www.landlords.co.nz/housing-statistics

look at Deavonport for example - 1.4 mill *Aug 2017)to 1.3 mill (now). That's a 7.6% decline right there. Those figures are medians! The big declines are happening in the upper quartile.

check again.. Median jumped back to $1.59m for Dec-18 (almost exactly where it was in Jul-17). Single suburb with not a huge number of sales, the data is too noisy.

If I was a spruiker i'd cherry pick that the median is up 59% since Aug 18 (when it was $1m) !! wowsers. :P

Seeing more capitalised banks would not be a bad thing. Having interest rates move away from gfc life support levels will do wonders for the equity of society by making asset based debt farming much less attractive.

It does seem like a sensible move. If banks increasingly wish to be regarded as too big to fail and protected from the risks they take, it's sensible of a Reserve Bank to provide them guidelines of how to manage risk appropriately so the taxpayer is less likely to have to bail them out.

of course there will be a slowdown if credit creation is slowed down, that is what NZ has built its economy on in the last ten years.
it was houses. immigrant, houses, immigrants.
we should have been concentrating on export led growth

Exporting immigrants :)

We did export things. Genesis energy, wellington power lines, Australian passport applications, golf courses, John Key's old house. I could go on.

Very soon, if we are to keep our tabulation system intact, we'll have to to eliminate interest. You just can't grow indefinitely, a concept that seems to be beyond the understanding of many. Just how much 'backing' would they need in such a scenario? Indeed, could they survive at all, in their present form?

powerdownkiwi
You talk as if capitalism is without hope, and futile.
What's the alternative?
Isn't life effectively one futile exercise. May not the supposed utopian alternatives to capitalism potentially leave our planet in a more perilous state than capitalism?

The alternative to futility is pointless suffering. You will die, and your comprehension of your 'achievements' (such as they are) will end.

I for one will be very interested to hear PDK's alternative to capitalism.

does it involve hessian sacks, potatoes and recycled newspaper?

Undoubtedly.
Unicorns and rainbows, too, no doubt.

Great question.

I've long advocated a joule-referenced system, minus interest. That way, at least, you might have a chance of fitting your system into your habitat/ecology, without annihilating your species.

Out of curiosity, who supplies the marginal joule?

One way or the other things will sort themselves out. Usually when resources run scarce there are wars, famines, diseases etc.

Relax mon, interest is only there to cover risk. Interest free means zero risk, and no risk = no reward. As long as there are people ready to take risks to make money, there will always be interest and I see no shortage of either.

Who needs money anyway?

Just because it is independent does not mean it can't go rogue or be politicised from within.

The whole independent notion is complete garbage

Geez Robertson and Twyford are sure a credit crunch won't happen. I'm so reassured.

Twyford and Robertson are so out of their depth with their portfolios.
Ardern is looking more under pressure by the day and the teethy grin is not going to get her out of it!

Its getting nasty - If you read between the lines of Geoff Mortlock's recent interest.co.nz piece, it's basically a scathing attack on Adrian Orr and the whole RBNZ - or did I misread that. The RBNZ is just tying to get the banks to have a bit more skin in the game. Fair enough given how exposed the banks are to housing. The OBR means nothing, at the end of the day if a bank becomes insolvent then the PM will be under enormous pressure to bail out the banks.

fat pat,

I think you're right. Few ordinary Kiwis with some money in a TD have any idea about OBR. If there were serious rumours that one of the big 4 banks were in trouble,then there would be a run on that bank and what would happen next? Contagion of course and the government of either colour would be forced to provide a blanket guarantee.
What we need is a deposit guarantee scheme which would give protection to the vast majority of depositors.
But the RBNZ would say that their Dashboard allows everybody to make an informed judgement on the relative strengths of the banks,so they have done everything they can. Absolute crap. For a start,almost nobody knows of the Dashboard's existence and I have seen no signs of a massive public education campaign. I defy anyone to give me a list of the big 4 banks in order of their financial strength from that information. It's an exercise in arse-covering.

While i agree that some of the commentary is a little light weight, I am more concerned at some of the criticism above. This Government is trying to change the whole approach to economic management, but they seem to understand that too much too soon will be very damaging. A credit crunch for the banks? I too think that that will be a ripple of some relatively minor changes that will need to be tolerated. But running around saying the sky is falling does not constitute a crisis, and remember where this is coming from - the Bank Lobby! their interest is to stop the changes.

I don't think any banker is begrudging or arguing against the RBNZ in terms of lifting capital levels. Every regulator in the world is proposing the same.

What the bankers are concerned about is the lack of any discernible logic from the RBNZ in suggesting the capital requirement should effectively double.

The Basel Committee for Banking Supervision (BCBS) has proposed a complete review of banks risk management standards and based on the effectiveness of the banks systems... including Australia. The effect of those proposed changes is an increase in capital of ~25-50%.

I think the banks are justified in asking how the RBNZ has arrived at a 100% increase when the G20 have formulated an extremely detailed capital model challenging the effectiveness of banks risk management practices and its half of that.

At least Robertson could ask "Why does the RBNZ know more than the G20?"

Think the APRA Chairman might have had the RBNZ in mind when he mentioned this in his speech this morning

"We also want them (the banks) to have stronger capital and liquidity management, founded on a strong risk culture. There are too many examples of financially sound institutions that frittered away their strength through poor risk management and reckless decision-making to suggest we can rely on stronger prudential metrics alone to deliver the requisite levels of safety and stability that the community expects"

Are we listening RBNZ?