Government warned of big bank backlash in wake of surprise Reserve Bank capital proposals going above international norm

Government warned of big bank backlash in wake of surprise Reserve Bank capital proposals going above international norm
Finance Minister Grant Robertson & RBNZ Governor Adrian Orr.

The Government has been warned by the Reserve Bank (RBNZ) to expect “intensive lobbying” from large banks on the regulator’s proposals to require them to hold more capital.

The RBNZ, a week before it on December 14 released a consultation document on its proposals, told the Government that while it had signalled the direction it was heading in, it believed banks weren’t expecting “increases of the scale” it proposed.

It also acknowledged, in the briefing paper prepared for Prime Minister Jacinda Ardern, Finance Minister Grant Robertson and Commerce and Consumer Affairs Minister Kris Faafoi, that its proposals went further than international standards suggested.

However, in a briefing paper dated February 12, the RBNZ said the public feedback it had received was mostly supportive.

“We are attempting to make complex issues such as capital more accessible to a broader range of stakeholders, especially the general public,” the RBNZ said.

“We are getting more submissions from the general public than we would normally expect for a consultation such as this, and most have been supportive.” has obtained these RBNZ briefings to government ministers under the Official Information Act. The papers, prepared by the RBNZ’s Financial Policy Manager Ian Woolford and signed off by the Deputy Governor Geoff Bascand, explain the proposals and detail the likely responses.

The 'likely bank responses' in the RBNZ's words

The RBNZ, in the December briefing explained: “We anticipate a negative reaction from the large banks.

“The large banks – effectively the four Australian owned banks – operate under a capital calculation framework that currently gives them an unjustifiably large capital advantage over the other banks in the system that are subject to our capital requirements.

"This is, they currently hold less capital for the same exposures than the small banks are required to. Our consultation will propose closing this gap.

“This gap between large and small banks originated as a result of the international standards, and is something that many countries’ regulators are grappling with.

"As a result, the uneven playing field concern is an issue that is being addressed through the international standards by way of limiting the gap by putting a floor on how much lower banks may operate under the set of standards known as ‘internal models’ requirements.

“The RBNZ is proposing to follow the international approach, but is proposing to go further in closing the gap than other countries (including Australia) and indeed further than the international standards suggest.

“As such, we expect that the banks that operate on the other capital framework (the ‘standardised approach’) will support our proposals in this regard.

“Our advice is to anticipate intensive lobbying from the large banks…”

High interest rates, banks exiting the market?

Indeed the lobbying from investment bank, UBS, has stood out.

It has suggested that the RBNZ’s bank capital proposals would see the Australian banks in New Zealand increase their mortgage rates by between 80 and 125 basis points.

Guessing it would be “highly unlikely” for the RBNZ not to follow through on its proposals, UBS has also suggested Australia’s major banks may look to sell their New Zealand subsidiaries.

The RBNZ, in its February briefing, said: “We estimate that banks will largely be able to meet the proposed requirements by retaining their expected earnings over the five-year transition period instead of paying dividends…

“Interest rates for borrowers may settle slightly higher, and depositors slightly lower, but this impact should be balanced against the benefits of the proposals.”

Robertson: 'I don’t think I’ve received the backlash'

Asked by whether the backlash he has received has been as severe as expected, Robertson said: “I don’t think I’ve received the backlash, because it’s the RBNZ’s proposal.

“Clearly these are changes that the banks have got concerns about – everybody can see that. What I’d ask is for people to use the consultation process to work through those concerns.”

Robertson in February told he hadn’t received advice to indicate the RBNZ’s proposals would cause an economic slowdown. Housing and Urban Development Minister Phil Twyford said they wouldn’t cause a KiwiBuild catastrophe.  

Meanwhile National’s Finance Spokesperson Amy Adams feared they could cause a credit crunch.

Confidence in credit availability among those in the agricultural sector has hit rock bottom according to ANZ’s latest Business Outlook survey.

The RBNZ’s consultation timeframe has been extended from late-March to May 3. The RBNZ is expected to make key decisions in the third quarter of the year.

For more on why the RBNZ’s argument for changing bank capital requirements, see this story and this interview.  

For full details on just what the Reserve Bank is proposing for bank capital, see this three-part series herehere, and here.

*This article was first published in our email for paying subscribers early on Monday morning. See here for more details and how to subscribe.

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“The lady (banks) doth protest too much, methinks.”
They are in a pretty privileged position extending “credit” the way they do.


Clearly dont want their own money exposed to the bubble.


The big 4 banks receive returns vastly in excess of their cost of capital. They receive such elevated returns because they are underpay for the risk their depositors are exposed to, that is caused by the high degree of leverage. The big 4 want this extraordinary privilege to continue. They will make assertions that they will pass on their "increased costs", but the only reason there might be such an outcome is because they have oligopoly power. Their is no valid theoretical reason why they should have increased costs with decreased leverage, apart from market power via oligopoly.

spot on, I was going to write a similar point but you have nailed and explained better than I could.

If any ones the roots cause of the inequality in NZ its this lot, they need reigning in by regulation.

International standards didn't work 10 years ago and don't work now. Good on RBNZ trying to make system more robust.

UBS has also suggested Australia’s major banks may look to sell their New Zealand subsidiaries.

Pleased to see UBS taking up a sideline writing Tui billboards.

Why are the big 4 allowed to use their own models? Seems pointless having regulations and not applying to all. Whose interest has the RBNZ been acting for the last few decades?

Why don't we just remove the license to print money from the banks? Did we ever vote/agree on this practice in the first place? Did the US have it right the first time - money supply in the hands of the people/state and remove it via taxes?

If the Reserve Bank target is inflation, isn't this best done via money/credit supply rather than interest rates?

the RBNZ approve and supposedly are meant to monitor the banks use of the internal models. It encourages banks to invest in their systems to be able to prove to the RBNZ that their models produce more accurate risk outcomes than the standard model.

Globally, the banks are being told there will be much tighter rules about applying internal models and those models cannot be used if they fail to produce consistently accurately results. Banks know capital will increase.

Is the RBNZ limiting the use of internal models because it says all other bank regulators are wrong or because it doesn't have the skills or resources to challenge the banks on the internal models it has approved?

Or is the RBNZ limiting the internal models approach because there are better uses of its staffs' time and limited resources than policing something so easy for banks to game? 
Separately Andy, as someone who works for one of the big 4 banks, I'd be interested in your answer to this. I haven't seen any crticis of the RBNZ capital proposals address this yet. Why should NZ allow 4 foreign (Australian) owned banks a capital advantage in NZ over locally owned banks?

The changes seem less about neutralising the internal model, and difficulty in policing it, and more about just increasing bank capital requirements generally. There is observation by well respected commentators regarding the lack of detailed research, even suggesting the RBNZ simply decided what capital ratios they wanted and back-solved some vague numbers to get there (1 in 200 years). It feels Labour to me and I find that concerning given the RBNZ is independent.

It's clear to me from my interviews with and discussions with RBNZ people that neutralising the internal models is a key aspect of their proposals. We've already had Kiwibank publicly say they're comfortable with what the RBNZ's proposing. I wouldn't be surprised if other NZ owned banks do the same.

I don't think its a case of it being about 4 foreign owned banks.. it just so happens they are large enough to spend the money required on their internal models. Given Kiwibank's size I would think they would have been approaching that point too... but wont bother now.

But lets take Kiwibank as an example... lets say for example they could spend a one-off $50m on the risk models and systems and evidence that as a result they have a better handle of their risks than applying a generic standard model. As a result, should the RBNZ approve, lets say they are able to hold $25m less capital. Now the RBNZ new standard says, "Actually... we will only let you hold $5m less capital".... would Kiwibank go ahead and improve their risk management practices. That investment of $50m for a $5m capital benefit is somewhat more marginal.

Put it another way, are no claims bonuses unfair on car insurance? If you are able to evidence to your insurer you are a safe driver you receive a reduction in premium. If Kiwibank are able to prove to the RBNZ they are a 'safe driver' and manage their risk then they too should be able receive a 'safe driver discount' and hold less capital.

Now, I am not saying the big 4 are perfect.. in fact, given Westpac's track record they have been told to hold an additional $1bn in capital.... similarly, the RBNZ could have taken away their 'safe driver discount' based on how they have managed their models and been told to use standard models until they can prove otherwise (which to be honest might have made a lot more sense).

But, to answer your question with a question, why should we make the 4 big banks hold the same amount of capital if they have evidenced they are a safer driver?

Is our issue with the safe driver discount? or with the insurer's assessment of them being safer?

Don't we want banks to be cognisant of the risks they are running and invest in managing them appropriately?

Its the direction every other bank regulator is going... including APRA.

How would we know if big 4 are "safe drivers", the reason the RBNZ is suddenly worried about capital is the roads could be about to get narrow and windy. When you accuse the RBNZ of not understanding the banks capital models, what I hear is they are so complicated that no one can be sure they work (I don't trust bankers not to group think their way into assumptions that should not have been made or arn't really justifiable).

For all the modelling you do, when things get difficult you either have the money to cover your losses or you don't. The big 4 have similar assets to the other banks and if the assets were to lose value would their models save them or they would they simply need the same capital ratios as everyone else to survive?

So... the concern is the RBNZ's ability to understand how safe the banks are... rather than allowing them to hold less capital because they are safe.

Adrian Orr has conceded the RBNZ don't have the skills, resources and inclination to monitor the banks internal models.... which to me is more of a comment about the RBNZ's dereliction of duty.

Why should bank supervision be simple? Shouldn't we be insisting the RBNZ do their job?

Some questions for you - I don't know the answers.

What is the cost to the RBNZ for adequate resources to effectively monitor the bank internal models?

Is that worth the benefit?

Who funds the RBNZ? - is that the NZ government? then that might mean that the government is unwilling to fund the additional cost when looking at a cost benefit analysis to the government.

No, I'm questioning if the models themselves work as expected by the public. More specifically, how can anyone know and verify if the models work, this includes the bank using them, if they are so complex the RBNZ does not understand them. Is there a better answer that some smart banker or banking consultant (who wont be held accountable if he's wrong) said so?

How familiar are you with your banks internal model? Can you answer my second paragraph or maybe just a quick example about how your model makes you safer than a bank with a higher capital ratio when your asset mix is similar?

As far as the reserve bank not being able to properly regulate the internal models because they are mostly macro economists*: When we start needing bankers to regulate bankers, i think we have problem. They become a closed group above external criticism and are free group think assumptions and ethics that others would be critical off. (This is my thoughts on the matter, I realise i have not justified all the logical steps here.)

*See Geof Mortlocks opinion pieces, Andy you seem to have a similar postion and argument on this.