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.”
Interest.co.nz 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 interest.co.nz 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 interest.co.nz 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.
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