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By Gareth Vaughan
The Reserve Bank has pushed out its timelines for the introduction of two key new regulatory initiatives - the Basel III global capital adequacy standards and banks' pre-positioning for its Open Bank Resolution (OBR) policy after consultation, although on the latter the central bank says cost-benefit analysis shows a "significant" net benefit.
The update on its OBR policy came in the Reserve Bank's bi-annual Financial Stability Report, yesterday, with the changes to its Basel III plans revealed in a letter to bank chief executives published on the Reserve Bank's website.
On banks' pre-positioning for its OBR policy, the Reserve Bank now says all registered banks with retail funding of more than NZ$1 billion, which ranges from the country's newest bank The Co-operative Bank all the way up to the biggest bank ANZ New Zealand, must have OBR functionality in place by June 30, 2013. Previously the start date had been the end of 2012.
New bank failure tool
Effectively the the OBR policy will give the Reserve Bank a new tool it could use to deal with a bank failure. If implemented the policy is touted as allowing a bank to open for business on the next business day after its temporary closure following an insolvency event or it being put into statutory management, and being able to provide customers with full or partial access to their accounts and other bank services.
The key feature of the policy is that creditors - including depositors - are able to access a portion of their funds immediately after the bank fails and is placed in statutory management. The bank can quickly reopen with the unfrozen or accessible portion of funds guaranteed by the government to avert a further run by creditors. The idea is creditors' additional funds can be unfrozen at later dates as the final losses are determined.
Last week Reserve Bank Deputy Governor Grant Spencer said the OBR policy should be seen as a complement, rather than a substitute, for the various “recovery plan” tools in the event of a bank failure such as living wills and loss-absorbing debt instruments.
Pre-positioning for the OBR policy means the banks must redesign their core banking systems, leading to suggestions it'll prove a costly exercise. International credit ratings agency Moody's Investors Service told interest.co.nz last year the OBR policy will mean there's less expectation the government would use taxpayers' money to bail out one of the country's major banks if it got into strife and more pressure on a bank's owners/shareholders to cough up in the event of a bank failure.
Such comments have led to suggestions bank credit ratings could be negatively impacted by the OBR policy, although Standard & Poor's has played this down, saying in its initial view the OBR policy won't be a significant imposition on its view of banks' financial strength.
OBR to be in place six months later than planned from June 2013
Banks were tasked with providing the Reserve Bank with detailed OBR implementation plans by the end of February.
"The Reserve Bank's initial proposal was to have the OBR policy in place by the end of 2012," the Reserve Bank says in its Financial Stability Report. "Following discussions with banks, the Reserve Bank will require all registered banks with retail funding of more than NZ$1 billion to have the OBR functionality in place by June 30, 2013."
"The Reserve Bank's cost-benefit analysis will be released shortly, and points to a significant net benefit from the OBR policy."
Kirk Hope, CEO of bank lobby group the New Zealand Banker's Association, said it was positive the timeframe for OBR's implementation had been pushed back but it was still too tight. And as for a cost-benefit analysis of the policy, Hope said this wasn't necessarily the most useful thing to see.
"I think it (the most useful thing to see) is analysis of a variety of options for dealing with a bank that is in a fairly significant crisis situation," Hope said. "What would be useful would also be to canvass alternatives and also acknowledge it might not be as black and white given there might be more than one tool that needs to be used in that type of fairly severe situation."
Hope added that a range of contingencies had to sit within banks' IT plans for the OBR policy, including the extent of the haircut a statutory manager may want to apply, even though it's impossible to know what this could be. Last month Hope told interest.co.nz that banks' required more policy detail and more justification from the Reserve Bank on both its Basel III plans and OBR policy.
Basel III introduction in the slow lane
On Basel III the Reserve Bank has brought its plans more in line with those of the Australian Prudential Regulation Authority (APRA) and pushed out its timetable for transitional arrangements for the de-recognition of non-qualifying capital issued by banks to January 1, 2018 from January 1, 2015.
In the letter to bank CEOs, Reserve Bank Head of Prudential Supervision Toby Fiennes says the central bank is adopting almost all of the Basel III standards developed by the Basel Committee on Banking Supervisions and endorsed by Group of 20 leaders, and in doing so is "generally well aligned" with APRA's proposals in most areas.
"The two most notable departures from the Basel standard and from APRA's requirements are our intention not to impose a minimum 'one size fits all' leverage ratio, and earlier implementation of the conservation and countercyclical buffer," says Fiennes.
The Reserve Bank's Basel III implementation plans are now just one year ahead of the timetable set by the Basel Committee, which runs until 2019, and its timetable has slipped from last November when it wanted its initial proposals to take effect from 2013, and from March when its second consultation paper suggested a January 1, 2015 deadline for transitional arrangements.
'Good they have listened'
Hope said the Reserve Bank's changes to its Basel III policies and timeframes were "helpful."
"The initial timeframes were fairly aspirational if you look around at what other jurisdictions are doing. I think it's good that they (the Reserve Bank) have listened. It's progress. Again I think it's going to come down to a continuing dialogue around these issues to get the best and most consistent outcomes, which is what we're looking for," said Hope.
Basel III is a set of reform measures designed to strengthen the regulation, supervision and risk management of the banking sector in the wake of the Global Financial Crisis. It aims to improve the banking sector's ability to absorb shocks arising from financial and economic stress, improve risk management and governance, and strengthen banks' transparency and disclosures.
Key changes to the Reserve Bank's plans revealed by Fiennes include conditionally allowing Tier 1 capital, such as perpetual non-cumulative fully-paid up preference shares, to be callable at the initiative of the bank after a minimum of five years with one condition being Reserve Bank approval. This makes such securities much more capital management friendly from a bank issuer perspective.
If a bank is operating within the capital conservation buffer, to be introduced from January 1, 2014, the Reserve Bank says it has decided to partially restrict distributions, such as dividends, rather than fully restrict them until the buffer is restored. This capital conservation buffer will be 2.5% above the new minimum Tier 1 Capital ratio of 6% (up from 4% now) thereby increasing it to 8.5%, and will also effectively add 2.5% to the existing 8% Total Capital Ratio, lifting it to 10.5%.
'Prudent management of staff bonuses'
Fiennes notes the Reserve Bank still believes "prudent management" of staff bonuses will be appropriate when banks operate within the conservation buffer.
The Reserve Bank's March consultation paper suggested all forms of regulatory capital should be capable of absorbing losses to support the viability of a distressed bank and that banks would have to convert - into common equity - all regulatory capital that's non-common equity if a "trigger event" occurs. However, it has changed its mind and will now let banks either write-off or convert to equity non-common equity regulatory capital. This brings the Reserve Bank into line with APRA. It also means that instead of a non-sharemarket listed New Zealand bank, such as Kiwibank, having to convert non-common equity into unlisted shares, or into shares in its parent in the case of the Australian owned banks, they can write them off.
Another change to the Reserve Bank plans sees a proposed three year phase out for existing capital instruments that aren't recognised under Basel III, up to 2015, stretched out to 2018. This gives banks more time to deal with the likes of the billions of dollars worth of subordinated callable bank bonds they have on issue, which are currently regarded by the Reserve Bank as Tier Two Capital but aren't expected to make the cut - in their current form - as capital under Basel III.
The Reserve Bank notes that some banks will need to raise new regulatory capital to comply with the Basel III standards and says it will consult on its draft Basel III standards around mid-year.