Chapman Tripp questions RBNZ's early adoption of Basel III capital rules given the international regulation of banking 'is still very much in play'

By Gareth Vaughan

Law firm Chapman Tripp is hitting out at the Reserve Bank's plan to introduce new global capital adequacy requirements for banks ahead of the international curve, saying the regulator is striving to implement the so-called Basel III reforms too quickly and in a way that's out of step with Australia, where the parents of New Zealand's big four banks hail from.

Chapman Tripp partner Ross Pennington told interest.co.nz he had two major concerns about the Reserve Bank's plans. The first is that getting out of step with what's going on in Australia is "questionable," and the second being that "leaping ahead of everyone else" isn't the best thing to do when the international regulation of banking is still "very much in play."

"I don't see why New Zealand should be the first cab off the rank in some of these things," said Pennington. "I think there's a first mover disadvantage here, not a first mover advantage."

The Reserve Bank said earlier this month it plans to fully implement Basel III by January 1, 2015, with the bulk of the new capital requirements in place from January 1, 2104. Although this pushes out the Reserve Bank's initial plans to have Basel III in place from the start of 2013, it's still ahead of the timetable set by international body, the Basel Committee on Banking Supervision. The Basel Committee proposes the new standards be phased in between 2013 and 2019.

Basel III is a set of reform measures, developed by the Basel Committee on Banking Supervision and endorsed by Group of 20 (G20) leaders, 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.

The Australian Prudential Regulation Authority (APRA) wants to accelerate aspects of the Basel Committee’s timetable, but not to the extent of the Reserve Bank. Both APRA and the Reserve Bank consider the banks they regulate, headed by the ANZ Banking Group, Commonwealth Bank of Australia (CBA), National Australia Bank, Westpac Banking Corporation and their subsidiaries ANZ NZ, ASB, BNZ and Westpac NZ,  to be well placed to meet the Basel III requirements.

'NZ will miss out on the benefit of debate & market adjustments'

Pennington's comments come after Chapman Tripp said in a brief counsel on the Reserve Bank's Basel III proposals: "We question the Reserve Bank’s haste in implementing all the Basel reforms ahead of the Basel Committee’s recommended timeframe as it will mean that regulators and the New Zealand banking system will miss out on both the benefit of the debate and of market adjustments (including the development of instruments meeting the new design requirements) that are likely to occur in the international transitional period."

Chapman Tripp points out the Reserve Bank's proposal to implement Basel III's capital conservation and countercyclical buffers in full from January 1, 2014 is just a year after the minimum capital requirements for common equity tier one, additional tier one capital and tier two capital are introduced, and two years ahead of the timetable set by the Basel Committee and proposed by APRA.

"It will mean that by 2014 banks will need a total capital ratio of 10.5% (as opposed to 8% now) and, depending on where New Zealand is in its economic cycle, may have to raise an additional 2.5% of common equity tier one for the countercyclical buffer - or at least be at risk that they will need to raise this within 12 months," says Chapman Tripp.

The law firm notes the Reserve Bank's proposals continue "a trend of divergence" by the Reserve Bank from the international framework in "some important substantive areas."

"We expect these areas to be a key focus, since a level regulatory playing field was a foundation principle of the original Basel framework.  In particular, we suggest that more analysis is needed of the potential impacts of this approach on the competitiveness of locally supervised banks, including in the critical matter of attracting capital."

Basel III under attack from profitable banks

Basel III has come under attack from the man at the top of New Zealand's biggest bank. Mike Smith, CEO of the ANZ Banking Group which operates both ANZ and the National Bank in New Zealand, last year urged banks from countries with "strong banking systems" like Australia, Canada, India and China to team up to fight against Basel III, which Smith suggested had been "hijacked" by ill-conceived policies seeking global conformity.

Separately, Kevin Murphy, managing director of locally owned bank TSB, which is one of the country's most strongly capitalised banks, told interest.co.nz after the release of the Reserve Bank's first Basel III consultation paper in November described the regulator's timeframes for the adoption of Basel III as "aggressive."

In a speech last August Reserve Bank Governor Alan Bollard pointed out New Zealand's big four Australian owned banks dominate the financial system to an extent seen in few other economies, accounting for nearly 90% of the banking sector, or just over 70% of the financial system as a whole. Bollard warned their Australian parent-shareholders not to expect profits in the future at the same levels they've enjoyed over the past decade due to post global financial crisis regulatory changes and ongoing deleveraging by customers.

ASB, the only bank to report interim financial results so far this year, said net profit after tax rose 31% to a record NZ$372 million with its return on equity up to 21.2% from 17.2%. ASB's net interest margins rose 11 basis points to 2.19% and its ordinary dividend was NZ$340 million, up from NZ$80 million.

ASB's record half-year follows the big four Australasian banks, combined, making record annual profit of A$25 billion last year. Their New Zealand subsidiaries contributed NZ$2.778 billion, which is NZ$78 million, or 3%, higher than in the boom year of 2007 when double digit lending growth was the norm compared with the anaemic, if any, lending growth of today.

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