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 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 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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Pephaps Mr Pennington might remind his clients that the RBNZ is really looking to save them from themselves.
The RBNZ is right to put the interests of NZ ahead of the marbeled banking chambers of Sydney and Melbourne - as it should. And be encouraged for action after the Finance Companies and SCF train wrecks.
While equity returns of 20% plus seem the norm, and leverage of capital up to 20 times by the banks are accepted, NZ is dealing with the aftermarth a dose of accelerated agri-lending (lending to earnings levels greater than I would suggest in Aust. Ag) and low/no deposit home lending - also an Australian wheez.
We hear of some laggard farm businesses values are at of below their current mortgage valuations. Westpac this morning indicating house prices are not sustainable after next year, and interest rates to rise. And this week from the East Island we see:
Bank of Queensland has reported a loss - the first since Westpac's whopper in the 90's
Home mortgage arrears up in Dec Qtr in the face of RBA rate reductions there.
or are these a sign of wellness -

Mr Pennington might do well to highlight the glaring disparity between the RBA's overnight cash rate set at 4.25% against the RBNZ's OCR set at 2.5%.
There is a lot of room for the Australian banks'  NZ  network to set aside easy profits for tighter regulatory capital  needs.  Kiwi depositors are making the down payment now , so why not the banks by 2014.

Is this a sign our RBNZ is refusing to be a puppet to the banks any longer....I certainly hope so.
Or have I read too much into this Tripp BS....because the RBNZ has clearly backed down and pushed out the date...
In other words now is not the time to be safe...doh!

with the bulk of the new capital requirements in place from January 1, 2104.

"Be nice to banks they are a poor, sorry, misunderstood lot." Hmmm.

In reply to Mr Tull, the point is not that beneficial reform 'gets kicked into the long grass' (as seems to be happening in the US), but that we take care to ensure that the rules do what they're designed to do, consistent with other policy objectives - including producing the growth everyone will need to pay their bills.  It would also be nice if the new rules won't themselves become a partial cause of the next crisis, as the previous versions were.  Notable here that Basel's risk weightings did, and still do, encourage excessive mortgage lending, and the periodic asset bubbles that are its offspring. Re rural overleverage, the summer rain did more to allay that than any Swiss canton ever will.
In reply to Mr Hulme, the OCR does not equate to banks' cost of funds, here, in Australia or anywhere else.
More generally, I presume "Mr Pennington" is a reference to my Dad.

@ RA Pennington  -  In reply to Mr Hulme, the OCR does not equate to banks' cost of funds, here, in Australia or anywhere else.
Still, Dr Debelle (Reserve Bank of Australia assistant governor) knocked down suggestions from bank executives there was no direct link between the Reserve Bank's cash rates and bank mortgage rates.
The level of the cash rate set by the Reserve Bank was a ''primary determinant'' of the level of funding costs for banks, he said. Although he noted there were other drivers, including competitive pressures for deposits and a premium for risks.
Investment rates are equally determined by the OCR in NZ. - ie the bank bill market, government T bill market and RP market undertaken by the RBNZ.

The importance of drafting such arrangements above, appears a point well made.
Some may suggest the abscence of "localised" regulations may have in part enabled the situtation we find ourselves in this time.
Many lay-folk find fascinating the practical application of bank regulation, in the sense that regulators have provided a boundary criteria beyond which banks should not venture across, while many individual banks seem to regard those same boundary criteria as positions their operations should reach and be operated atop of.
No one forced banks to operate at regulation boundaries. Rather we have esteemed  boards and expensive management to made such determinations we do.
Think of Basel risk weighting as the red line on your sports car's tachometer (rev counter). On occasion you may touch that red line when operating the vehicle and thats fine.
However we all know that prolonged engine operation at the red line level leads to early  engine failure. It could be suggested that the banks operating at the Basel risk weighting boundaries is now having our banking engine blow smoke.
Hurray for RBNZ.