By Gareth Vaughan
The new chief executive of the New Zealand Bankers' Association (NZBA) says banks need more policy detail and more justification from the Reserve Bank on its plans to implement new global capital adequacy requirements for local banks ahead of the timetable set by the international regulatory overseer.
Kirk Hope, the former executive director of the Financial Services Federation and an ex-Westpac head of regulatory affairs and government relations who took the NZBA helm in March, told interest.co.nz in a Double Shot interview banks wanted more detail and justification from the Reserve Bank on both its Basel III and Open Bank Resolution (OBR) policies.
In its second consultation paper on Basel III proposals the Reserve Bank said last month it plans to fully implement Basel III by January 1, 2015. 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.
"On the acceleration process we probably need a bit more policy detail and perhaps more justification on the reasons for acceleration," Hope said. "And you can understand why. Introducing new capital is no simple matter and you have to plan properly for it so I think it's only reasonable that we have a good justification for acceleration."
'Voice of the banking industry'
All the country's major banks are members of the NZBA, which refers to itself as "the voice of the banking industry."
Basel III is a set of reform measures, developed by the Basel Committee on Banking Supervision and endorsed by Group of 20 leaders, designed to strengthen the regulation, supervision and risk management of the banking sector in the wake of the Global Financial Crisis (GFC). 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.
Currently banks must have a Tier One Capital Ratio of at least 4%, or 6% for ANZ New Zealand, BNZ, Kiwibank and Westpac NZ due to the about NZ$8 billion of debt, combined, those banks still have on issue under the Crown Wholesale Funding Guarantee Scheme. Tier One Capital represents the shareholders' funds in the bank. The banks must also have a minimum 8% Total Capital Ratio.
The Reserve Bank's Basel III proposals would see the standard Tier One Capital Ratio rise to 6%. They also propose a 2.5% "Conservation Buffer" to ensure banks maintain a buffer of capital over the minimum ratio requirements that can be used to absorb losses in times of financial and economic stress. This will take the Tier One Capital Ratio to 8.5% and Total Capital Ratio to 10.5% from 2014. See more on the capital ratios and capital definitions here.
If a bank is operating within the Conservation Buffer the Reserve Bank also proposes tighter restrictions on earnings distributions such as dividend payments than the standard Basel III proposal. See more on the Reserve Bank's Basel III plans here.
Tier Two Capital issue
One of the concerns banks have is over the treatment of billions of dollars worth of callable bonds currently on issue, largely to retail investors, that are regarded by the Reserve Bank as Tier Two Capital for the banks now but will be classed as debt under its Basel III proposals. A total of NZ$1.07 billion of these bonds have call dates this year alone.
"There's a range of issues relating to capital and the acceleration timetable that banks probably want to continue to interact with the Reserve Bank on and the Tier Two issue is one of those. It's a live issue," said Hope, who replaced Sarah Mehrtens as NZBA chief executive last month.
Reserve Bank Governor Alan Bollard warned the Australian owners of New Zealand's major banks in a speech last year not to expect profits in the future at the same levels they've enjoyed over the past decade due to post GFC regulatory changes, such as Basel III, and ongoing deleveraging by customers. Bollard noted the four Australian owned banks - ANZ, ASB, BNZ and Westpac - dominate the New Zealand 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.
The big four banks are on a strong run of profit growth with their latest general disclosure statements showing a combined NZ$1.044 billion of profit after tax in the December quarter up NZ$406 million, or 64%, from NZ$638 million in the same period of 2010.
Submissions on the Reserve Bank's second Basel III consultation paper are due by tomorrow, April 13.
'Gap' in Open Bank Resolution policy justification
In another major regulatory development, banks were due to provide detailed implementation plans by the end of February, setting out how they meet the Reserve Bank's OBR pre-positioning policy. Hope said on this issue, a problem was again "the gap" in policy justification.
"The open bank resolution is not new. It has been around for more than 10 years in terms of a loose idea. But I think the banks probably need a little bit more of a clear picture of the policy justification for it. We went from a general idea into implementation and consultation on implementation again with specific timeframes which are relatively short. Those things are difficult to manage in complex environments involving technology and sometimes more thought needs to be given to those timetables," Hope said.
"There probably needed to be a bit more of a deeper consultation in the policy development process so that banks could have some of these questions answered before we move into a practical implementation phase," he added.
Effectively the the OBR policy would give the Reserve Bank a new option of how it could deal with a bank failure. An open bank resolution is an option whereby the bank is open for business on the next business day after its temporary closure following an insolvency event or an event that triggered putting it under statutory management, and is 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 are able to access a portion of their funds immediately after the bank fails and is placed in statutory management. The bank can then quickly reopen with the unfrozen or accessible portion of funds guaranteed by government to avert a further run by creditors. The idea is additional funds can be unfrozen at later dates as the final losses are determined.
However, the OBR policy has its critics including David Tripe, the Director of Massey University's Centre for Banking Studies. Tripe says the approach, although theoretically pure, is completely unrealistic in practice.
“Such a policy, if implemented, would impose financial hardship on large numbers of New Zealanders, including those with the least ability to bear the cost," he said. “A much more realistic approach would be to guarantee some amount in people’s accounts, say, up to NZ$50,000, which would mean that the people impacted by bank distress would be relatively few," Tripe said.
The Reserve Bank says the policy is intended to act as a resolution tool that places the cost of bank failure primarily onto a bank's shareholders and creditors rather than taxpayers, thus minimising moral hazard and providing a continuity of core banking services. The policy, previously known as Bank Creditor Recapitalisation, was developed after a review of the central bank's crisis management policies and instruments following the 1997 Asian financial crisis.
The Reserve Bank says its outsourcing, local incorporation and governance policies were all designed to facilitate the implementation of the OBR policy. Now, the pre-positioning of banks' internal IT systems represents the next stage in the process. See more on OBR here.
A Reserve Bank spokeswoman recently told interest.co.nz central bank staff were currently considering the banks' OBR implementation plans, and she was unable to provide any more detail on the timeframe for further public information releases.
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