The big four Australian-owned banks will still have to lift their capital reserves from a minimum 8.5% of risk-weighted assets to 16% but 2.5% of it can be in preference shares rather than cash as originally proposed.
They will need to raise capital reserves from an average 11.05% on June 30 to 13.5%.
Preference shares are significantly less costly than equity – the RBNZ estimates banks’ cost of equity would be 10.56% and the cost of preference shares would be 7.04%.
The smaller banks will also need to lift their capital to 14%, down from the originally proposed 15%, but will need only 11.5% of that to be common equity with the other 2.5% permitted to be preference shares.
Most, if not all, of the smaller banks will already meet the minimum common equity requirement but will have to either increase equity or sell preference shares to meet the new target.
The big four banks – Commonwealth Bank of Australia-owned ASB Bank, National Australia Bank-owned Bank of New Zealand, ANZ Bank NZ and Westpac NZ – will also lose much of the competitive cost advantage they have enjoyed since 2008 from using internal models to calculate how much capital they need.
The four major banks will also have to publish how much capital they would need if they used standardised models, making the advantage they get from using their internal models transparent for the first time.
That change and the lower capital requirements for the smaller banks are likely to make the competitive landscape significantly more even.
It appears ANZ, New Zealand’s largest, has been the most aggressive of the four and, in February, the central bank said ANZ needed to hold slightly more than half the capital that the government-owned Kiwibank needed to back each $100 of mortgage lending.
Kiwibank is New Zealand’s fifth-largest bank but its $22.7 billion in total assets at June 30 are dwarfed by ANZ’s $165b.
The difference in the quality or riskiness of each bank’s mortgage book is nowhere near great enough to justify ANZ requiring so much less capital.
Also unchanged, despite the relaxation of required capital, is the RBNZ’s assessment the higher capital levels will restrict bank collapses to a one-in-200-year event.
The central bank also decided to retain a minimum requirement for tier 2 capital which will take total capital for the four major banks to 18% and 16% for the other banks compared with 10.5% now.
It says the average actual capital level now is 14.1%. The smaller banks tend to hold more capital than the big four banks.
The RBNZ came in for widespread criticism for not using a risk-benefit analysis as its starting point for reviewing bank capital requirements.
The risk-benefit analysis estimates the likely impact will be to increase annual gross domestic product by 0.4%, a conclusion that could be controversial.
It estimates the benefit could be as much as a 2.5% increase in GDP and the worst-case scenario would be to shave 0.4% off GDP but both extremes are unlikely. In 85% of the different possible scenarios the impact on GDP would be positive.
Previously, the RBNZ said its proposals would reduce GDP a little but not by nearly as much as others had estimated.
For example, ANZ estimated the long-run hit would be about 20% of GDP and the transitional impacts would lower annual GDP by between one and three percentage points over 10 years.
Similarly, ASB said the proposals would lower GDP by more than a percentage point a year.
The relaxed capital requirements in the final decision will mean these calculations will have to be redone.
The RBNZ said not all benefits and costs are easily measurable and the unquantifiable benefits are very likely to exceed the unquantified costs – such as less access to credit for riskier customers.
Governor Adrian Orr said the higher capital requirements will make the banking system safer for all New Zealanders while ensuring bank owners have a meaningful stake in their businesses.
“Our decisions are not just about dollars and cents.
“More capital in the banking system better enables banks to weather economic volatility and maintain good, long-term customer outcomes.
“More capital also reduces the likelihood of a bank failure.
“Banking crises cause not only harmful economic costs but also distressful social issues such as the general decline in mental and physical health brought about by higher rates of unemployment. These effects are felt for generations,” Orr said. – BusinessDesk
