RBNZ yields little on bank capital

Ian Rogers
Preparing for a bank crisis - and trimming the sails to reduce the probability of one by close to three quarters - the Reserve Bank of New Zealand continues to set the standard on the prudential regulation of the industry.

"The probability of a [banking] crisis falls to 0.5 per cent" with a package of reforms to industry capital levels unveiled by the RBNZ yesterday.

The probability of a crisis at current capital levels is 1.82 per cent, the RBNZ said in its much anticipated Capital Review.

The central bank showed a degree of flexibility on the make-up of the stiffer total
capital requirement for banks, but no less resolve on the public policy issues to be addressed.

For systemically-important banks - ASB, ANZ New Zealand, Bank of New Zealand and Westpac New Zealand - the total capital requirement will be 18 per cent, implemented from July 2020 with a transition period of seven years (until 2027) before full compliance must be achieved.

For other banks, the capital requirement will be 16 per cent.

The RBNZ has also concluded that "a leverage ratio is not necessary in the New Zealand regime", the most drastic change in the review compared with the proposals of 2018.

On the other hand, the decision was made to set the D-SIB buffer at 2 per cent of risk-weighted assets, twice the level outlined before.

The central bank will permit AT1 (or hybrid instruments) to contribute to Tier 1 capital requirements up to a maximum of 2.5 per cent of RWA, and will also accept redeemable perpetual preference shares, "with suitable protections, as AT1 capital."  

The Reserve Bank said it "formed the view that redeemable, perpetual, preference shares with no contractual contingent features have the qualities required of Tier 1 capital, within limits."

Banks have until 2027 to comply with the new capital targets, two years longer than mooted before.

The amended mix of capital instruments in the review means, in the RBNZ analysis, that the higher industry capital levels will lift average lending rates by 20.5 basis points. At present, business overdraft rates are around 9 per cent and mortgage rates 5.25 per cent.

S&P Global Ratings said it estimated that to maintain a Tier 1 capital ratio at 1 per cent above the new standards, the four major New Zealand banks would need to raise their Tier 1 capital by about NZ$16.4 billon (or by about 47 per cent) compared with their capital levels as of September 2018.