Neil Sands
The Reserve Bank has announced a review of its capital requirements, in a major U-turn sparked by criticism at Parliament’s banking competition inquiry that the regime was forcing up interest rates and weighing down the economy.
Reserve Bank Chair Neil Quigley denied the change in position was linked to the abrupt departure earlier this month of governor Adrian Orr, who strongly supported the capital regime, which is meant to protect New Zealand from a 1-in-200-year economic shock.
Instead, Quigley said it would help set the record straight about claims made at the inquiry, being held by the Finance & Expenditure Select Committee, and provide guidance on any changes to the policy, if needed.
“We’ve heard the claims that our bank capital regime is unreasonably conservative and that it’s undermining competition and growth in the New Zealand economy,” Quigly said.
“We think that at least some of the claims that have been made are incorrect, but most of the claims can be tested empirically and we consider it’s important that we respond by undertaking this assessment.
“Consequently, the Reserve Bank board at its meeting last week has agreed to undertake an evidence-based framework for a review of our capital regime, utilising international experts and assessing it against the regimes in other countries.”
Quigley said the review would be completed by the end of the year. He acknowledged some committee members wanted faster action but said any policy change must be carefully considered.
“We cannot just decide next week that we’re going to do something different. We have to be evidence-based. We have to show that we’ve acted with integrity and considered the evidence that our experts and other people put in front of us.”
The central bank’s prudential capital requirements determine how much the banks must set aside to cope with a crisis. The banking inquiry has been told that New Zealand’s regime is among the most conservative in the world.
‘Odd’ timing
As recently as last year, the Reserve Bank flatly refused to consider a Commerce Commission recommendation that capital requirements should be reviewed, saying the current regime was implemented after a “careful and extensive” process.
Quigley was asked whether it was “odd” that the RBNZ had a change of heart so soon after Orr quit.
“Well, that may seem odd but in terms of the discussions we’ve been having inside the bank and the work we’ve been doing over quite a period of time, it’s not odd. And whoever was the governor… I suspect we would be saying that we’re going to have this review because it’s one of those issues that’s developed a head of steam and we need to respond.”
Finance Minister Nicola Willis welcomed the review, saying higher capital requirements increased the cost of borrowing.
“This can reduce economic activity and drive up the cost of living. I want to see settings that preserve financial stability while encouraging investment, job creation and income growth,” she said.
The Reserve Bank increases in minimum capital requirements followed a review in 2017-2019 and are being implemented over seven years with annual increases on 1 July each year.
The minimum capital requirement for large banks is currently 13.5% and will rise to 18% by 2028 if the review recommends no changes, with the requirement for smaller banks now at 11.5% and rising to 16%.
Acting governor Christian Hawkesby warned changing capital requirements would affect banking sector competition only marginally, saying reforms around open banking, consumer data rights and the wholesale payment system would have more impact.
Hawkesby said New Zealand’s banking sector presented unique challenges.
“We are unique in that we have a small, open economy that’s reliant on global capital and is subject to global shocks,” he said. We are unique in the sense that we have four large Australian-owned banks that dominate our banking industry and so we need to make sure that our regime is fit for purpose for New Zealand.”
The select committee banking inquiry is part of the coalition agreement between National and New Zealand First. It is examining issues including profitability, barriers to entry and regulatory impacts.
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