The big four Australian-owned banks will have to hold on to more of their domestic earnings over the next five years if the Reserve Bank goes ahead with its proposal for stricter capital requirements. 

The central bank, which issued a consultation paper today, wants lenders to hold more higher-quality capital on their books to help fund their credit, rather than using borrowed money. It also plans to limit the big four banks’ internal models that have led to lower capital requirements, giving them a competitive advantage over the minnow lenders which have to use the standardised approach.

The Reserve Bank wants to set a tier 1 capital requirement, including a 9-10 percent capital buffer, equal to 16 percent of a lender’s risk-weighted assets for the big four and 15 percent for all other lenders. The current requirement is for a 6 percent minimum plus a 2.5 percent buffer. 

For the big four – ANZ Bank New Zealand, Bank of New Zealand, ASB Bank, and Westpac New Zealand – that would mean they’d need to increase their tier 1 capital by $12.8 billion and replace another $6.2 billion of preference shares because they will no longer count as tier 1 capital. The Reserve Bank estimates they could achieve that within five years by retaining more of their profits, or about 70 percent of their average $4.4 billion of earnings. 

“Having shareholders able to absorb a greater share of losses if the company fails also provides stronger protection for depositors,” RBNZ deputy governor and general manager of financial stability Geoff Bascand said in a statement.

“While borrowing costs may increase a little, and bank shareholders may earn a lower return on their investment, we believe these impacts will be more than offset by having a safer banking system for all New Zealanders.” 

The Reserve Bank estimates the higher capital requirement could push up the cost of bank credit by 6 basis points. By lowering the availability of credit at a given price, the RBNZ estimates every 1 percentage point increase in the tier 1 capital ratio could slow GDP growth by 3 basis points, implying a near 0.2 percent hit to economic growth. 

The New Zealand dollar dropped on the news, recently trading at 67.92 US cents from 68.57 cents immediately before the release. 

The four major Australian banks return much of their profits to their parents. Over the past five years, ANZ has paid $11.78 billion in dividends and had retained earnings of $1.9 billion at its Sept. 30 balance date. BNZ paid $3.69 billion and had retained earnings of $3.89 billion and Westpac paid $4.16 billion of dividends with retained earnings of $2.23 billion. 

ASB reports on a June year. During the past five years it’s paid $3.04 billion in dividends and retained $3.71 billion. ASB’s parent Commonwealth Bank of Australia noted the paper.

ANZ, New Zealand’s biggest lender, said it was reviewing the consultation paper and will update the market once it’s done so. While its tier 1 capital ratio at 14.4 percent appears close to the new target, that includes preference shares that will need to be replaced. 

Its common equity tier 1 ratio – made up of shares and retained earnings – was 11.1 percent. Westpac’s common equity tier 1 ratio was 11.7 percent, while BNZ’s and ASB’s were 10.6 percent and 10.7 percent respectively. 

The smaller banks will need to lift their tier 1 capital by $900 million and replace another $100 million of non-compliant capital, which the RBNZ estimates will take about seven or eight years through retained earnings alone. 

The consultation closes on March 29. 

Leave a comment