The Reserve Bank’s proposed doubling of required bank capital will drive up interest rates and reduce available credit and slow economic growth, says Milford Asset Management analyst Ian Robertson.
The Reserve Bank has “rattled the cage” and he is surprised at the scale of the proposed increase, Robertson says.
He’s the latest analyst to weigh in the central bank’s unexpected proposal to raise the minimum level of tier 1 capital from the current 6 percent to 16 percent for the four major banks and to limit what qualifies as tier 1 capital to equity.
The Reserve Bank has estimated the big four banks would need to increase their tier 1 capital by $12.8 billion and replace another $6.2 billion of quasi-equity that will no longer count as tier 1 capital.
“Internationally, the trend has been for regulators to require banks to hold more capital, so the market was expecting the Reserve Bank proposal,” Robertson says.
“But we’re a little surprised by the extent of it … this puts New Zealand banks well ahead of what’s required internationally,” he says.
“You have to bear in mind there’s a cost to the economy in mandating against bank failure – the cost being the higher cost of borrowing and potentially less borrowing being made available to the public.”
Robertson takes issue with the Reserve Bank’s statements that the move will affect borrowers only marginally, saying the concern is that the impact will be a lot more than marginal and that it will drive up the costs of all borrowing, not just mortgages.
“Market analysts have come out forecasting anything from a 0.8 percent increase in borrowing costs per annum to 1.4 percent,” he says.
“Put that in context – a 1 percent increase in borrowing costs would be an additional $1,000 per $100,000 of an interest-only loan, so potentially it’s quite significant.”
Because banks typically regard unsecured and business loans as riskier than mortgages, they will end up bearing a greater proportion of the increase in borrowing costs.
“Longer term, if borrowing costs do go up in New Zealand, then we may see a lower natural cash rate than we might have seen otherwise,” Robertson says, echoing the conclusions of other analysts.