The New Zealand Bankers' Association is calling for a rethink of the Reserve Bank’s bank capital proposals to avoid hurting the economy. Photo: Lynn Grieveson.

The New Zealand Bankers’ Association is calling for a rethink of the Reserve Bank’s bank capital proposals to avoid hurting the economy.

“Independent analysis by former Treasury Secretary Dr Graham Scott shows the Reserve Bank should rethink its proposals to avoid putting a handbrake on our economy,” says NZBA chief executive Roger Beaumont.

“The review we commissioned from Sapere and led by Dr Scott expresses a valid concern that the Reserve Bank hasn’t yet done a cost-benefit analysis,” Beaumont says in a statement.

“It found that the Reserve Bank proposals are excessive and will cost housholds, businesses and our economy around $1.8 billion a year,” he says.

“That’s a conservative estimate of costs based on the Reserve Bank’s assumptions. The cost to our economy could be much higher.”

The Reserve Bank admitted in a paper released in April, the third such document released to back its proposals first announced on Dec. 14, that it hadn’t done a cost-benefit analysis yet. Many observers have said a cost-benefit analysis should have been the central bank’s starting point.

The proposals include a near doubling of the minimum common equity each of the four major banks have to hold from 8.5 percent of risk-weighted assets to 16 percent and reducing the advantage those banks receive from using their own internal models for calculating risk to no more than 90 percent of the results from using standardised models.

The smaller banks, all of which use standardised models and so are at a competitive disadvantage to the major banks which control 88 percent of the banking system, would be forced to increase their common equity capital to the slightly lower level of 15 percent of risk-weighted assets.

The Australian Prudential Regulation Authority, which regulates the Australian parent banks of New Zealand’s four largest banks, regards a common equity level of 10.4 percent of risk-weighted assets as “unquestionably strong.”

On Friday afternoon – the deadline for submissions on the bank capital proposals – the Reserve Bank announced it had ordered New Zealand’s largest bank, ANZ, to revert to using the standardised model for calculating operational risk capital.

That was because it had been using a model not approved by the central bank since 2014, having decommissioned the model it had been using previously without central bank approval.

ANZ said the Reserve Bank’s order reduced its common equity capital by 0.4 percent and its total capital by 0.6 percent.

In 2017, the Reserve Bank forced Westpac to carry about $1 billion in additional capital because it had been using 17 out of 35 capital models that the central bank hadn’t approved and that in the past it had used unapproved models going back to 2008 when the major banks first began using internal models.

Beaumont says while NZBA “absolutely support a strong and stable banking system that’s able to withstand significant shocks, that shouldn’t be at the expense of everything else.

“Our banks are already well-captalised and strong by international comparisons and Dr Scott’s work suggests that the Reserve Bank has significantly underestimated the negative consequences for our country.”

Beaumont says the proposals would require New Zealand banks to hold more capital than almost any other bank in the world and that could restrict lending.

The Reserve Bank has said that New Zealand banks currently carry about 12 percent common equity.

“In our view, a smaller increase in the capital required with an extended timeframe for implementation, combined with banks having options other than only shareholder equity to meet capital requirements, would more efficiently meet the Reserve Bank’s aims,” Beaumont says.

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