Reserve Bank should rethink capital proposals

The New Zealand Bankers’ Association has called on the Reserve Bank to reconsider its proposals to almost double capital requirements for New Zealand’s banks, and take into account an independent review by former Treasury Secretary Dr Graham Scott.

“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 New Zealand Bankers’ Association 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. It found that the Reserve Bank proposals are excessive and will cost households, businesses and our economy around $1.8 billion a year. That’s a conservative estimate of costs based on the Reserve Bank’s assumptions. The cost to our economy could be much higher.

“While we 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-capitalised and strong by international comparisons and Dr Scott’s work suggests that the Reserve Bank has significantly underestimated the negative consequences for our country.

“The proposals as they currently stand would require New Zealand’s banks to hold more capital than almost any other bank in the world. The impact of this move on households and businesses will be fundamental and could restrict lending.

“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 the capital requirements, would more efficiently meet the Reserve Bank’s aims.”

NZBA’s response to the Reserve Bank’s consultation paper is available here.

Underpinning and attached to this submission are two reports commissioned by NZBA:

  • Sapere report (May 2019): How much capital is enough – a review of Reserve Bank Tier 1 capital proposals
  • PwC report (May 2019): International comparability of the capital ratios of New Zealand’s major banks – update paper