Reserve Bank proposals to boost non-banks: S&P

The credit specialist and rating agency believes RBNZ proposals in their current form will require banks to store an extra $13 billion in tier one capital, an increase of a third on current levels. The proposals, led by governor Adrian Orr, will be put through a period of consultation and may be watered down over the five year consultation period.

RBNZ deputy governor Geoff Bascand, (pictured), has described the proposals as "closing the gap" between major and non-major lenders. Bascand is set to deliver an update on the consultation tomorrow.

Major banks have hit out at the plans, which would give New Zealand lenders one of the world's toughest bank capital regimes. Investment bank USB believes there will be a knock-on effect for borrowers. It says mortgage rates could rise by by $2 billion per year as banks try to fund the capital requirements.

While the proposals pose a challenge for the big banks, S&P expects non-bank lenders, and smaller players in the market, to gain from their misfortune. S&P says the rules could redress the balance in power the big four have over the rest of the market.

Credit analysts Nico DeLange, Sharad Jain, and Lisa Barrett said: "New Zealand's nonbank financial institutions and some smaller banks may benefit over the longer term from an improving competitive position given the capital headwinds facing the country's major banks. "The Capital impost for smaller banks (that operate on the standardized approach) will be less than that of the New Zealand major banks."

They said it was unlikely to change the big banks' overall dominance, however. "We believe that the competitive advantages the major have are not going to disappear any time soon."

The analysts said it should not be too difficult for NZ's major banks to comply with the new rules. "It is also our view that the ability of the New Zealand major banks to generate capital is supported by their robust profitability measured relative to international peers, based on their current capital levels."