Reserve Bank doubles down on capital proposals

RBNZ deputy governor Geoff Bascand delivered a speech today entitled "Safer banks for greater wellbeing", aimed at drumming up support for the controversial capital proposals. Bascand outlined the continued risk of another banking crisis and said lenders should hold extra capital to absorb losses and protect the wider financial system. 

He said he wanted to "level the playing field", as the country's big four banks used internal capital models with lower requirements, giving them a competitive advantage.

Under the proposals, banks would need to hold between 20% and 60% more as a safety buffer, making New Zealand one of the toughest bank regimes in the world.

Bascand said the proposals could help avert another 1980s-style banking crisis. "I fully remember the stresses of the 1980s/early 1990s, and contributing to the subsequent fiscal and social policy adjustment. Perhaps one banking crisis per lifetime is one too many?"

“Ensuring the soundness and efficiency of New Zealand’s banking system is a core responsibility of the Reserve Bank." Bascand added:  "The proposal aims to make bank failures less likely, ensure that bank shareholders have a meaningful interest in their bank’s business, and are able to absorb a greater share of any loss if they occur.

"New Zealand has already experienced two banking crises in its modern economic history, and a wide variety of finance company failures and near misses. There has also been more than 140 banking crises around the world since the 1970s. The social and economic costs of these failures is severe, in terms of unemployment, health and the quality of life."

Bascand said he wanted New Zealand's lenders to risk less of their customers' money and more of their own, putting more "skin in the game". 

He added: "I would like to note that banks themselves lend on these very same ‘skin in the game’ principles, for example, by requiring mortgage borrowers to provide a deposit. At one time, the owners of a bank had plenty more ‘skin in the game’ than they do today. However, over the last century, banks have started to use less of their own money and more of other people’s. While we are not attempting to turn back the clock a hundred years, we want to swing the pendulum back in the other direction a little bit."

The comments come despite lenders voicing fears about the plans. ANZ says its New Zealand subsidiary may have to raise an extra $6 billion to $8 billion. While UBS says mortgage rates could go up $2 billion per year to meet the requirements.

The RBNZ proposals are a long way from being implemented, and will undergo a five-year transition period. A consultation period on proposals runs until May 3.