Misconception about banks willingness to lend wrong

He disagrees with the general perception that banks are difficult to deal with over mortgage applications.

Pedersen, managing director of Kris Pedersen Mortgages says the misconception about banks’ willingness to lend have arisen from over-regulation by the previous Labour Government and Reserve Bank Governor Adrian Orr.

“The banks’ response to the current cost-of-living crisis compared to other economic downturns, has been pretty good,” he says. 

“For example, the BNZ was horrific to a lot of people before it was bailed out by the Government in 1991 and during the Global Financial Crisis (GFC) banks hit their customers hard.”

Pedersen says this time around the banks have been good to people who have hit trouble.

“From a lending appetite point of view they have been relaxing their criteria. The BNZ brought out a 95% home loan product. No bank has done that for the past 10 years. The TSB has also launched a more relaxed first home loan product. Both have been beneficial to borrowers.

But on the flipside, the Reserve Bank has added in more regulations, Pedersen says. “So, it’s not the trading banks that have necessarily tightened up on lending, but they have had certain things forced on them, such as having to hold more capital – previous Finance Minister Grant Robertson’s little present as he left office.”

The over-regulation is affecting businesses as well. He recently had a client who previously worked at a commercial level within a bank. “He wanted to refinance his business, but because of these over-the-top regulations, it is going to cost him a lot more in interest payments.”

To Pedersen this is stupid, particularly when the country is in a recession. “All this tinkering around the edges is doing is taking money out of the economy which is having flow-on effects that are hurting business.

The Commerce Commission’s recent Banking Industry Study draft report painted a troubling picture of the Reserve Bank of New Zealand’s approach to prudential regulation.

The draft report makes several recommendations urging the RBNZ to change its practices. 

The study suggests that many of the RBNZ’s rules, such as those related to capital requirements, risk weights, and access to funding, have inadvertently deterred competition.

The RBNZ’s 2019 decision to significantly increase banks’ capital requirements was controversial at the time.  With the effects now being felt by banking customers, the policy was always going to come under scrutiny.

The the big four Australian-owned banks – ANZ, ASB, BNZ and Westpac – are required to progressively to raise the capital they hold from 10.5% of their loans to 18%.  Smaller banks will have to hold a minimum of 16% of capital.

In 2021, S&P Global described these requirements as “some of the toughest bank capital standards worldwide.” S&P predicted that “meeting the high requirements [would] likely force New Zealand banks to cut riskier exposure, such as loans to smaller businesses, and require billions of dollars in extra funding.”

Pedersen says it is ridiculous. “If we want a more productive economy and ideally steer people away from property investment, we shouldn’t be making it harder to borrow and forcing people to use their homes as collateral, particularly when they are then charged commercial interest rates.”