New Zealand Bank Leaders Urge Scrutiny of RBNZ Capital Rules

(Bloomberg) -- New Zealand banking leaders urged lawmakers to consider whether the Reserve Bank’s capital requirements are too onerous.

The chairs and chief executives of three of the nation’s biggest lenders appeared at a parliament committee Monday in Wellington as part of its inquiry into banking competition. The shared view was that the RBNZ’s decision in 2019 to recommend capital levels that would allow banks to withstand a one in 200 year shock had been too severe, and had pushed up interest rates.

“We have capital settings that have been set on the basis of a one in two hundred year expected event. That is an extremely conservative setting,” Bank of New Zealand Chair Warwick Hunt told the committee. “The debate for everybody — banks, you as ultimately the lawmakers, the regulators — is what is the appropriate level going forward.”

The scrutiny follows steps by Finance Minister Nicola Willis to take advice on the amount of capital banks hold, saying that could make a difference to productivity and economic growth. Adrian Orr, who as RBNZ governor championed the tighter rules when they were introduced, unexpectedly stepped down last week.

Hunt, who sits on the board of BNZ parent National Australia Bank, noted that Australia’s approach is to protect against a one in 100 year event. All four of New Zealand’s largest banks are Australian-owned.

While the tighter capital rules were introduced in 2019, the start of implementation was deferred during the pandemic until mid-2022. It is a progressive process over seven years and the final targets don’t need to be achieved until 2028, although most lenders are ahead of where they need to be.

ASB Bank Chair Therese Walsh told the committee the current level of required capital was “about right” and it didn’t need to increase.

She said ASB agreed in 2019 that capital requirements needed to increase but argued they didn’t need to go as far as the RBNZ was proposing. The challenge for regulators today is to find a balance between ensuring banks are sound and not overwhelming them with regulation that adds costs and stifles competition, she said.

“Where is that sweet spot in terms of safety and security for the banking system because you know that that’s where we want to be?” she said. “About today, roughly speaking, is kind of where we think you find that moment.”

Earlier, ANZ Bank New Zealand Ltd. Chief Executive Antonia Watson said the nation needs to assess the risk weights that banks are required to apply to lending to ensure they are not too conservative compared to other nations. She also agreed decision makers need to assess how much prudential risk it wants banks to take compared to allowing more competition.

“We’ve chosen a one-in-200 year event,” Watson told the committee. “Is that the level of financial stability we want? That’s not a question for us. It’s a question for you and our regulators.”

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