Borrowers currently enjoy historically low interest rates, but are the bank capital requirements a game-changer?
On Thursday, the Reserve Bank announced that banks are required to increase their cash reserves from a minimum of 10.5 percent, to 18 percent (for large banks), requiring them to raise around $20b in seven years.
Speaking to The AM Show on Monday, economist Cameron Bagrie said that borrowers will be hit by the changes and the cost is likely to be up to three times more than the Reserve Bank's estimate.
"The Reserve Bank's proposal to make the banks safer - which we all want - now that's going to carry a cost," Bagrie said.
Although banks have a seven-year transition period to get their ducks in a row, the capital has to come from somewhere.
"The Reserve Bank put down on the table that the cost of that insurance policy by what borrowers could end up paying could be 20 basis points: $4, maybe $5 [per] week," Bagrie said.
On the face of it, the estimate cost isn't huge, but initial indications from banks is that borrowers shouldn't hang their hat on that.
"Banks have come out and respond[ed] and they think the cost could be 30 to 60 basis points: one-and-a-half to three times what the Reserve Bank's estimate is on the table.
"Their [the banks'] argument is that shareholders are stumping up more capital, [they] expect a return on that capital, so their number's going to be bigger than the Reserve Bank," Bagrie added.
Bagrie said that around the globe, the banking sector is said to have a post-tax return on equity of around 14 percent. As banks are a critical part of a well-performing economy, there are flow-on effects of them doing well - but returns should be kept in check.
"The more competitive the pressures we can bring across the economy, the more the potential passing on effect is going to be diluted," Bagrie said.
Aside from keeping the Commerce Commission on watch, another option available to the Government is to turbo-charge open banking.
"Open banking is just a mechanism for financial service providers to share information: it just makes transferring transitioning from bank-to-bank service providers that much easier and drives more competition," Bagrie said.
While open banking operates in countries such as Australia and the UK, New Zealand is slow to follow in their footsteps and if this were Government-led and industry assisted, it would generate results fairly quickly.
"The big issue in regard to the banking sector has got to be less about making money in the short-term and more about looking after your clients, customers and making profits in the medium-term," Bagrie added.
Campbell Hastie, a mortgage broker at Go2Guys, said that capital requirements aren't the only factor influencing interest rates.
"Taking a wider perspective, my view is that interest rates are bottoming out: this is the bottom.
"The change to the capital requirements is that final 'nail in the coffin'."
To attract money from savers, banks need to offer a half decent interest rate or they risk losing money from term deposits to other investments, such as property or shares.
"[Interest rates] have gone about as low as they can possibly go and I don't see that they can go any lower, otherwise that money is going to be looking for another home.
"I think mortgage rates will stay around where they are now (mid 3-to-early 4 percent, depending on the chosen fixed rate term), for around two-to-three years," Hastie added.
Interest rates are a lever for banks to bring in necessary cash to increase capital and ride out future financial crises, an outcome that the Reserve Bank has confirmed is necessary both economically and socially.
As banks look to preserve returns, the effect on interest rates is likely to be higher than the Reserve Bank's estimate, indicating that borrowers are wise to leave themselves some breathing space.