How Thursday's banking rule changes could hit the economy

Banks will have to hold billions more in cash under new rules expected to be announced on Thursday by the Reserve Bank.

The measure is intended to help them weather a one-in-200-year economic shock, but one economist is warning it could hamper the economy in the short-term.

It's understood the Reserve Bank's proposals would see the big four banks hold onto an extra $20 billion between them, making it less likely they collapse in a repeat of 2008's global financial crisis. 

"It's massive," economist Shamubeel Eaqub told The AM Show on Thursday. "They're going from about 12 percent to 16 percent of their books. This is quite a big deal - the banks made a ton of money, but it's still going to take them a long time to get there."

Banks have previously warned it could impact GDP growth and see mortgage rates rise. 

"At current very low-interest rates, the interest rate is not such a big deal," said Eaqub. "The bigger issue is, the Reserve Bank is trying to make our banks safer, and if banks are safer, it means that they're being less risky in who they lend to. That means they're going to lend less to farms, less to businesses and less to property development and those kinds of things. 

"So there is a real risk that what we find is as the banking system gets safer, our economy is starved of cheap capital."

Shamubeel Eaqub.
Shamubeel Eaqub. Photo credit: The AM Show

The banks are prepared however, Eaqub says, some having well above the capital requirements in their coffers already.

"Since the middle of 2016, we've seen them getting much tighter with how they lend money. It's been really, really apparent for farmers in particular. Farmers have been really under the screw for the last couple of years. 

"Even though milk prices have been rising, it's been really tough for them to get more money."

An academic earlier this year warned the banks might scale back their businesses in New Zealand, to avoid having to dump more capital into them. 

"I still need to earn a return on that capital and if I put more capital in, and my return is not going to be as good as it was, then I don't necessarily want to have more capital in my business," Massey University's Claire Matthews told The AM Show in July.

"Because they've got to have more capital, they don't have the same ability to spend. But also, if banks have to hold more capital, it will make the loans they give more expensive, and it'll put interest rates up."

Banks which fail to meet the capital goals face being put into statutory management by the Reserve Bank.