Academic's warning: Reserve Bank capital requirements would hit mortgages

The Reserve Bank's proposal to strengthen the financial sector by requiring banks to hold more capital would affect people's mortgages, an academic has warned. 

Under the proposal, the New Zealand banking sector would be required to hold an additional $20 billion in capital to comply with new standards, which banks have come out strongly against. 

ANZ's group chief executive Shayne Elliott told the Reserve Bank it would consider reviewing the "size, nature and operations" of its New Zealand business if the regulator went through with the proposal. 

Dr Claire Matthews of Massey University said she felt ANZ's response was fair, in that if banks are required to hold more capital in relation to their size, the "rational response" is to shrink the size of their business. 

"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."

She told Newshub while the regulator's intentions for the proposals are good - to protect the economy from a financial collapse - it could affect people's mortgages. 

"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."

ASB was similarly cautious about the proposals, with chairman Gavin Walker and chief executive Vittoria Shortt telling the regulator: "ASB does not support the level and composition of the capital requirements proposed."

The Reserve Bank hasn't made a final decision on the capital requirements yet. 

It follows the Government's announcement last week that it planned to introduce a "deposit protection regime" to "increase public confidence in banks". 

New Zealand would join the rest of the OECD in having a bank deposit guarantee regime, protecting Kiwis' deposits should a bank fail. But it's yet to be decided if the Government would back it financially.  

Matthews told Newshub: "It seems to me that requiring deposit insurance and also having a high level of capital is almost double support for the same thing, which seems unnecessary."

Grant Robertson, the Minister of Finance.
Grant Robertson, the Minister of Finance. Photo credit: Getty

Finance Minister Grant Robertson said the proposals "require mature debate", and wanted to "remind all parties that we are still in a consultation process". 

He told Newshub the proposals are part of a review of bank capital being undertaken by the Reserve Bank as the independent regulator. That independence is legislated through the Reserve Bank Act, he said. 

"The goal of this exercise by the Reserve Bank is to ensure New Zealand has a safe and efficient banking system, which gives support and confidence to all New Zealanders."

Robertson said banks in New Zealand are "generally safe and secure, and indeed very profitable, so much so that the Australian owners of some of them are among the most profitable banks in the world".

But he said we must "always be looking at whether there are ways to do better in terms of security and safety and to keep the worst from happening". 

Matthews said it was reasonable that the amount of capital that the banks hold should be increased to a degree. But she said she was not convinced of the extent of the increase that the Reserve Bank is asking for. 

"I think a lesser increase would be more appropriate."