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RBNZ orders big 4 to raise $19.1bn capital

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New Zealand’s central bank has decided the Kiwi arms of the big four will now have to almost double their total capital, an estimated combined increase of around $19.1 billion (NZ$20 billion).

The New Zealand banks owned by ANZ, CBA, NAB and Westpac will have to raise their total capital from the current minimum of 10.5 per cent to 18 per cent, while smaller banks in the country will need to increase their capital to 16 per cent. 

Currently, the average capital held by Kiwi banks is 14.1 per cent. 

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However, the Reserve Bank of New Zealand (RBNZ) has attempted to soften the blow, allowing seven years to implement the changes, starting from when they take effect on 1 July, next year. The timeframe has been amended from its original planned five years following industry consultation. 

Governor Adrian Orr said the decision to increase capital requirements is about making the banking system safer for all Kiwi consumers and ensuring the institutions’ owners have a greater stake in their business – the more they have to lose, the more carefully the banks will be managed.

“Our decisions are not just about dollars and cents. More capital in the banking system better enables banks to weather economic volatility and maintain good, long-term, customer outcomes,” Mr Orr said.

“More capital also reduces the likelihood of a bank failure. Banking crises cause not only harmful economic costs but also distressful social issues, such as the general decline in mental and physical health brought about by higher rates of unemployment. These effects are felt for generations.”

Rise in capital ‘ultimately increases the costs of providing loans’

For the big four, their New Zealand banks’ tier 1 capital requirement, will rise to 16 per cent of RWA, 13.5 per cent of which must be in the form of common equity tier 1 (CET1) capital. 

Tier 2 capital will remain in the framework and can comprise 2 per cent of the minimum total capital ratio of 18 per cent. 

Existing additional tier 1 and tier 2 contingent instruments issued by New Zealand banks will no longer be eligible under RBNZ’s new criteria, set to be phased out over the transition period.

The net result on ANZ is an increase in common equity tier 1 capital of $3 billion by 2027, which includes a $1 billion management buffer. 

The bank said its impact is net of around $1.4 billion (NZ$1.5 billion) it had retained in 2019 in anticipation of meeting higher requirements.

ANZ paused trading on the ASX on Thursday morning prior to the announcement, aware that the raised capital requirements could have a “material impact” on the bank. But the total CET1 impact of $4.5 billion was reported to be lower than originally anticipated. 

ANZ chief executive Shayne Elliott said RBNZ’s decision has provided the bank the certainty required to prepare its business for the future. 

“While the increased capital requirements remain significant, the consultation was thorough and the concerns of industry were given a fair hearing,” Mr Elliott said.

“We have been planning for these changes since the original consultation. Given the extended transition period and our strong capital position, we are confident we can meet the higher requirements without the need to raise additional capital.

“We remain aligned with the RBNZ’s objective to ensure a strong and efficient financial system in New Zealand.”

ANZ’s CET1 capital ratio as at 30 September was 11.4 per cent, around $3.5 billion above APRA’s stated unquestionably strong level of 10.5 per cent.

CBA on the other hand said it is well placed to meet the changes, noting that a significant increase in capital “ultimately increases the cost of providing loans to customers”. 

The bank’s New Zealand arm, ABS, will require an additional $2.8 billion (NZ$3 billion) in tier 1 capital, of which around $2.3 billion (NZ$2.5 billion) must be in CET1 capital.

Meanwhile Westpac has indicated it will need a further $2.1 billion to $2.7 billion (NZ$2.3 billion to $2.9 billion) of tier 1 capital to meet the requirements. 

It is capitalised with a tier 1 ratio of 13.9 per cent as at 30 September, based on the current RBMZ rules. 

RBNZ is ‘confident the decisions are the right ones for New Zealand’

RBNZ said it has prescribed more flexibility for banks on the use of specific capital instruments, alongside a more cost-effective mix of funding options for banks.

It views the result as a more level capital regime for all banks – with the majors having to measure their risk of exposures more conservatively, in line with the smaller banks and more transparency in capital reporting.

The Reserve Bank added it has implemented a lesser increase in capital for the smaller banks consistent with their more limited impact on society should they fail. 

RBNZ deputy governor and general manager of financial stability Geoff Bascand said the decisions were shaped by public input and insight received from submissions as well as public focus groups over the last two years.

Three international experts also provided supportive perspectives on the proposals.

“We’ve listened to feedback and reviewed all the data, and are confident the decisions are the right ones for New Zealand,” Mr Bascand said.

“We have amended our original proposals in a number of ways so we achieve a high level of resilience at lower potential cost, with a smoother transition path for all participants. Our analysis shows that the benefits of these changes will greatly outweigh any potential costs. 

“Following the global financial crisis, many regulators around the world have been taking steps to improve the safety of their banking systems. We’re confident we have the calibrations right for New Zealand conditions. These changes will be subject to monitoring, with the Reserve Bank reporting publicly on implementation during the transition period.”

 

RBNZ orders big 4 to raise $19.1bn capital
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Sarah Simpkins

Sarah Simpkins

Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth. 

Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio. 

You can contact her on [email protected].

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