RBNZ proposals will slow credit growth: Kiwibank

Reserve Bank proposals for banks to hold significantly more cash on their balance sheets will lead to slower credit growth and rising interest rates, Kiwibank economists have warned.

Monday, December 17th 2018, 1:59PM

The economists say RBNZ plans to make banks hold up between 20% and 60% more cash go "well beyond" similar rules elsewhere in the world. The economists have sounded a warning about the proposal in their latest weekly comment, and predict a "sharp tightening of financial conditions coming through".

The opinion letter, penned by Jarrod Kerr and Jeremy Couchman (pictured), said: "First, credit growth is likely to be slower as banks will need to hold more capital against all lending. Second, customers will likely pay more to borrow. A sharp lift in capital raises the cost of doing business for banks and may restrict the supply of credit (loans).

"No doubt the RBNZ will receive fierce feedback on the proposal, the time to do so ends on 29th March 19. Even if the proposals are scaled back a bit, they are still likely to go well beyond what we are seeing offshore," they added.

While the proposals would shore up New Zealand's banking system, the economists said this would come "at the expense of short term growth".

They added home owners are likely to bear the brunt of the enhanced capital adequacy rules: "If you told a plumber they must use pipes that are twice as large, twice as thick, and at twice the price, it wouldn’t surprise anyone that the cost of the job goes up."

Kiwibank's assessment comes as ANZ outlined the potential impact the new rules will have on its business. ANZ said it would need an additional $6 billion to $8 billion to meet the new requirements. The bank says it has a number of questions and comments to make, before the consultation period ends on 29 March next year.

Tags: Kiwibank Mortgage Rates RBNZ Reserve Bank