Small banks fire warning on capital requirements

Four smaller banks have warned that the Reserve Bank's new capital proposals could inadvertently widen the competitive gap between them and the big four.

Thursday, May 23rd 2019, 1:47PM

In a joint letter to the RBNZ, Kiwibank, The Co-Operative Bank, SBS Bank, and TSB state the new capital adequacy rules could make it an even more uneven playing field.

The Reserve Bank's rules are designed to make every bank in New Zealand hold a proportionate amount of cash to guard against risk in the financial system. The RBNZ estimates banks will need to keep an extra 20% to 60% of capital. It plans to double minimum tier 1 capital from 8.5% to 16% for the big four, and to 15% for smaller lenders.

But the four banks say the current proposals may not be effective and could result in "significant differences to residential lending, small businesses banking and agricultural lending risk weightings".

Currently, the big four use internal calculations to work out their capital buffer, while small banks use the "standardised approach". The big four have been able to keep less cash aside as a result.

Kiwibank, The Co-Operative Bank, SBS, and TSB said they welcomed the RBNZ proposals, in principle. They said "the IRB banks currently enjoy create an uneven playing field. There is no empirical information to suggest that the credit performance of the IRB bank portfolios is superior to that of Standardised banks, or that these IRB models make the portfolios any safer".

The quartet says the rules are far from perfect, however. The banks believe they should be able to meet capital requirements using non-tier 1 capital. Otherwise, they argue, "NZ-Owned Banks’ growth will be constrained, limiting competition in the sector." The banks believe tradable bonds and securities should also be counted for small banks.

The four banks argue the big four will maintain an advantage under the new proposals, and will be able to seek tier one capital from their Australian parent groups.

The letter, signed by executives including Kiwibank CEO Steve Jurkovich (pictured), adds: "The current regime favours listed and foreign-owned banks. In respect of the latter, the Australian banks have an ability to flow through capital from the Australian parent, often with a regulatory advantage from jurisdictional arbitrage."

The central bank has taken a tougher line on bank capital in recent months. In a shock move last week, the RBNZ censured ANZ, forcing it to use the standardised approach from now on. The decision will force ANZ to hold an extra $277 million in risk capital.

Tags: co-op money Kiwibank RBNZ Reserve Bank SBS TSB