RBNZ banking rules shaping credit markets

• A proposed rule forcing banks to hold more equity capital will make the banking sector more stable, however it will come with a raft of second round impacts. Chief among those will be the impact on banks’ willingness to lend. This is what we are watching most closely;
• Separately, we may see explicit preference for depositors over bond-holders in the event of default. If enacted, this may partially offset the credit benefit on senior unsecured paper of higher capital levels; and
• We are also likely to see issuance of a new high-quality mortgage-backed security type.

This article examines these three changes.

I. Greater equity shores up banks, but secondary impacts abound

NZ registered banks are currently required to hold equity capital equal to at least 8.5% of their risk-weighted assets.  The RBNZ is proposing to increase the required minimum to 16% for large banks and 15% for their smaller counterparts. The proposal will be phased in over five years. The RBNZ is also proposing that the larger banks use more conservative methodology in calculating capital ratios, such that the current stated average tier 1 equity ratio of 13.4% would reduce to 11.6%.

To put those numbers in perspective: