ANZ threatens to 'review and reconsider' NZ operations if Reserve Bank pursues capital ratio changes

ANZ says the proposed capital requirements would see it reduce its NZ footprint. Photo / Getty Images

ANZ group chief executive Shayne Elliott has threatened to review the "size, nature and operations" of the New Zealand business if the Reserve Bank implements its proposed changes to capital ratios, according to his submission released publicly today.The capital changes would see ANZ Group reduce investment and reallocate resources away from New Zealand to more profitable businesses, Elliott says.

Shayne Elliott, ANZ Group's chief executive, has threatened to cut back ANZ's footprint in NZ in response to the Reserve Bank's capital ratios changes. Photo / Michael Craig.

"This may also lead the New Zealand business to reduce operational costs (including employee costs)."

It may also require ANZ Group to "dispose, or cease operation, of the relevant underperforming New Zealand assets or businesses".

Another possibility was that some customer relationships in New Zealand could be directly managed out of Australia, he says.

The Reserve Bank is proposing a lift in the amount of risk weighted capital retail banks hold, from 8.5 per cent to 16 per cent.

Submissions on the proposal were released publicly today.

In total 161 were received including responses from the major banks, large companies like Fonterra, business and social organisations and numerous individuals.

All four major banks - ANZ, Westpac, BNZ and ASB - oppose the proposals in their current form and warn they will mean higher interest rates for borrowers, lower rates for savers and lower levels of GDP growth for the nation.

BNZ said it would need to raise equity if the proposals went ahead and that it may not be able to rely on its parent National Australia Bank (NAB) for ongoing support.

In a separate submission NAB said the increased capital requirements would make it challenging to continue with its current levels of support for the BNZ.

"In the absence of parental support, BNZ's credit rating would likely be several notches lower resulting in higher funding costs being passed on to consumers."

New Zealand's largest bank, ANZ is currently in the spotlight for the untimely departure of its chief executive and for breaching current capital rules.

ANZ, through New Zealand chairman John Key and Australian group chief executive Elliott also made separate submissions to the Reserve Bank.

ANZ's New Zealand chairman, Sir John Key, warned of a 1-3 per cent hit to GDP over 10 years, high lending cost and a significant risk to the dairy sector.

In his submission, which includes extensive modelling of the proposals, Key warned of a 1-3 per cent hit to GDP over 10 years, high lending cost and a significant risk to the dairy sector.

This mirrors concerns raised by Westpac - which released its own submission in May.

But Elliott makes a specific threat to downsize the local business if the RBNZ doesn't back down.

"The proposed increases are excessive," he says.

An increase of this magnitude would require ANZ Group "as the shareholder" to "review and reconsider the size, nature and operations of the New Zealand business."

That would include looking at the total amount of capital invested in New Zealand, the allocation of capital within New Zealand, the repricing of assets required to offset the increased cost of capital and the structure of the New Zealand operations.

By way of example Elliott highlights ANZ Group's recent sale of its wealth businesses and its Asian retail businesses as well as the downsizing of its institutional business.

In its summary of the submissions the RBNZ concedes that all four major banks say "the proposals go too far".

"Many submitters, particularly from the general public, support the proposed higher capital requirements for banks," the RBNZ said. "A number of submitters observe that higher capital requirements could lead to higher borrowing costs for New Zealanders.

"Some submitters, in particular banks and business groups, question whether the proposed increases are too large and too costly."

The RBNZ acknowledged specific concerns raised by submitters such as Fonterra, Synlait Milk and Federated Farmers about the risk to the heavily indebted agricultural sector.

In it submission, stock market operator NZX noted that its listed Debt Market could provide an "alternative funding source ... in a scenario where the RBNZ determined to raise regulatory capital requirements and registered banks were less willing to lend, or needed to impose a higher cost of credit".

Reserve Bank deputy governor Geoff Bascand said he welcomed reports by the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD) and American stock market index S&P last week "that support the proposals to increase bank capital ratios".

Reserve Bank deputy governor Geoff Bascand. Photo / File

Increasing the amount and quality of capital can be reasonably expected to mean that banks can survive all but the most exceptional shocks, said Bascand.

"We think the costs of doing so are outweighed by the benefits - someone's cost is for society's broader benefit."

A submission by the Salvation Army highlighted the wider social costs of banking collapse including "the lingering lack of confidence across the whole society and the risk of increased mental illness associated with financial loss, unemployment and uncertainty".

But although broadly supportive it also raised concerns about the distribution of higher interest rates if the banks follow through on threats to pass on the cost.

The RBNZ will continue its stakeholder outreach programme, which includes focus groups and engagement with iwi, social sector and industry groups, financial institutions and investors.

It has also engaged three external experts for an independent review of its proposals.

Its final decision on the review process is due in November.