No resting on their laurels for NZ's banks in 2020

Financial Markets Authority chief executive Rob Everett (left) and Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell

The Reserve Bank's final decisions on bank capital requirements in late 2019 came as a great relief to the banks but they can't count on 2020 being plain sailing.

The prudential regulator has given every sign that it intends to take a much more aggressive approach to its duties than the laissez faire attitude it had before Australia's royal commission on financial services got underway in early 2018.

RBNZ governor Adrian Orr was caught on the hop in the early days of his tenure when he said the conduct of New Zealand banks "is infinitely better than some of the activity you've seen in Australia."

But he soon realised his mistake and joined forces with the Financial Markets Authority to set about getting the local banks, particularly the subsidiaries of the big four Australian banks, to demonstrate they were squeaky clean.

FMA chief executive Rob Everett had struck a more appropriate note: "It's not credible to just say that New Zealand is different.

"You have to demonstrate why either the business structures here, or your business practices here, lead to different outcomes.

"Now we at the FMA, we see some of that. But, actually, we think the banks need to front up and really explain why it should be different. And that's the process that we're going through with them now."

The two regulators' public comment since then on bank conduct and culture has generally been that our banks are reasonably kosher but did need to pull up their socks in some areas.

But the RBNZ has since gone beyond the conduct and culture review and is now making more frequent public statements about banks that fall short of their obligations.

For example, in December it announced that ANZ Bank's directors can no longer just sign off its accounts saying everything's fine simply because they aren't aware of any problems.

2019 was a troubled year for ANZ, the country's largest bank. Photo / Rod Emmerson

ANZ's directors had been happily signing off accounts since 2014, unaware that their bank had failed to get RBNZ approval for the operational risk model it was using.

So now the RBNZ is requiring the directors to much more actively assure themselves everything has been done properly in a process known as director attestation.

As Deloitte had put it in its review of ANZ's director attestation, there had been "an element of complacency in ANZ's historical approach to the attestation process and that its operation was piecemeal."

That was just the latest of several press releases criticising ANZ that RBNZ had issued through 2019.

And in November, the RBNZ said it was stepping up its supervisions of National Australia Bank-owned Bank of New Zealand after discovering weaknesses in BNZ's capital calculation processes.

Grappling with a more interventionist regulator isn't the only change banks will have to deal with.

The Financial Markets (Conduct of Institutions) Amendment Bill, introduced to Parliament in December, will further regulate bank behaviour in an effort to reduce the risk of harm to consumers.

Another piece of legislation one would hope all the New Zealand banks have been rechecking that they comply with is anti-money laundering and counter-terrorism finance laws.

Adrian Orr, governor of the Reserve Bank. Photo / Rod Emmerson

None, surely, would want to face the ordeal Westpac's Australian parent has been enduring since November when Australia's anti-money laundering agency AUSTRAC found it had processed more than 23 million transactions in breach of these laws, including facilitating transactions enabling child exploitation in the Philippines.

RBNZ has already promised it will be having a close look at AUSTRAC's findings.

As for the new bank capital requirements, all the banks have seven years from July 1, 2020 to lift their tier 1 capital from 8.5 percent of risk-weighted assets. The four major banks will have to lift their tier 1 capital to 16 percent and the smaller banks to 14 percent.

All the banks will be able to sell preference shares to account for 2.5 percent of risk-weighted assets contributing to the required additional capital and, for the smaller banks, the stretch, if any, will be gentle.

Three of the four mainstream home-lending smaller banks already held more than 11.5 percent equity at Sept. 30 and SBS Bank at 11.4 percent wasn't far off.

And TSB Bank already exceeded the 14 percent total capital requirement with 14.6 percent, all of it equity. Kiwibank was at 13.5 percent, SBS Bank was at 14.2 percent and Cooperative Bank was at 16.7 percent.

Rabobank, important as a lender to agriculture, was at 13.2 percent, all of it equity, and Heartland was at 12.9 percent, all of it equity. All three of the Chinese banks operating in New Zealand, Bank of Baroda and Bank of India far exceed the requirements.

ANZ Bank has said it will now need to find about A$3 billion in fresh equity in addition to the A$1.5 billion in profits kept in NZ since the proposals were announced.

NAB has said BNZ would need to increase equity by NZ$3 billion to NZ$4 billion by July 1, 2027, CBA said ASB would need about another NZ$3 billion and Westpac said its NZ subsidiary would need between NZ$2.3 billion and NZ$2.9 billion.