If so, banks claim they will charge borrowers less interest than would otherwise be the case.
This could create an issue for the Reserve Bank. What if slightly lower interest rates end up being more stimulatory than the RBNZ deems necessary to keep inflation in check?
It might need to set the Official Cash Rate (OCR) at a slightly higher level to keep the interest rates banks charge their customers at a desirable level.
BNZ’s head of research Stephen Toplis raised this point on Monday.
He said BNZ economists weren’t changing their OCR outlooks – yet at least – as there was still a lot of water to go under the bridge.
Indeed, as it stands, the new capital rules will continue being phased in until 2028.
But Toplis wanted to “warn strongly” that it was more likely the OCR would end up higher than BNZ economists were forecasting, rather than lower.
Speaking to the Herald last week, Willis wouldn’t go so far as to say she wanted to appoint a governor who supported loosening the bank capital rules.
However, she expressed a willingness to override the RBNZ, echoing comments she made during an interview with the Herald last August.
Asked if she was open to changing legislation to force the RBNZ to loosen its rules, Willis said: “Whether or not I need to do that is something I’m taking advice on”.
Toplis admitted that trying to put numbers on how much higher the OCR might be if banks could hold less capital was “fraught with danger”, as banks’ estimates of the impact of the bank capital rules were “many and varied”.
Indeed, it’s unclear how much of the saving banks would book by holding less capital would be passed onto customers versus shareholders.
ASB estimates the capital rules have to date added 20 basis points to the average interest rate it charges borrowers. BNZ estimates they’ve added 28 to 35bps.
BNZ expects that by 2028, the capital rules will have added 48 to 61bps to its average interest rate, whereas ASB estimates it will have added 40 to 50bps.
ASB, in its submission to Parliament’s Finance and Expenditure Committee (which is inquiring into banking competition), said its declining return on equity indicated it was absorbing “some” of the impact of the tougher capital rules.
Appearing before the committee on Monday, the chief executives and chairpeople of ANZ, ASB, and BNZ underlined how costly and conservative the capital rules were (Westpac’s chief executive and chair are due to appear on Wednesday).
They made similar points about the need to relook at whether the rules struck the right balance between supporting efficiency and financial stability.
ANZ chief executive Antonia Watson recognised that New Zealand faced unique risks, as a small, natural disaster-prone, export-led country. But she urged regulators to compare the capital rules to those abroad.
ASB chief executive Vittoria Shortt made a similar point, calling for “international harmonisation of regulation”.
Both Shortt and BNZ chairman Warwick Hunt said it was a matter of looking at the regulatory environment more broadly, beyond the capital rules.
Banks have for several years voiced their opposition to tougher capital rules, with debate between them and their advocates, and Orr, getting heated at times.
Willis said she’d have more to say on the bank capital issue “in due course”.
An acting RBNZ governor will be appointed from April 1 for up to six months. Thereafter, Willis will appoint a new governor on the recommendation of the RBNZ board.
Christian Hawkesby – who was Orr’s deputy and is filling in for him until March 31 – was heavily involved in the formulation of the bank capital rules.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
