NZ banks ready for tough new rules

Tougher international rules on the quantity and quality of capital which banks will be required to hold are not expected to cause problems for New Zealand banks or to affect the availability and cost of credit to businesses and households.

Over the weekend the Basel Committee on Banking Supervision announced a package of measures whose principal effect is to require banks to hold more equity to support a given amount of risk-weighted lending.

The changes are designed to strengthen the banking system and help avoid another financial collapse.

PricewaterhouseCoopers partner Paul Skillender said the changes were likely to be less of an issue for Australian and New Zealand banks than their European and American counterparts.

"Banks in this part of the world have already been somewhat more conservative than elsewhere," he said.

"The composition of their existing capital - with a higher proportion of both shareholders' equity and retained earnings - is largely consistent with the new proposals. And they already hold tier one capital, in most cases, between 6 and 8 per cent."

The new Basel rules lift the amount of tier one capital required from 4 to 6 per cent of risk-weighed assets and, within that, the proportion of common equity from 2 to 4.5 per cent.

In addition a new "capital conservation buffer" of 2.5 per cent is required, which in effect raises the total requirement for common equity to 7 per cent.

Skillender said that, assuming the Reserve Bank adopted the new rules, they would be phased in over several years. While some European banks had announced capital raisings he did not foresee "anything as dramatic as that" here.

The local banks had already started to build up higher capital buffers through lower dividends (and corresponding higher retained earnings).

"That trend is likely to continue," he said.

Claire Matthews of Massey University's Centre for Banking Studies said she did not expect the new requirements would have a big impact because New Zealand banks had not been sitting close to the minimums required under the existing rules.

"They have tended to have a reasonable buffer and, while they have made some use of subordinated debt, they have tended to have quite a bit of standard capital," she said.

"While it may be that they have to make some changes to their capital structure to meet the detail, I suspect it is not going make too much difference to their pricing."

The Basel committee said the purpose of the new capital conservation buffer, to sit on top of tier one capital, was to ensure banks maintained a buffer of capital that could be used to absorb losses during periods of financial and economic stress.

Banks whose capital ratio fails to stay above the buffer will face restrictions on payouts such as dividends and bonuses. It will be phased in between January 2016 and January 2019.

Nobel laureate economist Joseph Stiglitz said: "While it's understandable, given the weaknesses and the failings of the banking system, that one would want to be slow in introducing these increased capital requirements, delay is exposing the public to continued risk."

The banks had complained that increased capital adequacy requirements of this kind would increase the cost of capital that firms would have to pay, he said.

"But one should recognise that through the bailouts that have been repeated all through the world, not just during this crisis, the public has in effect been subsidising the banking sector and that represents a very large distortion in the financial system. If the cost of capital is higher as a result, it's just undoing a distortionary subsidy."

SAFER BANKS
* Central bank governors and regulators have completed a package that will force banks to more than triple to 7 per cent the amount of top-quality capital they must hold to withstand shocks without state aid.
* Leaders of the Group of 20 countries (G20), who called for the reform, are due to give final approval to the package in November.

- ADDITIONAL REPORTING: AGENCIES