RBNZ appoints three independent experts to review bank capital proposals

The proposed bank capital changes have sparked some strong reactions from the banks. Photo/File.

The Reserve Bank has appointed three external experts to independently review the analysis and advice underpinning its bank capital proposals.

The three experts are James Cummings, a senior lecturer in finance at Macquarie University, Professor Ross Levine, chair of banking and finance at the Haas School of Business, University of California, Berkeley, and David Miles, Professor of Financial Economics at Imperial College London.

Cummings previously worked for the Australian Prudential Regulation Authority between 2009 and 2013, Levine has previously worked at the Board of Governors of the Federal Reserve System and the World Bank, and Miles was a member of the Bank of England's monetary policy committee from May 2009 through September 2015.

The trio will "look at whether all relevant considerations have been identified. The external experts will take into account the objectives of the capital review, as well as the domestic context, the available literature, the international debate and policy developments globally relating to the role of bank capital in supporting the soundness and efficiency of the financial system," RBNZ says.

The three experts will review the analysis and work of the Reserve Bank "and not that of individual staff members," it says.

The proposals include increasing minimum tier 1 capital from 8.5 per cent currently to 16 per cent for the four major banks and to 15 per cent for other banks.

RBNZ says the context of the capital review is that New Zealand is a small, open economy with external imbalances "and an economic and financial system that is disproportionately subject to external economic and financial shocks and changes in offshore sentiment."

It notes that the big four Australian-owned banks account for around 85 percent of the banking system and that the banks obtain a sizeable share of funding from offshore wholesale markets. Much of New Zealand's debt is concentrated in the household and agriculture sectors and that debt has been steadily climbing over recent decades.

"New Zealand households have high debt levels with household debt around 160 per cent of nominal disposable income. Household debt is concentrated in housing loans from banks," it says.

Housing loans account for more than 50 per cent of New Zealand banks' total assets.

The external experts are being asked to decide whether the problem that the capital review is seeking to address has been well specified and whether the Reserve Bank adopted an appropriate approach to evaluate and address it.

They are also being asked to review the inputs to the review and to decide whether the analysis and advice has taken into account all relevant matters, "including the costs and benefits of the different options."

A number of commentators have criticised RBNZ for not using a cost-benefit analysis as its starting point.

RBNZ reiterated that it will provide "a full assessment of costs and benefits" in its Regulatory Impact Statement.

The experts are being asked not to focus on whether the exact capital ratio is "right" but to "consider whether other relevant information or analysis has been overlooked."

Each expert is to prepare a separate report – RBNZ says it won't attempt to consolidate the reports – and they will be used as "an input into final decisions made in the capital review." RBNZ says it will publish the experts' final reports.

The trio is specifically directed not to undertake new modelling exercises, although they should identify whether there are "developments in modelling, or other analytical exercises, that have not been appropriately considered during the capital review."

Nor should they consider matters such as other prudential regulation tools, including deposit insurance, or the RBNZ's approach to supervision. Such matters are being considered in phase two of the Reserve Bank Act review.

- BusinessDesk