David Seymour sides with banks after ‘disappointing’ advice from Regulation Ministry

Regulation Minister David Seymour. Photo / Mark Mitchell

• Regulation Minister David Seymour asked for advice on the Reserve Bank’s capital requirements for banks earlier this year.
• The advice was released to the Herald under the Official Information Act.
• The Reserve Bank is currently reviewing the rules.

Regulation Minister David Seymour sided with New Zealand’s big banks over the advice of officials from his own Ministry for Regulation on the issue of how the contentious bank capital rules should be calculated and compared.

The rules, which were unveiled by the Reserve Bank in 2019 and are being phased in, require trading banks to hold considerably more capital for the lending that they do.

This makes the banks far safer and less likely to collapse. However, all sides acknowledge it comes with a cost.

The rules make lending more expensive, which means that banks do less of it, which ultimately means the economy does not grow as large as quickly as it would do had the rules been less onerous.

Whether that cost is worth the benefit of stability has caused one of the biggest and most fraught economic scraps in history – and it could have been the reason why Reserve Bank Governor Adrian Orr abruptly resigned in March.

Seymour has been a longstanding critic of the rules and sought advice from the new Ministry for Regulation earlier this year on the topic.

The ministry returned its advice to Seymour in February and it was released to the Herald under the Official Information Act.

The paper, an aide-mémoire, did not make any firm recommendations about what to do with the rules, but it tended to side with the Reserve Bank’s rules.

It said lifting the capital ratios of​​ New Zealand’s largest banks to 18% of their risk-weighted assets was not out of step with other countries.

‘Disappointing’ advice

Seymour disagreed. He told the Herald the first advice he received from the ministry was “pretty disappointing”.

He said the February paper “didn’t properly appreciate that there’s different types of capital”.

The advice missed the fact that other countries are “much more sophisticated in allowing some asset classes to be discounted within that [capital requirement],” Seymour said.

“You can calculate an effective capital ratio where our 18% is more like 27% – or a full 50% higher than other countries whose headline rates are high but whose nuance is missing,” Seymour said.

The 27% figure cited by Seymour came from a paper written by consultants PwC for the Bankers’ Association, the peak body of New Zealand’s banking sector.

ANZ, New Zealand’s largest bank, noted that in its submission on the new rules, it also cited the PwC study to argue the ratios were much higher in New Zealand than in comparable jurisdictions overseas.

It said the “internationally comparable” ratio would be 27.1%, an increase of 1680 basis points on the capital ratios that applied in 2017.

Seymour said that after he received the February advice, he sent the ministry to “talk more closely to the regulated parties to explain that [the 27% figure] to them”.

The Reserve Bank said that it was “hard to compare capital requirements across different jurisdictions”.

“Different risk weights used by different countries mean comparisons of headline capital ratios are not straightforward,” the bank said.

Former Reserve Bank Governor Adrian Orr championed the rules. Photo / Mark Mitchell

Making things even more complicated, the Reserve Bank said that other countries applied “additional requirements that are not technically capital but create loss-absorbing capacity – or apply additional firm specific buffers, that are often not publicly disclosed”.

These requirements might not count towards a country’s headline capital requirements, but they would cost that country’s banks in much the same way as New Zealand’s capital requirements cost ours.

Labour’s finance spokeswoman Barbara Edmonds said she was surprised Seymour was “wasting his own ministry’s time looking into this, given he is ignoring their advice anyway”.

She said any changes must respect the independence of the Reserve Bank.

Ministry says critic ‘misleading’

The ministry took aim at one of the leading critics of the capital rules, S&P Global, an arm of the ratings agency. In a 2021 article, S&P said the requirements were “some of the toughest bank capital standards worldwide”.

It said these were “double” the equivalent ratio for European banks and “significantly higher” than what Australian banks were asked to hold.

Former Reserve Bank economist Geof Mortlock was quoted in the article that the rules would “bite especially hard if and when NZ enters a recession – as is just a matter of time“.

However, the Regulations Ministry reckoned S&P’s claim that New Zealand’s rules were double the equivalent European standard was “misleading”.

The Ministry of Regulation's calculation of other countries' capital rules compared to New Zealand.

The paper said this did not take into account the fact the 18% capital ratio in New Zealand was “all inclusive” whereas banks in countries with lower headline ratios often had “additional requirements” placed on top of them, which brought their effective capital ratios closer to the level in New Zealand.

“The claimed disparities between New Zealand and Australia are no longer the case, and in practical terms, New Zealand’s level capital requirements are not unusual among large banks in Europe and Asia,” the official said.

Ratios similar to other countries

The ministry looked at banks from the United Kingdom, Ireland, France, and Japan and calculated their equivalent capital ratio by adding their minimum basic capital ratio with other additional requirements they had.

This calculation led the ministry to conclude that New Zealand’s capital ratios were not out of step with other countries.

“New Zealand’s total minimum requirements have not resulted in capital levels being out of step with overseas counterparts,” the ministry’s paper to Seymour said, although officials admitted that the rules were so country-specific they “cannot easily be compared across jurisdictions”.

Rules under review

Earlier this year, the chair of the Reserve Bank Neil Quigley announced the capital rules would be reviewed.

Despite the rules having been announced in 2019, the bank had come under heavy criticism to review them after they were blamed for reducing competition. Some of that pressure came from the Beehive, with Finance Minister Nicola Willis floating a legislative intervention after a Commerce Commission market study reckoned they might be holding the banks back from running more efficiently.

Edmonds said whatever happened, it was important to respect the Reserve Bank’s statutory independence.

Seymour told the Herald the purpose of the exercise would not have eroded the Reserve Bank’s independence. Instead, he said, it was a great transparency exercise and would help to make the case to the bank that change was needed.

Thomas Coughlan is the NZ Herald political editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the Press Gallery since 2018.