How your mortgage could rise under RBNZ capital requirement changes

The four big banks will have to carry almost double the current level of capital, following a Reserve Bank of New Zealand (RBNZ) decision announced today (5 December).

RBNZ released its final results of its review of capital requirements which started in March 2017, also known as the Capital Review. Capital is essentially how much money banks need to have in reserve, should the New Zealand economy face a downturn.

The Bank says the current capital requirements are too low and that this was creating risk for the banking sector, should there be any shock to New Zealand’s financial system.

Currently, the four big banks in New Zealand – ANZ, ASB, BNZ and Westpac – must hold a minimum of 10.5% in capital. From 1 July 2020 this minimum requirement will begin the process of almost doubling, up to 18%. The remaining smaller players in New Zealand will have to hold a lesser  amount of a minimum of 16%. Banks currently hold 14.1% in capital, on average. While these changes will start on 1 July, they will come in gradually, over a period of seven years. RBNZ believes this is plenty of time for banks to manage the transition and to “minimise any adjustment costs”.

In a media release, RBNZ Governor Adrian Orr says these increases are needed to make the national banking system safer for all New Zealanders and to ensure that all bank owners have a “meaningful stake in their businesses”.

“Our decisions are not just about dollars and cents. More capital in the banking system better enables banks to weather economic volatility and maintain good, long-term, customer outcomes,” Mr Orr says.

“More capital also reduces the likelihood of a bank failure. Banking crises cause not only harmful economic costs but also distressful social issues, such as the general decline in mental and physical health brought about by higher rates of unemployment. These effects are felt for generations.”

What do these change to capital requirements mean for consumers?

At the media conference following the announcement, Mr Orr said that in money terms, this change to capital requirements is equivalent to an increase of $20 billion in capital. Mr Orr also said that the phased-in changes extrapolates to about a 1% increase in capital requirement per year for the banks.

Banks were told of these changes – under an agreement of non-disclosure – at 8:30am this morning.

With the banks’ capital requirement increasing, it is natural to assume that costs will be passed onto consumers in some shape or form. And one place where this could very likely happen is an increase to the current low-rate home loan market in New Zealand.

RBNZ says that, on average, banks could add up to 20.5 basis points to their lending rates,  over a seven year period, in order to collect the extra money they are required to have in capital. It also says that some banks are already “reducing their risk appetite” when it comes to some of the loans they have been issuing.

The Bank says it will carefully monitor the impact of these changes to bank capital requirements over the seven-year phase-in period and will release a report on this every year.

However, RBNZ says the key takeaway for consumers is that these changes will mean a safer and more competitive banking environment.

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