MNI INTERVIEW: Easing Capital Rules On NZ Banks Would Backfire
MNI (SYDNEY) - New Zealand should opt to maintain high capital requirements on its banking system, as a reduction would make it more expensive for them to raise capital on international markets, a financial regulation expert and participant in the government’s recent banking inquiry told MNI, adding authorities will likely pursue change next year following further study.
Offshore investors appreciate New Zealand banks’ high profits and low risk, said Martien Lubberink, associate professor of accounting and capital at Victoria University of Wellington, who testified to the select committee on the banking competition inquiry last week, following the end of submissions in October.
“If these pension funds or institutional investors start doubting New Zealand’s stability, then you get capital flight,” he said in an interview.
New Zealand’s centre-right government is considering whether to ease stringent capital requirements, in a bid to lower the cost of loans and fuel economic growth. (See MNI: RBNZ Set For Governance Shift After Banking Inquiry)
While easing requirements might lead to a 20-basis-point discount on SME loans, it would also alter the perception of New Zealand’s banking and regulatory regime among important offshore investors, Lubberink warned. “International investors rely on these high capital requirements, and they love it, because it gives a sense of safety,” he added.
The nation's four largest lenders currently must hold capital equal to at least 18% of risk-weighted assets, while smaller banks must hold a minimum of 16%, double the level of European banks and significantly higher than in Australia. The rules, implemented in 2022, have been criticised for constraining lending.
The government will very likely pursue the change following an additional study into the impact next year, Lubberick added.
COMPETITION BOOST
Lubbernick instead called on the government to incentivise smaller banks to merge to help boost competition and innovation, noting recent downturns had shown these institutions tended to shadow each other’s behaviour in times of stress.
Clearer rules would push the banks to innovate, he added.
“If you change the rules, the banks will change their perspective,” he continued, adding political inertia had curtailed reform over recent years.
The government should also streamline banking oversight, he suggested, noting three ministers at present technically shared the industry within their portfolios alongside the RBNZ’s macroprudential role.
The central bank would greatly benefit from more senior staff with specialised banking supervision expertise, he argued, pointing out the lack of experience on the current board. “There's too few people that are experienced in the area of how to manage or regulate and supervise banks,” he argued.
The select committee hearings will continue through to December.