Banks May Get More Time to Raise N.Z. Capital Buffers, Orr Says

(Bloomberg) -- New Zealand central bank governor Adrian Orr said he’s prepared to be flexible on the time banks will have to phase in new capital requirements, as some analysts warn the controversial proposals could squeeze lenders.

In an interview with Bloomberg Thursday, Orr mounted a strong defense of his plan to raise banks’ capital buffers but also said the Reserve Bank remains open-minded and hasn’t made any final decisions, including on the overall level of capital.

The RBNZ is proposing that banks be required to raise high-quality Tier-1 capital to 16 percent of overall risk-weighted assets, up from about 12 percent now and almost double the current regulatory minimum, over five years. A longer transition period could give lenders more scope to increase capital from retained earnings rather than raise it elsewhere.

Asked if the five-year implementation time was up for debate, Orr said: “Absolutely. We said five because it’s not four and it’s not six. It just seemed to be not too far away and not too close. Our job is to have as smooth a transition as possible to wherever we decide we’re transitioning to.”

He added that transition times could differ between institutions “because they’re all starting at different places and have different ownership structures, different access to capital.”

‘Best Foot Forward’

Banks have until May 3 to make submissions on the plans, and the RBNZ expects to make a decision in the third quarter.

Asked if there was room to move on the overall capital levels the RBNZ has proposed, Orr said: “We’ve put our best foot forward and what we need to be told is have we missed something.”

He said capital ratios for banks are being debated globally and New Zealand has slipped behind.

“The world has moved beyond us,” he said. “We are now at the lower end of capital. If we put capital where we said, we get back towards the cautious end, not in the top quartile.”

‘Poor’ Analysis

The RBNZ estimates that the four largest New Zealand banks, which are all Australian-owned, would need to raise an additional NZ$20 billion ($13.5 billion) to meet the proposed requirements. While the central bank says this will have only a minimal effect on borrowing costs and economic growth, analysts at UBS Group AG see a much greater impact.

New Zealand lenders may have to raise home-loan interest rates as much as 125 basis points to maintain their current rates of return, according to UBS analysts in Sydney. Local economists have said the increased capital buffers could slow lending and lead to a lower official cash rate.

“Some of the analysis has been poor,’’ Orr said. Making banks safer will reduce both the cost and overall level of debt they need, while competition will limit the impact of lower profitability on customers, he said.

He pointed out that Standard & Poor’s has a negative outlook on its credit ratings for the four major Australian banks, which hold almost 90 percent of deposits in New Zealand, due to various vulnerabilities.

“All of those things are really important to New Zealand and all point to why more capital and stand-alone capability is necessary,” Orr said.

To contact the reporters on this story: Tracy Withers in Wellington at twithers@bloomberg.net;Matthew Brockett in Wellington at mbrockett1@bloomberg.net

To contact the editors responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net, Peter Vercoe

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