RBNZ Capital Plan May Impact Rates Less Than Feared, Expert Says

(Bloomberg) -- An external expert who reviewed the Reserve Bank of New Zealand’s proposals to tighten bank capital requirements concludes that the impact on interest rates may be less than even the central bank estimates.

“The estimates derived by the Reserve Bank of the impact of higher capital requirements on bank funding costs are overstated,” said James Cummings, senior finance lecturer at Macquarie University in Sydney, in his report released by the RBNZ Tuesday in Wellington. “If the proposed higher capital requirements have a smaller impact on bank funding costs than estimated by the Reserve Bank, the share of the cost that banks pass on to their customers in the form of higher interest rates on loans can be expected to be smaller,” he said.

Cummings was one of three experts commissioned by the RBNZ to review its plans to raise bank capital amid criticism from lenders that the increase would force them to push up interest rates, which may curb economic growth. Some of the big Australian-owned banks have warned they may shrink their New Zealand operations if the RBNZ proceeds as planned. The central bank is due to announce its final decisions in early December.

Professor David Miles of Imperial College, London, also concludes that the cost of higher capital may be overstated, the RBNZ said in a summary of his report. The third report by Professor Ross Levine of University of California, Berkeley, doesn’t come to a clear conclusion on interest rates.

The RBNZ is proposing that banks be required to raise high-quality Tier-1 capital to 16% of overall risk-weighted assets, up from about 12% now and almost double the current regulatory minimum, over five years. It has said it is “open minded” about the size of increase and the transition period.

The RBNZ estimated the impact of raising extra capital will have only a minimal effect on borrowing costs, increasing the spread between deposit and lending rates by 20-40 basis points. But other analysis has suggested banks may have to raise home-loan interest rates as much as 125 basis points to maintain their current rates of return.

Cummings says banks should be able to raise extra equity at a lower premium than the RBNZ has estimated. One option is that New Zealand’s four largest lenders list their shares in New Zealand, which will further reduce equity financing costs by use of tax credits, he said.

All three reports conclude that the RBNZ’s analysis was sensible, balanced and not biased toward having more capital than necessary, the RBNZ said in its summary.

The RBNZ is currently preparing a cost-benefit analysis which will be released with the final decision, it said. It is also “considering a range of perspectives about possible interest-rate impacts,” it said.

©2019 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.