7. Banks face heavier capital needs

RBNZ anticipates banks will need deeper capital stocks under standardised reporting. Photo: Lynn Grieveson

The Reserve Bank expects big lenders who have been allowed to use their own models to measure their risk exposure will need to dig a little deeper if it goes ahead with plans to introduce a standardised reporting regime. Paul McBeth reports.

The central bank has spent the past year consulting with the sector in a review of the capital settings lenders operate under and has settled on its preferred outcomes on the risk-weighted asset component. It would make the big four Australian-owned lenders, which have been allowed to use internal models with the Reserve Bank's permission, report using a standardised measure that locally incorporated banks have to meet. That's expected to push lenders currently relying on internal models to adopt more conservative weightings and lead to a higher capital requirement.

Earlier consultations raised some concerns about lenders using their own models to calculate risk and the difference with banks using a standardised approach, and the Reserve Bank today said it favours reporting standardised outcomes alongside the internal models, "to make it easier for external observers to identify unusually high or low model outcomes".

Governor Adrian Orr said the preferred options aim to lift how much capital banks need to hold, make it easier for investors to assess capital adequacy, and limit any unintended competitive advantages.

"We also want to ensure we are being fair to both large and small banks, and avoid creating unintended competitive advantages," he said in a statement. "Importantly, all banks must have ‘enough skin in the game’ to truly focus on enterprise risk management, responsible lending, and the ability to weather all events."

Last year, Westpac Banking Corp's New Zealand unit had to increase its minimum regulatory capital requirements for using a number of internal models that weren't approved by the Reserve Bank, while ASB Bank had to restate its reported ratios after miscalculating breached the conditions of its licence.

The Reserve Bank said it considers internal models lead to a lower capital requirement than the standardised approach, and while that may be appropriate in a more precise measure of risk, it's "difficult to explain the lower internal model risk weights for exposures to banks and local governments, and for residential mortgage exposures". It didn't consider the dual reporting would be onerous for the banks and "would provide considerable transparency".

ANZ Bank New Zealand, the country's biggest lender, ASB and Bank of New Zealand all opposed the introduction of dual reporting, while Westpac said it could help improve transparency.

State-owned Kiwibank said the internal models gave accredited banks "significant capital and competitive advantages over the locally owned standardised banks" that "reinforce the existing high concentration of retail banking amongst the IRB (internal-rating based) banks which generates additional systemic risk for the banking system as a whole," and recommended all banks move to the same reporting standard.

"If the option of dual reporting is retained we caution that will only be effective if all the banks follow the same reporting formats," Kiwibank said in its submission. "At its simplest, that reporting could be achieved via the dashboard as that will provide a simple common format incorporating the headline capital ratios that all stakeholders actually focus on."

Both ANZ and BNZ warned the new regime will probably lead to higher compliance costs, which BNZ warned would raise its cost of capital and ultimately lead to "higher interest rates borne by customers".

The Reserve Bank said its next step is a quantitative impact study of the decisions made so far, while the final phase of the consultation will address setting minimum capital ratios.