By Gareth Vaughan
ANZ New Zealand says a key factor in its estimate that the Reserve Bank's proposed increases to bank regulatory capital requirements could shave up to 3% off Gross Domestic Product (GDP) is because there's a transfer of wealth out of New Zealand from bank borrowers to banks' foreign shareholders.
ANZ NZ makes this comment in its submission on the Reserve Bank's capital review proposals. A redacted version of the ANZ NZ submission was published by the Reserve Bank on July 1. Interest.co.nz sought unredacted versions of both ANZ NZ's and BNZ's submissions under the Official Information Act (OIA). The Reserve Bank says under section 105(8) of the Reserve Bank of New Zealand Act prudential information supplied to the Reserve Bank from registered banks is not subject to the OIA. However ANZ NZ has provided a less redacted version of its submission. BNZ has not.
ANZ NZ says it estimates the long run cost of the Reserve Bank's proposals, in present value terms, would be about 20% of GDP versus the Reserve Bank's estimate of 4% to 12% of GDP. ANZ NZ additionally estimates the transitional impacts of the proposals at GDP being 1% to 3% lower over 10 years. The bank points out that in NZ, given four Australian owned banks control about 88% of NZ banking system assets, any fall in bank returns wouldn't be recouped by domestic shareholders.
"Rather there is a transfer of wealth out of the country from borrowers to foreign shareholders, increasing the negative impact on GDP," ANZ's submission says.
This comment is interesting because ANZ NZ, plus ASB, BNZ and Westpac NZ, which are also Australian owned, typically talk up their contribution to the NZ economy and play down the dividends and other returns their Australian parents get from their NZ offshoots. As previously reported by interest.co.nz ANZ NZ, which is a subsidiary of Australia's ANZ Banking Group, paid $14.638 billion in dividends between 2009 and 2018.
ANZ NZ says the extent to which its estimate of a 1% to 3% GDP impact after 10 years could be expected to result in a permanent impact on GDP is subject to a lot of uncertainty. But nonetheless the bank expects a permanent impact from the capital proposals on GDP of 0.4% to 2.0%.
"While 1% of GDP might sound like a small permanent impact, this implies that the level of GDP - the net value of total production in the economy every year - is lower in perpetuity. In present value terms, i.e. taking into account the fact that we care more about today than tomorrow, this is equivalent to a total impact of at least 20% of GDP (assuming a discount rate of 5%). By contrast, the Reserve Bank's estimates of 0.2% to 0.6% would imply a total net present value impact of 4% to 12% of GDP. We believe this is too low," ANZ NZ says.
"Our work estimates a transitional impact on GDP growth of 1% to 3% over 10 years due to higher credit spreads, portfolio rebalancing and potential retrenchment in lending from the Australian parents if return on equity cannot be recouped to an acceptable degree, given the opportunity cost of doing business elsewhere," ANZ NZ says.
Parent the ANZ Banking Group has said capital increases of the magnitude proposed by the Reserve Bank would see it "review and reconsider" the size, nature and operations of its New Zealand business. ANZ NZ says the Reserve Bank's capital proposals would have a material impact on capital allocation and business planning at both ANZ NZ and ANZ Banking Group level. It notes the Group has been through a major capital reallocation process over recent years resulting in the sale of its Asia Retail and Wealth businesses, and largely quitting its emerging corporate portfolio in Asia.
ANZ NZ is comfortably NZ's biggest bank. As of March 31 its total assets stood at $164.952 billion. And in the year to September 2018 ANZ NZ's net profit after tax was $1.986 billion. Of the big four Australian banks ANZ has far and away the biggest exposure to NZ at about a quarter of group earnings compared to about 10% at the other banking groups.
ANZ NZ's submission also argues that to offset banks' higher cost of funds should the Reserve Bank capital proposals go ahead, banks would need to increase the average interest rate margin charged on loans by somewhere in the range of 20 basis points to 120 basis points. Additionally the Official Cash Rate would need to be "persistently lower accordingly."
Announced in December last year the Reserve Bank capital proposals would see NZ banks - led by ANZ NZ, ASB, BNZ and Westpac NZ - required to bolster their capital by about $20 billion over a minimum of five years. (For background and detail on the proposals and bank capital in general, and the nuts and bolts of what's proposed, see our three part series here, here and here. Additionally the Reserve Bank proposes to designate the big four as systemically important banks meaning they'd have capital requirements above and beyond other banks. Also see: RBNZ capital proposals threaten serious disruption to big bank shareholders' halcyon days).
The Reserve Bank wants to increase bank capital requirements so bank shareholders have a "meaningful stake" in their bank providing a greater incentive to ensure it is well managed, and provides stronger protection for depositors. It notes the economic and social costs of bank failures can be very high and persistent, saying its proposals are designed to make bank failures less frequent.
ANZ NZ argues NZ banks' existing capital adequacy requirements and voluntary capital buffers are appropriate. Extra capital is unnecessary, ANZ NZ says, because the current requirements already produce "adequately conservative capital positions" demonstrated by international comparisons, stress testing results and the Reserve Bank's own past analysis.
Final decisions in the Reserve Bank capital review are expected in November.
*This article was first published in our email for paying subscribers early on Monday morning. See here for more details and how to subscribe.
11 Comments
"Rather there is a transfer of wealth out of the country from borrowers to foreign shareholders, increasing the negative impact on GDP," ANZ's submission says.
Is this analysis based upon all lending or that which is restricted to productive investment which is eligible to be counted for GDP calculation purposes?
Because:
The majority of bank credit creation in the UK [and NZ] is not even used for transactions that contribute to and are part of GDP, but instead is used for asset transactions. They are not part of GDP, since national income accountants require a ‘value added’ for inclusion in GDP, not just the shifting of ownership rights from one person to another. When bank credit for asset transactions rises, asset prices are driven up, because the loans do not transfer existing purchasing power, but instead constitute an increase in net purchasing power: money is being created and injected into asset markets. When a larger effective demand for assets is exerted, while in the short-term the amount of available assets is largely fixed, the price of assets must rise. Link-section III.
It's almost like it's written in Latin, much like the bible, to keep the truth from the masses and maintain power and control in the hands of a few.
Would GDP have been higher or lower over past decades if profits hadn't been shifted to Aussie parent companies?
Banks, if operated prudently shouldn't really be failing. It's not like they're offering the latest trend or novelty item. Does there need to be a stronger social responsibility on the banking system?
Opportunity cost: we're not happy with what we have and we want more. I'd like to know where they think they can do business elsewhere?
The RBNZ has been a passenger for too long. Private banking institutions have too much power. They're like a runaway steam train and the driver can only go along for the ride until it runs out of steam. The train will eventually stop but what carnage has it left in its wake? Hmm, relates to the whole economic, financial model too.
So true.
Like the GFC exposed the Rating Agencies, this current imbroglio and mess here is exposing the RBNZ.
Banks have always been able to manipulate regulators and outside analysts, by themselves or in collusion, to their own advantage and profits.
And the media have bought into the Banks' story for long and that still continues, seeing the exposure and space given to what their economists/executives are strutting out to continue the scam.
It is sad that we are waking up this only now, and now it may be too late.
$5 billion profit a year removed by Foriegn Banks, 10 years is $50 Billion profit gone.
Fonterra our largest exporter would take 100 years to earn What Foreign Banks take 10 years.
So the question is with Fonterra used up until year 2119 to cover foreign bank profits until 2029, what companies NZ owned will cover the next 90 years foreign bank profits.
The strangest part to all this is a knighted ex NZ Prime Minister is a Board Chair of a major Foriegn Bank whose profit extraction is doing so much damage to the NZ economy.
Bottom line is foreign banks should by law not be allowed to operate in NZ beyond the ability to do transactions with NZ banks. This is simply in the nations interest for all the reasons stated in the article.
Why ANZ's comments are surprising to someone is in itself, surprising.
The banks by law should never have been allowed to be sold to foreign interests as the money they squeeze from the average Joe does not go to benefit the country anymore in the form of GDP etc etc.
It just goes to show the lack of common sense, good judgement and education by the policy makers...but I honestly cannot say that this comment will surprise anyone...
At least if the exorbitant fees and interest rate spreads gouged by the current banks were NZ owned at least the money would stay in the country for the benefit of the overall economy.
Even if the Gov. had to bail themselves out on occasion ( BNZ was majority owned by the gov. before being sold to Foriegn interests in 1992) it would keep future profits in the country and have a way less negative impact on the economy overall than all the exorbitant profits being slimed off overseas to no advantage to the NZ economy whatsoever. Its like having the Chinese own the majority of our banks...you think there would not be an outcry then...whats the difference???
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