The Reserve Bank (RBNZ) is pushing out the start date of its bank capital requirements by a year to encourage banks to lend.
Banks will now be required to start their seven-year transition to meeting more stringent capital requirements on July 1 2021.
“We estimate that this headroom will enable banks to supply up to around $47 billion more lending than would have been the case, had the decisions been implemented as planned,” Reserve Bank Deputy Governor Geoff Bascand said.
He said the RBNZ is identifying other regulatory initiatives that can be deferred, to reduce the burden on financial institutions at this time of uncertainty. These will be announced in coming days.
The RBNZ has also changed the pricing of its standing facilities and ESAS accounts, in part to help cash markets to function at a lower Official Cash Rate (OCR).
Interest.co.nz last week asked both Finance Minister Grant Robertson and Assistant Governor Christian Hawkesby whether consideration was being given to extending the start date of the capital rules, and both said no.
The world is changing fast and we now need your support more than ever. Quality journalism is expensive and in these very troubled times our ad revenues are becoming very uncertain. We provide our coverage free to readers, and if you value that, we ask that you Become a Supporter. To do that, either click on the Red button below, or on the Black button at the top of this page. The level of your support is up to you. Thank you. (If you are already a Supporter, you're a hero.)
Here is a statement from the RBNZ:
New Zealand’s financial system is sound, with strong capital and liquidity buffers, but faces significant uncertainties from the impacts of COVID-19. The Reserve Bank is announcing additional measures to support the provision of credit and market functioning.
Reserve Bank Deputy Governor Geoff Bascand says the situation around COVID-19 is evolving rapidly, and there is much uncertainty.
“To support credit availability, the Bank has decided to delay the start date of increased capital requirements for banks by 12 months - to 1 July 2021. Should conditions warrant it next year, the Reserve Bank will consider whether further delays are necessary.”
“We are taking this action now to help support lending in the economy at time when there is a lot of uncertainty. The Reserve Bank’s expectation is that banks will utilise this flexibility to maintain lending to households and businesses. Banks have significant buffers above current regulatory minimums, and we encourage them to use them,” Bascand said.
“Deferring the capital framework implementation provides banks with significant capital headroom. We estimate that this headroom will enable banks to supply up to around $47 billion more lending than would have been the case, had the decisions been implemented as planned.”
Bascand said the Reserve Bank is currently identifying other regulatory initiatives that can be deferred, to reduce the burden on financial institutions at this time of uncertainty. These will be announced in coming days. The Reserve Bank is working closely with the Council of Financial Regulators and international regulators.
Assistant Governor Christian Hawkesby said the Bank is also ensuring there is sufficient liquidity in the financial system, through regular market operations.
“The Bank has a number of operational tools at its disposal to support liquidity and market functioning in New Zealand. This has helped the domestic cash market and foreign exchange swap market to continue to function effectively over recent weeks,” Hawkesby says.
“Banks currently have robust liquidity and funding positions and can manage short-term disruptions to offshore funding markets. We will continue to monitor developments closely and engage regularly with market participants to ensure we are ready to provide support if needed.”
The Reserve Bank also announced the following changes to the pricing of its standing facilities and ESAS accounts, in part to assist cash market functioning at a lower OCR:
- Cash that ESAS account holders have on deposit at the Reserve Bank that is in excess of their allocated ESAS credit tier will be remunerated at the OCR less 25 basis points (from OCR less 75 basis points).
- Bonds lent through the Bond Lending Facility well be lent at the OCR less 50 basis points (from OCR less 75 basis points).
- A maximum rate will be set for bonds lent through the Repo Facility at the OCR less 50 basis points (from OCR less 75 basis points).
- Cash will continue to be lent via the Overnight Reverse Repo Facility at the OCR plus 25 basis points until further notice.
The Reserve Bank has a number of tools to provide additional liquidity, and support to market functioning, should these be required in the future:
- The ability to provide term funding through a Term Auction Facility (TAF) which can provide collateralised loans out to 12 months. This facility was previously provided from 2008 to 2010.
- The Bank has an established role to provide liquidity in the New Zealand dollar foreign exchange market in periods of illiquidity or dysfunction, and is operationally ready to undertake this role if required.
- The ability to provide liquidity to the NZ government bond market to support market functioning.
Hawkesby says the Reserve Bank continues to monitor developments, and is ready to act to ensure markets and the financial system operate in a stable and efficient manner.
31 Comments
Bank capital is a myth. It is not like some asset locked up in a vault, ready to be sold and converted into cash to be available for help. What will actually help in a bank crisis situation is for the owners/shareholders/governments to infuse additional funds to stem the fall and stabilise gradually.
My favourite quote about Bank balance sheets : 'Nothing is left on the right side and Nothing is right on the left side'
I don't think they really care that much at the moment. Just lend and create more dollars.
BNZ stated they will do $100,000 over the phone.
I'm much too risk adverse and don't know enough about what is coming to have a crack.
Selling the family orchard just out of H'Nth at present. Dont know how that is going to pan out. It would be a good bolt hole bug out property. A wait and see.
Mr Orr, come walk across my swimming pool
I think its already been well documented and proven that just throwing money at this doesn't work. All we are going to do it rack up even more debt so it is inevitably going to end up in an even worse crisis than we have right now at some point in the not so distant future. Why on earth would people want to borrow more money to buy already over inflated houses in a situation like this ? of course if the housing market crashes in line with the stock market then sure there will be ques at the banks for mortgages as long as you still have a job that is. All I see right now is a lose lose situation for the majority of New Zealanders. Anybody making "Big Gains" in the present is doing so at the expense of many others making "Big Losses". Somebody has to keep paying until we catch up with the can that keeps being kicked down the road.
This is next level stupid. I've been saying for a long time the increase in capital requirements will likely come into effect too late to avoid the next crisis (that its supposed to protect us from).
Adrian Orr seems to be aware of the impending risks, but every time there is uncertainty he just panics and tries to create more debt to solve a problem of too much debt.
Absolute numb skulls. They are trapped into some pretty crazy thinking attempting to solve maxed out debts with more debt. But in the end I think the goal is clear:
We can never let property prices drop as it would destroy the banks. Everything else comes a long way behind.
Forgive me, I'm a geologist not an economist, but in these rapidly growing times of global economic uncertainty are lending institutions going to be inundated with applications for new loans from companies wanting to expand business activity simply because the cost of borrowing has gone down? If they are then it would be from either naive or desperate businesses and the fallout, should things really turn to custard, would be even worse for indebted businesses or the private sector. It's one way to find out just how strong our banks' really are. I don't think Orr has got it quite right here but then the RBNZ has very limited ammunition to fight this crisis. It is the government that needs to step up to the plate.
RBNZ defers start date of new bank capital rules by a year, giving banks headroom to lend around $47 billion more than would otherwise have been the case
According to the Reserve Bank, the new capital requirements mean banks will need to contribute $12 of their shareholders' money for every $100 of lending up from $8 now, with depositors and creditors providing the rest.
That means depositors will continue to bear the greater burden of underwriting NZ's banking business with even lower compensatory risk adjusted returns, given the RBNZ cut official interest rates in half twice today.
Banks will always look to maximise return on capital on behalf of shareholders, hence lending priorities will be determined by the asset class that demands the least capital and provides the most liquid collateral - there is a reason why the risk weights for sovereign bonds are zero.
Residential property standard risk weights can be reduced by implementing 'the internal models based approach'. ANZ has reported a figure as low as 27%.
Banks have migrated away from lending to productive business enterprises because the risk weights can be as high as 150%. Thus around 60% of NZ bank lending is dedicated to residential property mortgages held by one third of the most creditworthy households.
So, what to do with money in the bank on 0% interest (or even, if push comes to shove, negative interest rates). Blue-chip shares, in some cases, are still above FVE (fair value estimate) and paying 4 to 5% dividend. The economy would have to come to a complete standstill for these to lose more value.
Also, as an aside:
But Jacinda, these are Gestapo tactics. You MAY deport non-self-isolators ! But Jacinda, these are Gestapo tactics. You MAY deport non-self-isolators ! What about returning NZders who don't self-isolate, where are you going to deport them to? I would suggest that you parachute them onto the Auckland Islands way south of NZ. You're too nice for these draconian measures. This is not the Jacinda that I know.
https://a.msn.com/r/2/BB11e8XX?m=en-nz&referrerID=InAppShare
I disagree with most of the comments.
This is a force majeure event.
Everything including the kitchen sink needs to be thrown at it.
Yes, it will have consequences, but its has parallels to the coronavirus
We either:
a) face a very short deep deep deep depression where almost everyone goes bankrupt (uncontrolled coronavirus epidemic & lots die), or
b) we pump money into the system (central bank buys assets) and have another great recession with an extended time frame (social distancing & fewer casualties)
Yes, down the track we have a problem. Central banks will own a huge pile of assets the market can never afford to buy back. But that's for another day.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.