TSB is suggesting the explicit assumption in the Reserve Bank's regulatory capital settings that New Zealand is not prepared to tolerate a system-wide banking crisis more than once every 200 years be scaled, or tiered, down for smaller banks.
TSB's CEO Kerry Boielle made this suggestion in an appearance in front of Parliament's banking inquiry on Wednesday, being undertaken by MPs from the Finance and Expenditure and Primary Production committees.
"One of the areas the Committee has dug into previously is the one-in-200-year stress test. So that could be amended exactly as we've suggested around holding a higher level of capital for those banks that pose a greater systemic risk to New Zealand, and scale that down or tier that down for the smaller banks. There is definitely opportunity to differentiate there," Boielle said.
During its bank regulatory capital review in 2018-19 the Reserve Bank, in setting new capital requirements, made what Governor Adrian Orr described as an "explicit assumption" NZ isn't prepared to tolerate a system-wide banking crisis more than once every 200 years. The decision included consideration of the social impacts of banking crises.
Following the capital review, banks are phasing in new capital requirements by 2028. In a joint written submission TSB, The Co-operative Bank, Heartland Bank, Kiwibank and SBS Bank detailed long standing views the playing field is uneven for them versus the big four banks, being ANZ, ASB, BNZ and Westpac. In particular they argue the factors below help maintain what the Commerce Commission described in its probe of competition for personal banking services as a "two-tier oligopoly."
• The capital advantages of the four Australian-owned banks (classified by the Reserve Bank of New Zealand (RBNZ) as Domestic Systemically Important Banks (D-SIB)).
• The disproportionate costs of banking regulation imposed on non-D-SIB banks, which materially constrains their ability to compete through investment and innovation.
• The ability for the D-SIBs to access more funding options which generally leads to a lower cost of funding, further entrenching the ability of D-SIBs to compete in an enhanced manner relative to smaller banks.
The Reserve Bank, however, has strongly argued for the retention of the ability for the big four banks to use the internal ratings-based (IRB) capital framework whereby they set their own models for measuring credit risk exposure which they must get approved by the Reserve Bank. In contrast the standardised approach used by other banks, including TSB, is set by the Reserve Bank.
The capital changes banks are phasing in will require the big four banks to have total capital equivalent to 18% of their risk weighted assets (RWA), used to determine the minimum amount of capital that must be held by banks to reduce the risk of insolvency. Other banks, including TSB, are required to have total capital equivalent to 16% of their RWA. Both are increases from 10.5%.
Boielle said the big four banks using the IRB capital framework means if TSB has the same interest rate on a loan as one of the big four banks; "they [the big bank] are earning considerably more on that. Why? It's those capital settings ...the cost of holding capital, it's a competitive advantage for banking and we're disadvantaged by the current set of rules."
A customer shifting to TSB from one of the big four banks with the same house, the same borrower, the same loan is; "suddenly designated riskier," requiring TSB "to hold a higher capital charge," she said.
"That doesn't make sense."
RoE 'struggles'
Meanwhile, TSB Chairman Mark Darrow told MPs TSB "struggles" to get a return on equity of 5% or 6%.
"With different settings and the same pool of customers they [the big four] are getting two or three times that. So all I can say is at the moment we don't have a level playing field. As a consequence you see the returns you get," Darrow said.
National Party Waitaki MP Miles Anderson asked Darrow if TSB's regulatory settings were aligned with the big four banks it'd be satisfied with a 6% return on equity, or would it be looking to get a similar return to those of the big four?
Darrow said 5% or 6% is sub-optimal.
"We need to be profitable. We need to satisfy our regulators that we are profitable enough, that we are self sustained, and we need to be a bit north of that [5% to 6%]."
Anderson asked if north meant 7% or 8%.
'[Our] cost of capital is around 9%. Equilibrium point," Darrow said.
Boielle told MPs even in 2028, when the Reserve Bank's capital changes have been fully phased in, the big four banks will "still have around about a 1.2% higher return on equity advantage" over other banks such as TSB.
"That 1.2% return on equity that the Australian-owned banks are able to enjoy because of the current capital settings, changing that would unlock around about $10 million for us which would be enabled to be invested either into product innovation or customers, better pricing, more service etc," she said.
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