Big banks are likely to have capital rules loosened as a result of the inquiry into the lack of banking competition

Parliament's banking inquiry was meant to give the Finance and Expenditure Committee (FEC) a chance to grill big bank CEOs on anti-competitive behavior and excessive profits.

But after some early sabre-rattling, the committee now seems increasingly likely to recommend the Government should grant the banks’ biggest wish—relaxing the Reserve Bank’s regulatory capital rules.

The big four banks strongly lobbied against these capital requirements in 2019, arguing they would raise business costs and limit lending capacity. 

But the Reserve Bank (RBNZ) refused to back down, although it extended the implementation timeline and added some flexibility to the proposed rules. Then-Governor Adrian Orr defended the policy with such ferocity that some big bank executives felt muzzled.

When asked about capital rules in the first round of the inquiry hearings, almost all the bank chief executives and chairpeople told the committee it was up to the RBNZ to make those decisions.

In the second set of hearings, held on Monday after Orr’s resignation last week, the bank leaders were more willing to discuss their views on regulatory capital settings.

ASB chairwoman Therese Walsh said the bank stood by its 2019 submissions, which supported the central bank's decision to increase capital settings, but argued the proposed increase was too large.

“We do believe the capital requirements needed to be enhanced, which they have been … where we sit today is probably about right,” she said. 

“So, no further increases, because I'm sure the committee is aware that there's further increases to come”.

Banks are expected to phase the increased requirements in by 2028.

The total capital ratio for ASB was currently about 16%, as a percentage of risk weighted exposures, but would rise to 18%, which ASB says could cause mortgage rates to increase between zero and 100 basis points.

Walsh said the current settings were roughly the “sweet spot” balancing financial stability and economic growth priorities. 

Vultures circling

The FEC members appear sympathetic to looser capital rules. Dan Bidois quoted a submission from Simon Jensen and Andrew Body who said the new capital adequacy ratios were “making banks risk averse and stalling New Zealand's growth”.

Finance Minister Nicola Willis has asked for advice on whether she can (or should) force the central bank to relax its capital rules, in the hope it would encourage more lending to the business sector.

This would be a boon for the banks and a nightmare for bank capital expert Martien Lubberink, an associate professor at Victoria University.

“The current vacuum of credible leadership [at RBNZ] creates opportunities for poor regulation. Like vultures circling a carcass, the big banks and their allies are seizing the moment to push for lower capital requirements,” he wrote in a recent blog post. 

He accused Jensen and Body—an investment banker and law consultant, respectively—of using cherry-picked evidence to support their argument, contradicting global regulators and researchers.

If Willis did override the RBNZ’s regulatory settings, she would risk being held accountable for any future financial instability or bank failures. Plus, it would look to the public like she was helping, not challenging, the big banks. 

“Instead of boosting competition or strengthening the economy, the primary beneficiaries of such a move would be the largest Australian-owned banks—the very institutions that political rhetoric often targets,” he wrote. 

Wider review 

Instead, the Minister of Finance should ask whoever replaces Orr to review all stability regulations imposed since the Global Financial Crisis, including the capital requirements. 

ASB’s chief executive Vittoria Shortt said there had been a focus on the capital rules but New Zealand banks were heavily regulated on many different levels, for no clear reason.

“I personally would like to see a lot more, what I describe as, international harmonisation of regulation for New Zealand, full stop,” she told the committee.

It is possible the big banks will be well-rewarded for sitting through a 90 minute committee hearing, despite the occasional awkward question about CEO salaries and institutional "wokeness."

Willis told Interest.co.nz she wasn’t interested in whether policy changes were good or bad for the banks, only if they would help New Zealanders get a better deal. 

“We're wanting solutions from all corners. It's been well articulated that the capital adequacy ratios posed a risk both to interest rates going higher and potentially constricting lending to productive businesses,” she said. 

“It could be that there are recommendations coming from the committee about reducing the overall capital adequacy ratios, as well as looking at the individual risk weightings for certain classes and investment”.