Westpac argues the Reserve Bank should consider following other countries in relaxing banks' capital requirements to improve access to lending

Westpac New Zealand wants the Reserve Bank (RBNZ) to review the capital adequacy rules it set in 2019 and consider whether they are still suitable for the post-pandemic economy.

Chief executive Catherine McGrath and board chairwoman Pip Greenwood appeared before Parliament’s Finance and Expenditure committee on Wednesday as part of the ongoing banking inquiry.

McGrath said the RBNZ’s increased capital requirements would add about $20,000 each year to the cost of the average farm loan, at about $4.4 million, once fully implemented. 

She acknowledged it was difficult to strike the right balance between financial stability and the impact on consumers, but thought a review of the settings should happen. 

“In any business I’ve been involved in, you tend to stand back and do a review to ask, is the path we set six years ago still the appropriate way forward?” she said. 

“We’ve had Covid since those decisions were made and it’s also been interesting to see what other countries have done. So, we think it's an entirely appropriate time to do a review”.

The RBNZ had added “three levels of conservatism” to its banking rules, she said. 

New Zealand’s method for calculating risk results in higher capital requirements. The Basel scalar multiplier means banks must hold 1.2 times the capital they’d think needed. And then, banks must hold 13.5% of top-quality capital (common equity Tier 1 capital), much higher than the Basel minimum of 4.5% and Australia’s 10.5%.

This was more cautious than most other countries in the world, some of which have started to ease their requirements anyway, she said. 

“And so, we think it's a very appropriate time to do a review and ask, are these fit for purpose for Aotearoa, moving forward?”

Regulators in the United Kingdom watered down proposed increases to capital requirements late last year and delayed implementation. Doing so would support growth and competitiveness, it said. 

The decision came shortly after the US Federal Reserve halved its own planned increase after intense pushback from big American banks, including JPMorgan Chase which argued the rules would reduce access to lending.

The RBNZ was scheduled to speak to the committee Wednesday, but had to be rescheduled due to Parliament sitting under urgency — which allows lawmakers to hold extended debates and rush legislation through the House. 

Climate adaptation 

Westpac’s McGrath also said she was looking to expand an energy-efficiency lending product to include climate mitigation, and also partner with an insurer to provide mortgages and property insurance.

The bank currently offers a Greater Choices home loan which gives customers $50,000 interest free to spend on making the house more energy efficient. This can include installing a heat pump, insulation, solar power, or even buying an electric car and charger. 

McGrath said customers in South Dunedin, where there is a huge risk of flooding, had told the bank it wanted to use that money to make the outside of their property more resilient. 

She said after Cyclone Gabrielle she had been reflecting on how insurers cover damage to the home and its contents, but didn’t help finance any prevention measures. Westpac NZ was looking at whether it could broaden the criteria of the Greater Choices home loan or support customers in other ways. 

It has also put out a tender for an insurer to join a strategic partnership to provide customers with better insurance options, using more personalized data, and hopefully offer better financial security.