RBNZ criticises Basel III leverage plan as too blunt; also concerned about liquidity rules

By Bernard Hickey The Reserve Bank of New Zealand has criticised proposals for new global banking regulations as creating inflexible 'one-size-fits all' rules on leverage and liquidity that may harm or restrict less international banks in countries with small government bond markets. The Reserve Bank's comments on the proposals were published on the website of the Bank of International Settlements (BIS) in Basel, along with responses from other banks, central banks, consultants and industry bodies to BIS' proposals in December to improve the quality of the capital banks hold and reduce the amount of leverage banks employ. The BIS proposed 'hard and fast' rules on capital and leverage that were aimed at the large trans-national banks such as the now nationalised Royal Bank of Scotland and Citibank, both of whom held diluted capital and became highly leveraged before slumping under heavy losses from bad loans. They have become known as the Basel III proposals, given they are the next round after the Basel II rules which are now in place. The Reserve Bank said it was worried the 'hard and fast' leverage ratio proposed by the BIS could act as a straitjacket for smaller, less internationalised banks. "Our key high-level concern is with the leverage ratio," the Reserve Bank said in its published comments. "We believe that the introduction of a minimum leverage ratio will detract from the risk-based measures, and may actually impose an unnecessary constraint on the growth of low-risk banks," the bank said. "At the very least we believe it should be entirely optional, or as a fall-back should only be applied to the very largest banks, if that is where the problem is perceived to be," it said. "A single one-size-fits-all leverage ratio cannot be well targeted or accurately calibrated," it said. "A single minimum leverage ratio by its nature cannot provide a well- targeted backstop to more than a small portion of the institutions to which it is applied. While the discussion about the rationale for a leverage ratio has been directed to its role in reducing the risks of large complex banks, as we understand it the ratio is currently intended to apply to all banks. "Depending on how the ratio is calibrated it could impact on many relatively simple, transparent banks with low risk portfolios that are well capitalised, while providing little or no comfort about higher-risk, poorly-capitalised banks." The Reserve Bank suggested that a minimum leverage ratio only be applied to banks with assets of more than US$200 billion. New Zealand's biggest bank is ANZ National, which had NZ$124 billion of assets at December 31. It said the New Zealand experience with leverage ratios had been poor, referring to the ratios applied through trust deeds on capital adequacy for non-bank deposit takers such as finance companies. "The finance companies, which were the bulk of this sector, generally appeared to be strongly capitalised by this measure," the Reserve Bank said. "The reality was that because of the risk structure of their lending books (in particular property development lending) they were poorly capitalised, and they failed in large numbers and with very heavy losses when the downturn hit," it said. Not enough government bonds The Reserve Bank also said it was concerned about the BIS' proposed definition for liquid assets in its Liquidity Coverage Ratio, given it forced banks to buy government bonds in their own currency. This would be difficult for banks in markets where governments had issued relatively low levels of debt, such as New Zealand and Australia. "In a small economy with its own currency and prudent fiscal policy (such as New Zealand), there will be insufficient government debt and few if any other local currency securities meeting the stringent criteria to be highly liquid," it said. "In practice therefore we believe that eligibility in central bank operations has to remain an important contributor to the liquidity of securities." This was first published this morning in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.