NAB CEO warns Basle III push for 100% stable funds could significantly hit borrowing costs, availability

NAB warns push for 100% stable funds could slam borrowing costs, credit availability

 National Australia Bank Chief Executive Cameron Clyne has warned that a push later this year by international banking regulators towards 100% stable funding rules could significantly increase the cost and availability of credit in New Zealand and Australia. 

Speaking on the eve of a G20 summit in Toronto on the weekend, Clyne told Interest.co.nz in a Double Shot interview that regulators were likely to discuss reform proposals in Toronto with a view to confirmation at the G20's Seoul summit in November.

Regulators considering so-called 'Basle III' reforms were looking at the potential for a 100% stable funding rule for banks internationally that would force them to raise all their funding from local depositors and longer term bond issues. This would completely remove the ability of New Zealand and Australian banks to use short term foreign wholesale funds. The Reserve Bank of New Zealand has introduced its own Core Funding Ratio that ensures banks have 65% of their funding from local and long term sources. That ratio is set to rise to 75% within two years.

Clyne said New Zealand and Australia needed some local flexibility given their structural reliance on wholesale short term foreign funds. 

"There's some proposals coming out of Basle III and the financial regulatory forums that suggest that the funding ratio should in an extreme sense be 100%. ie 100% of customer deposits plus term funding," Clyne said.

"We've done some modelling. If we went to that ratio it would have a very profound impact on the cost and availability of credit," he said.

"What we're arguing for is that there should be some local flexibility and that each market is different and that Australia and New Zealand came through the crisis in better shape than just about any other economies in the world and therefore we probably don't need as strict a standard as that," he said.

"I'm optimistic that we're going to get some local flexibility, but we do need to be mindful that there is a push in some markets for these sort of funding ratios to come in. You'd be talking about a significant increase in spreads. Anywhere north of 50 basis points over and above normal funding costs is where you start to get significant. You'd also start to see a potential constriction in credit."

"If you start to get a situation where the marginal dollar of capital becomes very precious then you may find it is deployed much more lightly than it is now."

'Not enough government bonds'

The Basle III regulatory reform push was also looking at new rules for the level of capital held, the quality and liquidity of that capital, the levels of leverage allowed from that capital, and the stability of bank funding.

Australian and New Zealand banks held plenty of capital, but were not able to invest in enough government debt to meet the likely global standards for capital liquidity, so would need some local flexibility to issue mortgage-backed securities of some sort, Clyne said.

"Capital is not a huge concern for the Australian and New Zealand banks. We are very well capitalised by global standards and any regulatory moves will be bringing other banks up to the standard that Australian and New Zealand banks are at," Clyne said.

"The liquidity is more of a concern. Banks do need to hold more liquid assets to buffer them through a funding crisis. The issue for Australia and New Zealand is that the regulators are looking for traditional holding of government securities. We don't have enough government debt in Australia and New Zealand for us to hold so we're going to needs some flexibility to look at other asset classes, maybe residential mortgages," he said.

"We've got a strong prime mortgage market in Australia and New Zealand. It may mean parcelling up those mortgages and making them available for repo to the central bank as being effective liquid assets."

Earlier this month BNZ issued New Zealand's first covered bonds. The Australian Bankers Association is pushing the Australian Prudential Regulatory Authority to allow similar issues of covered bonds in Australia, where they are currently banned because they breach banking laws that prevent other securities having priority over regular customer term deposits.

"We just don't have government debt. Other jurisdictions are issuing a lot of government debt so it's easy for them to ask their banks to hold that debt as liquid assets."

'Stable funding biggest issue'

But it was the stable funding ratio that concerned NAB most.

"The one that is of most concern is what they're calling this net stable funding ratio. Australia and New Zealand banks both rely on offshore capital. We simply don't save enough for the spending that we want."

Asked if these sorts of controls were inevitable to de-leverage developed economies, he said: "I'm not suggesting there's not a case for change. These are not necessarily banking issues. They are economic issues. Australia and New Zealand are structurally reliant on those funding sources, therefore there's got to be some recognition of that structural imbalance and some note that any change has to have some transition with that."

Funding costs double again...for now

Meanwhile, Clyne said bank funding costs on international markets had increased in recent months because of concerns about European Sovereign Debt, but he was reasonably confident this would increase funding costs in the long term, although the longer this went on the higher the risk.

"The funding costs are going back up. There's definitely a concern in Europe. People are reasonably confident that Europe will come through it. There's been some dire predictions of the end of the European Union or the end of the euro and we're certainly not of that view," Clyne said.

"We're optimistic Europe will come through it. Europe is probably looking at an extended period of sub-trend growth as it puts in place budget restraints and fiscal austerity packages and other things," he said.  

"You're seeing spreads going out for three year money from 100 basis points over to close to 200 in some cases. The issue is how long that lasts for. We're rolling funding all the time and you tend to look at what the average cost of the book is. If this is a relatively short term phenomenom and the rescue packages are put in place and the transparency is evident then spreads will come back in and therefore it probably won't have a significant effect on the average cost."

"But if it lasts for a significant period of time as it did in 2008 that does tend to impact on the overall costs of your funding book and that's going to have an impact on cost of credit here in New Zealand."

'GFC impact profound'

Clyne said impact of the Global Financial Crisis had been profound.

"We're in for maybe five years of volatility. What we had pre the GFC was remarkably stability in funding costs. We were seeing fairly small movements and therefore a fairly predictable interest rate outlook absent of monetary policy objectives might have been, and I think we're moving to a period of volatility."

Here is part II of the interview.