RBNZ joins Aussies in welcoming Basel III moves towards flexibility, national discretion

The Reserve Bank is welcoming this week’s announcements from the Basel Committee on Banking Supervision saying the direction of them is broadly consistent with New Zealand and Australia’s recommendations for more flexibility and national discretion in global banking standards in the face of concerns tough new liquidity rules could both push up lending rates and restrict lending.

The committee, working through the Bank for International Settlements the central banks’ bank, is overseeing global negotiations on financial reform in the wake of the Global Financial Crisis (GFC). It's draft recommendations released last December would require banks to increase capital buffers and hold more liquid assets to meet withdrawals during any short-term crisis. The aim is to finalise a deal before a G20 meeting in Seoul this November.

Spokeswoman Anthea Black told interest.co.nz  that although the Reserve Bank isn't a member of the Basel Committee, it's being kept in the loop on developments. This is from a number of contacts such as the Australian Prudential Regulation Authority, the Executives' Meeting of East Asia-Pacific Central Banks, or EMEAP, which is a cooperative organisation of central banks and monetary authorities, and  the Basel consultative group of smaller countries which the Reserve Bank is a member of.

"We have not seen surprises in the recent release," Black said.

"The direction of recent announcements by the Basel Committee are generally consistent with our (and Australia’s) recommendations for more flexibility and national discretion in the standards."

The Reserve Bank says it's considering all aspects of the global regulatory discussion and will look to change standards where doing so is appropriate for the New Zealand financial system.

At a meeting in Basel on Monday the committee agreed to consider an exemption designed for countries with low levels of government debt. It has been hailed across the Tasman as a victory for Australia. Atended by Reserve Bank of Australia governor Glenn Stevens, the meeting reviewed the Basel committee’s capital and liquidity reform package.

Morgan Stanley analyst Richard Wiles said the key developments for Australian banks, which own New Zealand's big four ASB, ANZ, BNZ and Westpac, include less onerous requirements for the net stable funding ratio. This includes greater recognition of retail and small and medium sized business deposits, and lower stable funding requirements for home loans.

Plans for stable funding rules, that could have forced banks to switch billions of dollars worth of short-term funding into more expensive long term funding, have been shelved until 2018.

The committee also announced a compromise on the definition of liquid assets that should allow banks in countries with smaller government bond markets - like Australia - to include AA- or above rated bonds from banks or "high quality" non-finance companies. Standards for this will be developed at the committee's September meeting.

The committee is also proposing a minimum Tier 1 leverage ratio of 3% meaning banks will be required to keep capital above 3% of total assets regardless of risk weighting. The leverage ratio is designed as a back up to existing capital adequacy rules that were abused ahead of the Global Financial Crisis (GFC) when some banks passed off subprime mortgages and other complex debt instruments as low risk enabling them to keep capital levels at 4% of risk-weighted assets.

Wiles said although the initial changes were positive for Australian banks, his initial view was that the current trend towards higher quality and longer duration bank funding wouldn't be abandoned.

Monday's meeting considered comments received in public consultation since December.

The Reserve Bank was among those to lodge a submission, notably arguing against a single, one size fits all leverage ratio and saying that complying with new liquidity rules would be difficult for for small countries like New Zealand that lack deep debt markets.

It pointed out the New Zealand experience with leverage ratios had been poor, especially in relation to finance companies.

"They were applied (through trust deed provisions) to the non-bank deposit taking sector as a capital adequacy requirement. The finance companies, which were the bulk of this sector, generally appeared to be strongly capitalised by this measure. 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."

The Reserve Bank introduced a Core Funding Ratio (CFR) on April 1, which requires banks to raise 65% of their funding from the retail market and wholesale sources of more than one year's duration. The CFR seeks to address a vulnerability of New Zealand banks to offshore, short-term wholesale funding highlighted during the GFC.

National Australia Bank Chief Executive Cameron Clyne warned in a Double Shot interview on Interest.co.nz last month 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.

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