Some New Zealand banks might have to beef up their capital holdings to meet the Reserve Bank's Basel III proposals

By Gareth Vaughan

Some of New Zealand's key trading banks may have some work to do to meet what at least one bank chief executive views as an "aggressive" timeframe planned by their regulator the Reserve Bank for the adoption of its New Zealandised version of the Basel III global banking capital requirements.

Based on their most recent disclosures, only Rabobank had a key ratio under one of the proposed new limits, although both Kiwibank's key capital ratios are sailing close. However, the Reserve Bank may decide to impose a so-called "countercyclical" buffer of up to 2.5% on top of what it proposed in a consultation paper released yesterday on its plans for the introduction of Basel III.

The central bank's proposals will leave the banks existing total capital ratio minimum at 8% but lift their tier one minimum requirement to 6% from 4%. However, a new 2.5% "conservation buffer" is also proposed to ensure banks maintain a buffer of capital over the minimum ratio requirements that can be used to absorb losses in times of financial and economic stress. This will take the tier one capital ratio to 8.5% and total capital ratio to 10.5%.

International overseer, the Basel Committee on Banking Supervision, wants the Basel III requirements phased in from 2013 to 2019 but the Reserve Bank wants them up and running from January 1, 2013.

A Reserve Bank spokeswoman told interest.co.nz the Basel Committee also contemplates a countercyclical buffer of up to 2.5%. If that was fully adopted in New Zealand it would further increase the tier one capital ratio requirement to 11% and the total capital ratio requirement to 13%.

"However, the Reserve Bank has yet to reach a final position on the countercyclical buffer and has not put proposals forward on this in its latest consultation paper," the spokeswoman said.

'Aggressive timeframe'

TSB Bank managing director Kevin Murphy told interest.co.nz the Reserve Bank's timeframes for the adoption of Basel III were "aggressive" but won't pose a problem for TSB.

"With a current total Capital Adequacy Ratio of around 16.00% we are already well in excess of both the current minimum total capital of 8.00% and the new ratio of 10.50% allowing for the conservation buffer," Murphy said. "What makes our position even stronger is that the capital we have is all tier one capital and is 'clean capital' , ie share capital and retained earnings."

As of June 30 TSB's tier one capital ratio was 15.64% and its total capital ratio was 16.16%.

Across the other banks the most recently disclosed capital ratios show almost all the banks' sitting above what the new minimum requirements - 8.5% for tier one capital and 10.5% for total capital excluding any countercyclical buffer - will be. Only Rabobank  with a 7.65% tier one ratio as of June 30 registered a ratio below the new minimum settings, although its total capital ratio was above the new minimum at 11.32%.

BNZ's tier one ratio at 8.99% as of September 30 wasn't far above the new minimum but it had a little more comfort with its 11.84% total capital ratio. State owned Kiwibank's tier one ratio was 9% at June 30 and its total ratio was 11%. Both Rabobank, a rural specialist, and Kiwibank have been among the most aggressive lenders in a credit market featuring anemic lending growth at best over the past year or so.

Elsewhere the latest key ratio figures show a little more comfort. ANZ NZ's tier one ratio was 9.96% and total capital ratio 12.66% as of September 30, ASB's tier one was 11.2% and total 12.8% at June 30, SBS Bank's tier one was 11.51% and total 13.89% at June 30, and The Co-operative Bank - formerly PSIS -  had a 17.4% tier one and 18.1% total capital ratio as of June 30.

In its annual results last week Westpac disclosed a tier one capital ratio of 10.5% but no total capital ratio and says it won't until its September quarter general disclosure statement is released next month. However, as of June 30 Westpac's total capital ratio was 12.8%.

Although the current Reserve Bank mandated tier one capital ratio is 4%, for ANZ, BNZ, Westpac and Kiwibank, who have a combined NZ$9 billion of debt guaranteed by the Crown wholesale funding guarantee, it's 6%.

How it breaks down

The Reserve Bank defines capital as a measure of how much a bank's assets exceed the amount of money it owes depositors and other ordinary creditors. It is divided into two categories, called "tier one capital" and "tier two capital". Total capital is the sum of both.

Tier one capital represents the shareholders' funds in the bank - their share of the bank's assets after all of the bank's debts have been repaid to creditors.

Tier two capital generally has a lower capacity to absorb losses than tier one capital. One of the more important forms of tier two capital is "subordinated debt" such as money the bank owes to creditors, but that in a winding up can only be repaid after the bank has repaid the money it owes to depositors and other ordinary creditors.

Capital is expressed as a percentage of a banking group's total “risk weighted exposures”. Risk weighted exposures are a measure of the banking group’s exposure to credit risk, market risk and operational risk. Capital as a percentage of risk weighted exposures is known as the capital ratio. Use of the capital ratio enables a banking group's capital position to be compared with those of other banks.  See more on the Reserve Bank's website.

'Pragmatic approach'

Tim Loan, SBS Bank's general manager for finance, said his preliminary view was the Basel III consultation paper didn't appear to reveal any surprises, although SBS staff would be looking in more detail over coming weeks. Loan said it appeared the Reserve Bank was taking a pragmatic approach to its capital definitions with the criteria for inclusion as both tier one and tier two capital tightened.

"We will need to work through the proposals in more detail, in particular the impacts on our tier two capital, but even if our tier two capital no longer qualified we would have sufficient headroom over and above the proposed minimum ratio plus conservation buffer," Loan said.

Meanwhile, Westpac New Zealand CEO George Frazis told interest.co.nz last week New Zealand banks were "pretty much there already" in terms of meeting what was likely to come out of Basel III.  Frazis said Westpac's capital ratios and liquidity were "really strong" and noted the bank was well positioned for the step up in the core funding ratio to 75% from 70% next July given that its current core funding ratio is 80%.  The core funding ratio is the proportion of funding that banks must source from retail deposits and wholesale sources with durations of at least a year.

ANZ boss not happy

Mike Smith, CEO of Australia's ANZ Banking Group which owns both ANZ New Zealand's ANZ and National banks, has been an outspoken critic of Basel III.  Smith recently raised the prospect of banks from countries with "strong banking systems" such as India, China, Australia, and Canada joining forces to fight against Basel III, saying the international banking reform process had been "hijacked" by ill-conceived policies seeking global conformity when what was relevant for countries like France, the USA and UK wasn't necessarily relevant elsewhere.

An ANZ NZ spokesman said the bank would be considering the Reserve Bank's consultation paper closely but it was too early to comment at this stage.  

Meanwhile Nigel Annett, ASB's Treasurer, said it was too soon to comment in detail on the Reserve Bank proposals, but ASB considered itself well placed to meet the requirements.

The Reserve Bank says its initial cost-benefit analysis of the Basel III capital ratios suggests tightening existing requirements is "easily" justified.

"Our analysis took into account the key benefit of of higher capital requirements - a reduction in the expected cost of a banking crisis including fiscal cost, and the potential costs of higher capital requirements including the impact on bank lending rates."

The Reserve Bank has called for submissions on its proposals by January 27.

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