Political pressure pushes the Reserve Bank to review prudential capital requirements

The Reserve Bank (RBNZ) has agreed to review its bank capital requirements after months of political pressure from the Government and following the sudden resignation of its Governor, Adrian Orr.

RBNZ Chairman Neil Quiqley announced the review during a hearing of Parliament’s Finance and Expenditure Committee (FEC) as part of the ongoing banking inquiry.

The central bank has been watching international views on capital standards soften and listening to commentary from the Government and its inquiry that its own rules were “unduly conservative”. 

"It's just one of those issues that's developed a head of steam and we need to respond,” Quigley said.

He indicated the RBNZ might reconsider whether to continue raising capital ratios or pause the increase in July when requirements for systemically important banks increase from 13.5% to 14.5%, as a percentage of risk weighted exposures, on the way to 18% by 2028.

The FEC’s banking inquiry recently conducted a second round of hearings with the chief executives of the four largest banks. The hearings focused heavily on the RBNZ’s prudential capital rules.

Bank executives have become more vocal in criticising the central bank’s risk-averse capital settings since Orr resigned in poorly-explained circumstances earlier this month.

Finance Minister Nicola Willis has been exploring ways to pressure the bank into loosening its rules, and issued a press release welcoming the review just minutes after the announcement.

“Higher capital requirements increase the cost of borrowing. This can reduce economic activity and drive up the cost of living. I want to see settings that preserve financial stability while encouraging investment, job creation and income growth,” she said.

Quiqley confirmed to the committee that he had coordinated the announcement with Willis’ office after the board agreed to the capital review in its Thursday meeting last week.

Orr remained a legal board member at the time of the meeting but did not attend or participate in the decision, as he has been on leave since before his resignation was announced.

However, Quiqley referred to Orr in the past tense, saying he had been involved in discussions about the review “up until he finished at the bank”, before later acknowledging the Governor was technically still on leave as of Monday, March 31.

Interest.co.nz asked why Orr hadn't come back from leave to take part in the decision and announcement. Quiqley responded: “You know the answer to that”.

It is relevant that the Governor is technically ‘on leave,’ as otherwise the RBNZ board would have been required to recommend a temporary replacement to Willis by April 1.

A temporary Governor must be recommended before the end of April. However, a permanent replacement is unlikely to be appointed until the capital review process is completed.

Quiqley declined to comment on whether Hawkesby would be nominated, while Hawkesby himself refused to answer any questions and was rushed out of the building by RBNZ staff.

Open minds 

Prior to this, Hawkesby told the FEC hearing he was “open-minded” about reviewing the cost–benefit analysis of the capital requirement rules. 

“Our observation is that some of the evidence that you've been provided in this committee has analysis backing it. Other things that have come to this committee are more assertions that don't have analysis backing them,” he said.

Quigley hinted at what a capital review might suggest. He said that while Australia’s total capital target is similar to New Zealand’s, it allows a larger portion to be met with lower quality, Tier 2 capital.

But he pushed back on the suggestion from Labour MPs the independence of the RBNZ had been compromised and that Orr’s departure was a factor. 

“My job is to safeguard the integrity and independence of the Reserve Bank as an institution,” he told the committee.  

The bank had consulted on the capital requirements for two years before their introduction and could not change them ‘arbitrarily.’

“We're open to receiving evidence that people want to provide us, but to change the position we've articulated on any regulatory matter, we need to go through a process that demonstrates both intellectual and practical integrity.”