The Reserve Bank should extend the delay on introducing higher capital requirement on banks, ANZ New Zealand chairman Sir John Key has told a conference for finance professionals.
The new bank capital rules, which would have required the four major banks to lift minimum tier 1 capital from 8.5 per cent to 16 per cent over seven years from July 1 this year, were deferred until July 1 next year because of Covid-19.
The four major banks account for about 88 per cent of the banking system and are likely to need to raise around $20 billion between them.
The capital requirement has been a sore point between the Reserve Bank and banks in recent years with banks warning the increase will push up the cost of borrowing and make it harder to access capital.
At an online conference held by INFINZ, four of the top bank bosses were asked about the relationship now with regulators and what effect the Covid-19 response had had on it.
While the bank chiefs were largely complimentary about the Government and regulators’ responses to the pandemic, there was a call to ease up on more regulatory change.
Key said the response from the regulators so far had been necessary and bold.
“There will always be some constructive tension in the relationship because we have the same agenda which is a strong New Zealand, but we come at it from different angles.”
But Key said he would encourage the Reserve Bank to extend the holiday on the capital requirements.
“The biggest sector that is going to be affected is agriculture. But what is going to happen if those requirements start in 2021 then you have got this counter-productive thing happening.
“You have got a lot of pressure on farms, lots of on farm costs coming around sustainability. But the only area where the banks can easily re-price is agriculture because, bluntly, we are all pretty full on agriculture risk. It is difficult.”
Westpac chief executive David McLean backed Key and said now was the time to be using capital over the next few years not building it up.
“For the next few years we have got a lot of regulatory change coming, quite a bit was deferred for a while through Covid, now there is a bit of a cliff of regulatory change looming and we are going to be applying all of our resources to helping customers, so to the extent we can smooth that wave of regulatory change will be quite important.”
The bank chiefs were also asked how well prepared they were for the official cash rate to go negative, a move the Reserve Bank has signalled could happen next year.
McLean said it would meet the deadline of December 1 but he believed it would be counter-productive and have a negative effect on sentiment.
“Other QE [quantitative easing] tools are probably more effective for the Reserve Bank to use.”
BNZ chief executive Angie Mentis said it had just tested a bond that was negative to test its systems.
“I speak to a lot of people offshore in other jurisdictions and I think there are other ways around fiscal policy and QE that can be the tools first. And I do worry about going in there and coming out.”
“And I do think it is going to be counter-productive to what Reserve Bank is going to do.”
Key said it had to be asked what the Reserve Bank was trying to achieve.
“Ultimately what you are really talking about is dropping interest rates, which is what the Reserve Bank has done.”
Key said using negative interest rates had not helped Japan. “None of us are going to be paying people to take a mortgage.”
He said it meant banks would be giving less to deposit holders, many of whom were retirees and needed the money.
“You do get to the point where if you really needed it you would go there. But the general view – like everything in life – it is in the nuclear option but I personally wouldn’t go there.”
ASB chief executive Vittoria Shortt said monetary policy had a new toolset and there were quite a few other tools to use first.
McLean said central banks faced a dilemma that quantitative easing was needed to stimulate economies but it did have the effect of pushing up asset prices.
“Which is increasing distortions in the economy. And we see that in New Zealand where already house prices were at very high levels relative to income compared to rest of world are now getting astronomically out of control. This a problem for central banks.
Key said he was also concerned about the asset bubble and ANZ was being more conservative with its lending because of concerns about it.
“It is a difficult one, on the one hand we know we want people to get on the property ladder, there are lots of reasons why they want to do that. In times of very low interest rates it allows them to own a home as opposed to renting a home and the outcomes are better for them.”
But he said as asset prices went up it was tremendously difficult to save a deposit.
“Actually getting a loan is probably the easy bit and paying the loan is easy but it is amassing the 10 or 20 per cent they need.
“But I do think we have got to be careful we are not we are servicing the sector not feeding a bubble.”
Key said the big risk was if someone’s circumstances changed.
“At the moment I would say this is the weirdest recession I have ever been in – it doesn’t feel like it when you go to some of the places you go to – it is because it will be affecting one portion of the community who maybe have got less part-time work, one has lost a job. So it is trying to get people to understand their circumstances might change.”
Biggest challenge banking industry faces?
Key said the big challenges were partly about the changing demands of customers and how that intersects with unregulated industries.
“One of the things that could be a real worry here is that if you start seeing the non-bank deposit sector really growing … that it starts advertising higher interest rates under the illusion they look like bank when they are really mezzanine finance providers for property developers. Well, hello and welcome to all the problems I dealt with when I was prime minister.”
“There is a reason we wrote a billion dollars off to South Canterbury Finance and all these kinds of people. I do worry it is a space where customers don’t walk through door, they use brokers. It is a great thing, it is flexible. There is this disintermediation of banks but does it come with systemic risks to the system in that we get more and more regulated and they get less and less.”
McLean said another example was the buy now pay later sector.
“The problem is it is not regulated and people who are using it now are finding that what they thought was a deferred payment has just given them debt. Potentially the write-offs in that sector are huge.”
Mentis said some of the other challenges faced by the banks was the need to re-skill its workforce. “We are trying to professionalise our bankers.”
And she also pointed to the change in way staff were working. “We haven’t found the right way yet, even though our staff are overwhelmingly wanting a form of flexibility.”
Shortt said Covid had really shown up a lack of financial resilience in both individuals and businesses.
“Yes this is a one in 100 year event but we know the world is more volatile than ever before.
“Whether natural disaster or pandemic we don’t really have the level of financial resilience in New Zealand. I would love the banking sector to really shift that and lift that.”
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