“We believe there are other participants in the New Zealand financial system who would be more natural providers of equity capital to a New Zealand BGF,” it said.
“ANZ believes that further analysis is required in order to verify the existence of a market failure in the supply of investment capital to SMEs and, consequently, the need for a BGF.
“However, if this analysis confirms the existence of a market failure, ANZ is open to consideration of the BGF as a way to support capital flow to the SME sector.”
Loans taken out by businesses (of all sizes) account for 18 per cent of ANZ’s loan book.
The Icehouse – an advisory organisation for SMEs – told the RBNZ it believed the market wasn’t providing medium-sized businesses with the growth capital required.
It noted SMEs are often majority-owned by families and/or founder owner-managers, who worry that accepting equity finance could result in them losing control of their businesses.
It argued that giving them access to “patient minority growth capital” would help them expand while retaining majority control.
The Icehouse suggested the Government should also try to get non-banks to invest in the BGF.
“There are a number of NZ-owned financial entities, for example, KiwiSaver providers, [the] NZ Super Fund and ACC, that would align to the impact-oriented, nation-building objective of the NZ BGF,” The Icehouse said.
It noted that broadening the pool of investors in the fund would also lower the risk faced by shareholders.
The issue of risk-sharing was at the heart of the RBNZ’s consultation on how banks’ investments in the BGF should be treated under its capital adequacy rules.
It recognised banks would face less risk investing in the diversified fund, alongside each other and the Government, than they would investing in a single entity. So, they shouldn’t have to hold as much capital for their exposures to the BGF.
Having considered feedback from submitters, the RBNZ on Monday announced that BGF investments would have a 250 per cent risk weighting, which is less than the 400 per cent for investments in single entities under existing rules.
ANZ had warned the RBNZ that its capital rules would determine how attractive the BGF was to banks.
“The long-term viability of the BGF will be dependent on the economic returns for investors and, for banks, these returns are directly related to registered bank capital requirements set by the RBNZ,” ANZ said.
It suggested the RBNZ investigate loosening requirements even more, noting a 100 per cent risk weight is applied to investments in a similar scheme in the United Kingdom.
Similarly, BNZ also wanted the risk weight to be easier, at 100 per cent.
Meanwhile, ASB said, “We note that the 250 per cent risk weight is still much higher than the risk weight that would apply if the corporate SME exposures that are expected to benefit from BGF funding, instead received direct bank debt financing.”
BNZ concluded, “The effectiveness of the fund will depend on the level of participation from the banking sector. A wider group of participating banks will spread the systemic risk of the fund …”
The Ministry of Business, Innovation and Employment suggested the RBNZ should re-assess the risk weightings “if the BGF is successfully established and performs well”.
“This is on the basis that the intrinsic risks to the BGF will evolve as any establishment risks are overcome and fund management demonstrates capability in ongoing portfolio risk management and performance,” the ministry said.
The RBNZ responded, saying it would monitor developments and was open to reconsidering whether the risk weight remained appropriate.
BNZ and Kiwibank also suggested the RBNZ could lower its capital requirements for banks’ investments in other vehicles like the BGF.
“There are other ways that banks could achieve a diversified exposure to SMEs (with the commensurate benefit to the economy), such as investments in venture capital or accelerator funds,” Kiwibank said.
“The RBNZ should extend other such similar vehicles the same reduced risk weight treatment as the BGF.”
