Banks capital change threat to small business, rural sector, say critics

Business groups are worried small business owners and rural borrowers will feel the brunt from bank capital changes. Photo / File

The Reserve Bank's decision to increase the amount of capital banks will have to hold poses a "significant potential threat to the economic stability of small businesses and the rural sector", a business advocacy group says.

After a year-long consultation, the Reserve Bank revealed its final decisions today in a move that will require the major banks to find an extra $20 billion over seven years.

Starting from mid-2020, the banks which dominate the sector will have to increase their total capital to 18 per cent, from a minimum of 10.5 per cent now.

Typically, banks carry a buffer above the minimum of at least an additional 2 percentage points.

Smaller banks, including the likes of Kiwibank, TSB, Cooperative and SBS will need to have total capital of 16 per cent, up from what they hold now but below December's proposal.

Larger banks need to hold more capital than their smaller rivals because if one were to fail it could have a severe impact on the economy.

The RBNZ has estimated the impact from the changes on home loan rates would be a 20 basis-point rise.

But the plans have been hit by criticism from business industry groups.

Leeann Watson, chief executive of the Canterbury Employers' Chamber of Commerce said an extra $20 billion was a significant amount of money the banks would have to find.

"For local businesses on the ground, there is a very real threat that the potential multi-billion-dollar costs will be passed on to customers, not shareholders - and that this would adversely impact businesses that just aren't in a position to absorb that kind of hit.

"The additional costs to borrowers could make lending more expensive and more unobtainable for those businesses already struggling to access capital. The cost of credit for those businesses able to access lending would also likely increase."

Economists and analysts have picked that commercial property, agricultural and high-loan-to-value-ratio home loan customers could be affected the most by the change as that lending is seen as more risky by the banks and means they have to hold more assets to cover it.

David McLeish, senior portfolio manager and head of fixed income at Fisher Funds, said a large portion of the banking industry's lending came from low-loan-to-value residential mortgages.

"This will remain an attractive business for the banks. It is therefore unlikely banks will materially pull back from this type of lending."

But he warned other borrowers were likely to feel more of a pinch.

"High LVR residential borrowers, such as first-home buyers, farmers and small companies are likely to be some of the hardest hit. This is because loans made to these higher risk borrowers require the lender to hold a larger amount of capital against them in case the loan goes bad.

"This could see either higher lending rates or reduced credit made available to these borrowers or both."

The final decision on the capital changes has also frustrated Business New Zealand which has called for more consultation on the changes which come into effect in July 2020.

Chief executive Kirk Hope said New Zealand's major financial institutions were already well capitalised and managed.

"Imposing additional requirements on banks will adversely harm their customer base and the costs of reducing risk will be passed on to businesses, households and rural borrowers."

While Hope said the Reserve Bank had taken on board some of the concerns of the business community, like extending the phase-in period from five to seven years, it wanted more time to consider a cost/benefit analysis which wasn't released until today.

"There has been no chance for interested parties to have input.

"Given the significance of this on consumers, households, businesses, and the rural sector that will ultimately bear the brunt of increased costs and/or restrictions on capital. A further round of consultation is needed," he said.

Public policy think tank, The New Zealand Initiative, also said the changes should be suspended until consultation on the cost/benefit analysis could be held.

Initiative chair Roger Partridge said a cost-benefit analysis was a fundamental requirement of good regulatory decision-making.

"The RBNZ's failure to prepare a full cost-benefit analysis at the outset of the consultation process means its analysis has not had the benefit of testing and challenge during public consultation. This is highly unsatisfactory."

But Reserve Bank governor Adrian Orr has said there will be no more consultation and has also been steadfast in his view that the benefits of the increased capital will far outweigh the costs though stronger banks much more able to stand up to a potential financial disaster.