Date locked in for controversial bank capital decision

Reserve Bank Governor Adrian Orr. Photo / File

The Reserve Bank will reveal its final decision on a controversial proposal to make banks hold more capital on Thursday December 5 at 12pm.

The Reserve Bank is proposing a lift in the amount of risk-weighted capital retail banks hold, from 8.5 per cent to 16 per cent.

The increase is designed to make banks safer and better designed to handle periods of financial stress by holding enough capital to reduce the probability of a financial crisis in New Zealand to a one in 200-year event.

But Australian bank bosses have pushed back, calling it overly conservative and warning that it could limit the availability of credit in some sectors of the economy and increase interest costs for borrowers.

Some economists have also warned the proposed hikes go beyond similar moves in Australia and may be detrimental to economic growth.

But last month the Reserve Bank released an independent review of the proposal by three academic economists.

Two of the three academics concluded that the RBNZ had in fact overstated the impact of the capital proposals on bank funding costs.

They argued that bank profits in this country are more than strong enough to handle the higher capital ratios, meaning the pass through of interest rate costs should be lower than the Reserve Bank estimates.

This contrasts sharply with major banks such as Westpac, which have argued the Reserve Bank underestimated the likely cost to borrowers.

In its submission on the proposals, Westpac said it estimated the increase in capital could up the cost to borrowers by adding more than 100 basis points to the interest rate on a home loan - an increase of around $6000 to an average home loan in Auckland.

The Reserve Bank has indicated it will consider all comments and suggestions made by the independent experts and is also considering points raised in the submission process by the banks and others.

It says it will refine its estimates of costs and benefits, consider a range of perspectives on interest rate impacts, assess the impact of incentives on various groups in the financial system and undertake additional analysis of the definition of capital and processes for determining the level of risk-weighted assets.

The RBNZ will hold a press conference shortly after the release, at 1pm.