In May, RBNZ governor Adrian Orr even wrote a fiery letter to the editor of the Herald to take aim at an opinion piece critical of the rules, written by the head of the partially bank-funded think tank, the New Zealand Initiative.
Banks argue the capital requirements are too heavy-handed, and therefore costly.
Businesses complain they encourage banks to issue disproportionately more housing loans than business or agricultural loans, because they have to hold more capital in relation to the latter.
However, the RBNZ is adamant the rules are needed to keep banks strong and stable.
Indeed, banks are coming through this recessionary period well and continue to report high profits and arrears well below those following the 2008 Global Financial Crisis.
Willis said she would wait to see what the Commerce Commission said in its final market study report.
The commission, in its draft report released in March, suggested the capital rules stymied competition between smaller and larger banks.
Willis said she was open to changing the remit or even the legislation the RBNZ operates under if she was convinced it needed to change its position and had to be strong-armed into doing so.
“I don’t want to get ahead of myself or rush to a conclusion,” she cautioned.
“There’s a lot of water to go under the bridge... But I think it would be the wrong thing to do to close the door and say, we would under no circumstances consider changing these frameworks.”
Willis stressed she understood the importance of financial stability so a very strong case would need to be made for her to intervene.
Specifically, she was interested in whether the capital rules could be changed to make it easier for financial technology firms that offer a limited range of products or services to better compete with banks.
The RBNZ agrees open banking – banks sharing customers’ data with tech companies that can provide banking services – would improve competition.
It said this in a statement responding to the Commerce Commission’s draft report.
The aim of the statement was for the RBNZ to say it wouldn’t entertain the idea of reviewing its capital rules.
“The current bank capital framework is the result of a careful and extensive review process that occurred recently and is still being phased in,” the RBNZ said.
The rules will be fully implemented in 2028 – more than 10 years after the RBNZ started consulting on updating them.
Willis pokes her nose in on another RBNZ issue
On a separate but related matter, Willis said she had asked officials for advice on the way the RBNZ manages banks’ settlement accounts.
Banks have accounts at the RBNZ that are used to settle transactions.
The value of these accounts shot up eight-fold on the back of the RBNZ’s Covid-era money printing programmes to a peak of $56 billion, before dropping back to $38b in June.
The issue is that the RBNZ pays banks interest at the Official Cash Rate (OCR) on these sums, and the OCR has been relatively high at 5.5% for more than a year now.
Former Finance Minister Grant Robertson sought advice from the Treasury and RBNZ on whether the system could be changed to save the Crown money. Remunerating banks less than the OCR could be seen as a de facto bank tax.
Robertson dropped the idea on the RBNZ’s advice. It feared tinkering with the system could impede the effectiveness of its monetary policy.
Willis, however, wanted to better understand the issue, including how other central banks were tackling it.
“It’s another question which potentially relates to bank profitability and is something worth looking at,” she said.
“The RBNZ would view it as something that is within their domain to decide. But ultimately, as legislators, we can contemplate whether or not we will want to make any legislative change on that.”
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
