Today, the Reserve Bank put two options on the table for how it could “materially” loosen the rules.
It warned its proposed changes would only have “minor impacts on economic activity and the attractiveness of the New Zealand market to new entrants”.
However, they would make it easier for small banks to compete with large banks.
As well as proposing to change the total amount of capital it requires banks to hold, the Reserve Bank proposed taking a more granular approach towards the capital it requires smaller banks to hold in relation to the different types of loans they issue (the big four Australian-owned banks are allowed to set their own risk weightings).
Having additional categories for different types of loans should enable risk to be priced more accurately.
This could make it cheaper and easier for farmers or business owners, for example, to get loans.
Governor Christian Hawkesby said capital settings were one of the most important tools the bank had to protect and promote the stability of the financial system.
“However, it’s essential we strike the right balance – protecting depositors and the wider economy, while supporting competition and economic efficiency,” he said.
The Reserve Bank noted the cost of bank capital was just one of a number of factors that influenced the cost and availability of bank loans.
One of its proposed changes could see banks’ funding costs fall by 6.5 basis points and the other by 11.3bps compared to if the current rules were fully implemented by 2028.
This would translate to loans being either 8 or 13.9bps cheaper on average.
Higher risk borrowers would see their borrowing costs fall by more than lower risk borrowers.
The Reserve Bank estimated farmers could pay about 20bps less than under the status quo, meanwhile homeowners could pay about 5bps less.
Overall, it believed the proposed changed would have a minute impact on economic growth.
The trade-off is that the proposed changes would make banks weaker - reduce the buffer they have to recoup losses in a crisis, before depositors are affected.
Why consider a change now, while the rules decided on under Orr’s leadership are still being phased in?
The Reserve Bank said a few factors had changed.
Under the Deposit Takers Act 2021, it has more comprehensive tools to supervise deposit takers and respond in the event of a crisis.
Indeed, as of July this year, a new Depositor Compensation Scheme will insure up to $100,000 of deposits per person, per bank.
The idea is that if people know the first $100,000 of their savings in a bank is safe, they are less likely to withdraw their money during a crisis, causing a bank to collapse.
The Reserve Bank also acknowledged Finance Minister Nicola Willis issued it with a new Financial Policy Remit in 2024, which requires it to put more emphasis on efficiency and competition in the way it regulates financial institutions.
And, it acknowledged the feedback the Commerce Commission and Parliament’s Finance and Expenditure Committee received in response to inquiries they did into banking competition. A number of submitters – including the banks – argued the capital rules were too restrictive.
Willis, who had explored ways of compelling the Reserve Bank to change its bank capital rules, welcomed the proposed changes.
The public has until October 3 to provide feedback to the Reserve Bank. It will make a decision on the capital rules before the end of the year.
Separately, the Reserve Bank announced it had decided to reduce the amount of capital it would require deposit-takers to hold to become licensed from $30 million to $5m.
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.
