KEY POINTS:
A Reserve Bank plan to curb rising house prices by forcing banks to hold more cash to back their mortgage lending was yesterday panned as inappropriate and probably ineffective by the authors of a leading banking industry survey.
In frustration at its inability to rein in house price
inflation through a series of increases in official interest rates, the Reserve Bank has said it is exploring alternative methods to cool the residential property market.
In March, RBNZ Governor Alan Bollard said he would meet with retail banks, which have been competing aggressively on lending rates, to discuss capital adequacy ratios - potentially requiring them to hold more cash in reserve.
However, Godfrey Boyce of accountancy firm KPMG, which yesterday released its annual survey of the banking industry, said such a move was unlikely to have the desired effect.
"The response the Governor's looking for is in terms of the pricing of loans, but that's not necessarily a given - some banks are already carrying good capital levels."
As such, any increase in capital adequacy ratios would have to be comparatively large before it had any impact.
Boyce also believed the Reserve Bank should not be looking at using a mechanism intended to promote financial stability to fight inflation.
"It's using the wrong tool for the job. I'd be more looking for what's happening with the official cash rate or indeed tax policy as being tools that might have more immediate impact.
"It seems to me you should be focusing on the consumer rather than necessarily the intermediary who's servicing the need."
The Reserve Bank can be expected to give further details about its work around capital adequacy ratios in its next Financial Stability Report which will be published next month.
Meanwhile, KPMG's survey found the industry was "in good shape to meet any market shock or slowdown".
However, it acknowledged Bollard's concerns about the rapid expansion of mortgage credit at low margins and the impact a correction in the housing market might have on the sector, given housing loans make up the majority of the major banks' business.
But KPMG didn't believe the banks had been "guilty of putting all their eggs in the housing market", according to Boyce.
Housing loans currently comprised about 54 per cent of all lending by banks, a figure that had remained steady for some time.
Nevertheless, the Reserve Bank's concerns about a decline in margins or the amount banks earn on loans was borne out by the survey.
Boyce said margins across the sector had contracted by 17 basis points to 2.35 per cent.
But that lower per-dollar profitability had been offset by rapid growth in lending which rose 15 per cent to $275 billion,.
That saw banks' overall profits rise 7 per cent to top $3 billion for the first time last year, with 90 per cent of that earned by the big four - ANZ/National, Westpac, ASB Bank and Bank of New Zealand.
"The banks have become accustomed to loan growth more than offsetting the concessions they've made on interest rate margins as they've fought the mortgage war," said Boyce.
However: "In spite of a steady rise in underlying profitability over the past 10 years, they can't assume it's going to continue indefinitely," Boyce cautioned.
Balancing act
* Reserve Bank plans to increase banks' capital adequacy ratios will not affect the housing market, says KPMG.
* The Reserve Bank should stick with its existing tool - the official cash rate - the accounting firm says.
* Despite rapid growth in mortgage lending at lower margins, the banking sector remains well placed to weather any slowdown in the property market, KPMG has found.
