New banking rules drawn up in the Swiss city of Basel are likely to mean lower profits for NZ banks, says Moody's. Pictured: Basel. Photo / Thinkstock
New banking rules drawn up in the Swiss city of Basel are likely to mean lower profits for NZ banks, says Moody's. Pictured: Basel. Photo / Thinkstock
New proposals for global banking regulatory reform are likely to lead to structural changes to the New Zealand banking system and lower profits for banks, according to Moody's Investors Service.
In a report on the New Zealand banking system, the international credit rating agency says the challenges for New Zealandbanks under the so-called "Basel III proposals" are related to a requirement for increased "stable funding" and liquid asset holdings. These proposals, Moody's says, directly address the issue of New Zealand banks' heavy reliance on offshore wholesale funding.
"The issue clearly affecting New Zealand banks under the proposed Basel liquidity ratios is the pool of available "liquid assets" under the Basel definition," Moody's said.
"New Zealand banks may not be able to meet the liquidity ratios because of an insufficient supply of eligible assets under the current definition."
This is largely driven by a limited supply of New Zealand government debt and the country's small domestic capital markets.
"While the proposed changes would negatively affect profits, our initial analysis - from a ratings perspective - suggests the possibility that (absent other profit pressures, such as an increase in competition), the margin loss would be offset by the improvement in bank funding/liquidity," Moody's added.
Overall Moody's said the impact of the Basel Committee's capital proposals should be far less significant than elsewhere in the world because local banks are already well capitalised.
"The Reserve Bank of New Zealand requires them to hold additional capital under capital adequacy calculations that are more conservative than those of Australia's Australian Prudential Regulation Authority (APRA) and the UK's Financial Services Authority (FSA)."
Moody's says New Zealand's major banks remain vulnerable to funding disruptions, given wholesale funding accounts for around 40 per cent of their total funding.
