In December the Reserve Bank of New Zealand (RBNZ) released a discussion paper concerning proposed changes to bank capital requirements.
In essence, the proposal would see banks having to almost double the levels of capital they hold.
The RBNZ's basic premise is they will be more resilient to economic shocks and downturns, which will, in turn, strengthen New Zealand's banking system and economy.
From an ideological standpoint this sounds like a sensible and prudent approach, but I'd argue the commercial reality of implementing a change such as this would result in something entirely different – and potentially ominous.
One of the key lessons to emerge from the Global Financial Crisis was the over-reliance on offshore funding.
In other words, our local banks were relying on offshore capital (monies) to help fund their domestic lending and when the foreign markets effectively closed, our banks were left exposed.
This reliance has been addressed domestically - to some degree - with more emphasis on local funding (term deposits), but of course there's only a finite amount of capital available here in New Zealand.
If the RBNZ's proposed changes were implemented, the sharp lift in capital requirements would create increased costs to raise the additional capital.
This has the potential to not only impact the cost of borrowing money but also the availability of credit, particularly at a time where banks are already starting to tighten up in this area.
In addition, any mortgage re-pricing will therefore be passed on to mortgage holders.
For the average Kiwi that will effectively mean they'll 'carry the can' for new standards that are currently out of kilter with global requirements.
If additional costs are passed on to retail, politically, will anyone question reducing bank profitability?
A lower return on equity for the banks may matter to shareholders but isn't likely to concern anyone else making these decisions.
In fact, this appears to be a relatively easy sell to the general public, with the banks already reeling from the Royal Commission in Australia.
Of more importance to Kiwis is the question of competitiveness for New Zealand owned entities Kiwibank, TSB and SBS. Unlike Australian owned banks, who are able to fund through their parent companies, this isn't a luxury reserved for our locally owned banks.
Kiwibank was launched with the premise they were going to keep our Aussie counterparts honest, which will undoubtedly become more difficult if it isn't on an even playing field.
You could argue that this "parental" assistance is a long-standing competitive advantage, but to my mind the RBNZ's change will further enhance that.
The RBNZ are clearly concerned about housing and are most probably looking across the Tasman with some trepidation, but if you limit the availability of credit, curb migration and force higher mortgage rates, how does that then facilitate financial stability?
The changes being proposed are still in the consultation phase and are subject to change.
However, if the RBNZ take a "hard-line" stance and continue as planned, they have the potential to change the very fabric of the way banks operate in New Zealand, which is something each and every one of us will be impacted by.
- Mark Fowler is Head of Investments at Hobson Wealth Partners.
The views expressed in this article are those of Hobson Wealth Partners Limited, an NZX Firm and do not constitute advice.