New Zealand's big four banks were beset from all sides through 2018 with not only Australia's royal commission revealing their parents' sins and omissions but New Zealand's own regulators launching their own inquiries after realising saying "New Zealand is different" was never going to be adequate.
But accounting firm KPMG reckons the most consequential regulatory impost on the banking industry was the Reserve Bank's proposal to effectively double the amount of equity the New Zealand subsidiaries will have to hold.
Head of banking and finance at KPMG, John Kensington, says one impact of the increased capital requirement "could create a real live stress test of the lending market."
Banks in New Zealand are currently required to hold 6 per cent of risk-weighted assets as tier 1 capital, or 8.5 per cent including buffers. For the four major banks, the Reserve Bank is proposing to lift that regulatory minimum to 16 per cent, a much higher requirement than any other country has imposed.
On top of that, the benefit the big four banks currently get from using their own internal models for risk-weighting their capital requirements is going to be severely curtailed.
Currently, KPMG estimates that for every $100 worth of capital banks using standard capital models have to hold, the major banks have to hold only $76 against the same quality of loans.
The Reserve Bank wants to increase that requirement for the big four banks to $90 of capital against the same quality of loans to reduce the major banks' advantage.
"This is expected to raise the risk-weighted assets of the big four banks by $36 billion, requiring even further increases to capital for the big four banks," says KPMG's latest Financial Institutions Performance Survey (FIPS).
"In simple terms, the RBNZ is saying that they want a banking sector that is secure against a one-in-200-year shock," Kensington says in the introduction to FIPS.
"Reading between the lines, it could also be saying if you are dominant in the market and make commensurate returns, then your balance sheet needs to be able to withstand a significant downturn, should it occur," he says.
Undoubtedly, the big four Australian-owned banks, ANZ Bank, Bank of New Zealand, ASB Bank and Westpac, both dominate the New Zealand market – the Reserve Bank estimates they account for about 88 per cent of the domestic banking system – and are currently reaping handsome rewards.
KPMG's survey found the banking sector's annual net profit in the year ended September last year rose 11.2 per cent, or by $580 million, to $5.77b - the big four banks took $482m of that increase.
The Reserve Bank's proposals on capital "is out for consultation and they're saying they're prepared to listen to what the banks have to say," Kensington says.
While the banks are arguing that doubling their capital will result in a halving of their return on capital, the Reserve Bank is arguing that more capital will make the banks so much safer that investors will be happy with lower returns.
The total amount of capital the banks will have to raise "is not insignificant and New Zealand is not a capital-rich country," and so the additional capital will probably have to come from offshore.
Then there will be pressures on the banks to raise returns, so they're likely to shift towards types of lending that need less capital, such as mortgages with low loan-to-valuation ratios.
In other words, the banks are likely to become more risk-averse and that could lead to rationing of capital.
"They're going to have to increase their return or they will get caned by the share market," Kensington says.
Since most KiwiSaver accounts will contain bank shares, that, in turn, will hit most New Zealanders' retirement savings.
That is likely to mean the banks paying lower interest rates on deposits. One estimate KPMG cites is that the cost of borrowing will rise by between 80-125 basis points – a two-year fixed rate mortgage at 3.99 per cent could rise to as much as 5.24 per cent, all other things being equal.
"New Zealand is a very young country that does not have huge pools of private wealth and is very reliant on borrowing to do business," the report says.
"Lowering the quantity of available credit could mean that some people can no longer borrow from the bank, or at best borrow less, at higher rates and may be pushed to a non-bank lender with even higher interest rates if credit rationing occurs."
And there's a question of whether the currently tiny non-bank sector would have the capacity to cope with the likely additional demand.
Rural borrowers are currently indebted to New Zealand banks for $60.4b of which two-thirds is lent to dairy farms.
"We need dairy farms to be lent to and we need dairy to be strong because it's the backbone of the country," Kensington says.
The construction industry is also likely to feel the pinch if lending is rationed, not great when Auckland is so short of houses.
But the "most scary" impact of loan rationing would most likely fall on small-to-medium sized businesses – according to the Ministry of Business, Innovation and Employment, 97 per cent of New Zealand businesses employ less than 20 people and produce 28 per cent of GDP.
Many small businesses have little in the way of assets they can offer as collateral for loans and so the owners have to put their own homes on the line, Kensington says.