A major battle over the safety of New Zealand's banking system faded into dust on Monday, with the Reserve Bank parking its bank capital reforms, possibly for years.
Monday's emergency interest rate cut attracted the early headlines but bank economists said the more significant move was news that the Reserve Bank was postponing new capital adequacy rules for at least a year.
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The Reserve Bank spent much of 2018 and 2019 pushing back against a sustained lobbying effort from the banking sector, arguing that across the sector, banks should hold at least an additional $20 billion on their balance sheets, in order to withstand a significant economic downturn.
On Monday, governor Adrian Orr and his deputy suggested New Zealand's banks could grow lending for the next few years without stretching capital levels.
Capital levels across the sector were "quite close to where they want them to be as a regulatory minimum," Orr told reporters, and near the levels the banks wanted them to reach.
"They do have a lot of bandwidth, they do have a capital buffer. We're saying, use it, if needed."
Orr has previously argued that bank capital levels needed to be higher, because the risks of failure inevitably fell onto the public. On Monday he denied his latest comments reflected a different message.
"No. It's absolutely consistent with everything we've been saying."
The move was met with relief by the banking sector.
BNZ head of research, Stephen Toplis, said the move to slash the OCR will not make "any difference to economic outcomes whatsoever" and "in their heart of hearts, we don't think the Reserve Bank thinks so either".
But Toplis said the delay of the capital changes had "the potential to have a meaningful impact" on the economy.
"With a recession under way, there is likely to be a significant demand for working capital from the business sector," Toplis said.
"These requirements were running headlong into the banking sector's need to meet the Reserve Bank's new capital requirements."
The Reserve Bank estimated that relaxing the capital rules would mean the New Zealand banking sector had scope to lend another $47 billion compared to what they would have otherwise been able to, if the rules were still in place.
Deputy governor Geoff Bascand, the central bank's head of financial stability, said current bank capital levels were 3-4 percentage points above regulatory minimums.
Beneath that there was a "conservation buffer", in which banks might face restrictions on dividend payments "and so forth," Bascand said.
"There's substantial room there that they've got above requirements to be able to continue to lend.
"In addition to the deferral of capital proposals, there's probably another couple of years, at least, of credit growth that could be sustained, before they hit minimum."
Roger Beaumont, chief executive of the New Zealand Bankers' Association, welcomed the move.
"I think it was a really well considered and pragmatic decision by the Reserve Bank which will mean that banks have greater capacity to support their customers, who are financially impacted by Covid-19, and work through those issues."
NZBA released research in 2019 saying the Reserve Bank's capital would act as a handbrake on the economy.
Beaumont declined to comment directly on the battle the sector had with the Reserve Bank over capital.
"That's water under the bridge. The world has changed since the case [for higher capital] was made, and I think we have to accept that and respect that the bank is responding quite appropriately to a very challenging environment."
Brad Olsen, senior economist at Infometrics, said the move to push back capital plans raised questions about the plan in the first place.
"If the Reserve Bank's reason for putting this in was to ensure the viability of the financial system, to then reverse it when the viability of the financial system comes into question really does make you wonder about why we had such a large change coming through in the first place?"