RBNZ to announce final decision on bank capital rules by November

Reserve Bank Deputy Governor Geoff Bascand.

The Reserve Bank says it will announce its final decision on new bank capital rules by the end of November.

The central bank says it has received 164 submissions on its bank capital proposals and reiterated its commitment to release them publicly in June, along with the Reserve Bank's summary.

While many in the market have taken a cynical attitude towards the consultation, believing that Reserve Bank governor Adrian Orr has already made up his mind, the central bank is indicating its views may have shifted on how long the phase-in period will be.

It says implementation of any new rules would start from April 2020 with a transition period of "a number of years" before banks will be expected to fully comply.

Previously, the Reserve Bank has proposed a five-year phase-in period.

"The proposals are consistent with steps taken by other banking regulators after the Global Financial Crisis," says deputy Reserve Bank governor Geoff Bascand in a statement.

That is contradicted by the New Zealand Bankers' Association's submission, which includes an update from PricewaterhouseCoopers showing that the proposals would effectively lift the big four New Zealand banks' common equity to 27.1 percent of risk-weighted capital when measured on a like-for-like basis with other banks globally.

While the Reserve Bank's proposal is to near double the minimum common equity banks should hold from 8.5 percent currently to 16 percent, the central bank here takes a more conservative approach towards measuring capital, according to PwC.

"It is important that the public understands how higher levels of capital better protect their deposits," Bascand says.

"It is pleasing to see stakeholders' interest in the proposals reflected in the 164 responses received as well as in the feedback received through our briefings with banks, industry bodies, investors, the news media and social sector groups."

Bascand says the Reserve Bank will continue its "stakeholder outreach programme, which includes conducting focus groups to understand how New Zealanders feel about risks in our financial system, how these risks could affect them, and how the risks should be managed."

He says an important part of the consultation process involves seeking relevant information from industry and broader stakeholders "to better understand costs and benefits."

The Reserve Bank admitted in April that it hadn't done a cost-benefit analysis and many observers have said that should have been the first thing the central bank should have done.

"The proposals were designed around a net benefits framework where more capital was required up to the point that financial stability gains were matched by increases in costs," Bascand says.

"Our policy development process is to develop policy options, lay out our thinking on the nature of the costs and benefits of the policy being consulted on, seek input from affected parties and produce a full cost benefit around any modified proposals before making final policy decisions," he says.

Estimates of the costs of the policy vary; the Reserve Bank has said they may raise the cost of borrowing by 20-40 basis points but UBS has estimated they would raise the cost by 80-125 basis points.

Others have arrived at estimates in between. The NZBA's submission estimates the cost to the economy would be about $1.8 billion a year

The Reserve Bank says it is in the process of appointing external experts to independently review the analysis and advice underpinning its proposals.