Reserve Bank governor Adrian Orr shares fiery ‘letter to the editor’ with bank bosses

Reserve Bank governor Adrian Orr tells bank bosses criticism of capital rules is "tired and misleading". Photo / Mark Mitchell

The Reserve Bank (RBNZ) is upping the ante, trying to quash the narrative its approach towards regulating banks is hampering competition.

The Herald understands RBNZ governor Adrian Orr wrote to the bosses of the big four Australian-owned banks late last week, using rather colourful language to defend the amount of capital the regulator requires banks to hold.

Orr is believed to have sent the chairs and chief executives of ANZ, ASB, BNZ and Westpac letters replicating the letter to the editor he sent the Herald in response to an opinion piece written by Roger Partridge, the chair of the partially bank-funded think tank, The New Zealand Initiative.

“The author lays blame for the lack of competition in the New Zealand banking sector at the feet of the Reserve Bank’s capital requirements and credit risk weights for retail banks,” Orr said.

“This is tired, misleading, and needs to be called out.

“I am unsure what to be most concerned about: that the retail banks who are members of the NZ Initiative believe this? Or, they don’t, but are still willing to sponsor this?”

Partridge, in his opinion piece, reiterated his right-leaning organisation’s long-standing view that banks are too heavily regulated.

He claimed banks would try to recoup the cost of more regulation from their customers.

Partridge also argued the rules were inefficient, disincentivising banks to lend to riskier customers, like small businesses and farmers.

He used the Commerce Commission’s study on competition in the banking sector as a way into the debate.

In its interim report, the commission said the rules hampered competition among banks.

It feared they created an uneven playing field between the big and small banks in New Zealand.

The commission didn’t specify whether small banks should be regulated more lightly, or big banks more heavily to even things up, but sought feedback on its findings. It will release its final report before August 20.

The RBNZ’s deputy governor Christian Hawkesby shut down the Commerce Commission’s recommendations. The day it published its draft report in March, he told the Herald the RBNZ wasn’t planning on changing the rules.

A month later, the RBNZ issued a statement saying: “We disagree with the commission’s analysis regarding our prudential capital settings and the recommendation for us to re-review them.

“The current bank capital framework is the result of a careful and extensive review process that occurred recently and is still being phased in.”

The rules will be fully in place by 2028 – more than a decade after the RBNZ started consulting on strengthening them.

Orr also used a Newstalk ZB interview and select committee appearance last week dedicated to discussing the official cash rate (OCR) review, to push back against the banks.

Coming back to his letter, Orr said, “The large four Australian-owned retail banks in New Zealand have for years posted the highest risk-adjusted returns on capital amongst their peers globally.

“They continue to do so even after the Reserve Bank’s insistence they hold more capital.”

Banks’ returns on equity fell to 11.2 per cent in the December quarter. This was below the 30-year average of 15.3 per cent.

Banks’ returns on equity were higher before the 2008/9 Global Financial Crisis.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.