David Seymour wants bank capital rules reversed, asks Regulations Ministry for advice

Act leader and Associate Finance Minister David Seymour says the Government should return to the former rules around the amount of capital banks are required to hold. Photo / Alex Burton

Act leader and Associate Finance Minister David Seymour reckons one recipe for growth would be for the Reserve Bank to scrap long-gestating rules to make banks more secure in the event of an economic downturn, while his new Regulations Ministry has confirmed it is running its eye over the rules.

In 2019, the Reserve Bank unveiled changes to make all banks, including the big four Australia-owned banks ANZ, ASB, BNZ and Westpac, lift the amount of capital they hold. The phase-in of the requirements was paused during the pandemic but has now restarted. Seymour told Parliament it could go back to the old rules.

Higher levels of capital meant the banks would be safer during a downturn. The Reserve Bank reckoned its rules would allow the banks to withstand a one-in-200-year financial crisis and to protect depositors’ money.

However, the rules, which ratings agency S&P said were among the most stringent in the world, come at a cost. The banks argue the changes increase their costs, which are then passed on to bank customers in the form of higher costs and a reduced appetite for lending. Higher costs for business and retail customers act as a brake on the economy. There is a real and costly trade-off between risk on the one side and economic growth on the other.

There are no easy answers, particularly when it is the taxpayer who is likely to be on the hook if a large bank were ever to go bust.

In his debate on the Prime Minister’s statement on Tuesday, Seymour said the capital requirements have “pushed up the price of borrowing to every firm, every farm, and every family in this country”.

“These capital requirements were put in place in order for us to get through a major shock, and when the shock of Covid-19 came along, guess what! Actually, we were fine with the old capital requirements. We never needed to have them phased in at all, and we should drop them today. That would reduce the cost of borrowing for New Zealand families and New Zealand firms,” he said.

He said Minister of Finance Nicola Willis should pick up the phone to Reserve Bank Governor Adrian Orr and say, “It’s not going to work, mate. Just drop it.”

The Ministry for Regulation confirmed yesterday that Seymour had asked “for some information relating to the regulatory regime that establishes the RBNZ’s capital requirements for banks”.

“This information is currently being prepared,” a Regulation Ministry spokesperson said.

They said the ministry had not initiated a full review of the capital requirements, unlike its reviews of other sectors like early childhood education. Rather, they were responding to Seymour’s request.

Last year, the Commerce Commission also criticised the capital framework, arguing it was a barrier to competition. The bank pushed back on the criticism. Reserve Bank deputy governor Christian Hawkesby told RNZ the changes would bring “very marginal benefits to competition, and could have unintended consequences and put us out of step with international regulatory approaches”.

Willis has previously said she is open to making the Reserve Bank ease its regulation of banks.

She’s prepared to override the regulator if a strong enough case can be made that reducing the amount of capital banks need to hold would improve competition and efficiency in the sector without undermining the stability of the financial system.

Willis proactively shared her position during an interview with the Herald, ahead of the Commerce Commission concluding its study on competition in the banking sector on August 20.

When the Herald put to Willis that the Reserve Bank would strongly oppose being made to soften its rules, she said: “Yes, well, we’re accountable to the people who elect us. The RBNZ [Reserve Bank] is unelected. Ultimately, this is about a democratic mandate.”

The rules could be headed for something of a public sector turf war and might be a litmus test of the Regulation Ministry’s power. The Reserve Bank jealously guards its independence both in setting monetary policy and as a regulator, which is what the capital requirements fall under.

The Ministry for Regulation, however, is not just any ministry. It is a central agency, meaning it is equal to the likes of Treasury, the Department of Prime Minister and Cabinet and the Public Service Commission.

Just what the ministry says about the requirements, and how far the Beehive is willing to go to implement any changes it might suggest, could be seen as a litmus test of its power.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.