Proposals to change the capital requirements for banks will widen the competitive gap between large and small banks rather than reduce it, a submission from four New Zealand-owned banks has warned.
Kiwibank, TSB Bank, The Co-operative Bank and SBS Bank have joined together to submit to the Reserve Bank's proposals and said while they supported in principle the banking industry's submission there were "some matters of specific relevance to the group".
Submissions closed on Friday on the RBNZ's proposals which include a near doubling of the minimum common equity banks should hold from 8.5 per cent currently to 16 per cent.
The proposed increase is designed to make banks safer but have prompted warnings that it will push up home loan rates and see deposit rates cut.
It has also been slated as a way to make the playing field between the big four Australia-owned banks - ANZ, BNZ, ASB and Westpac - and the smaller New Zealand-owned banks more even.
In the joint submission the NZ-owned banks said they welcomed moved to introduce a level playing field and a regime which decreased system risk.
But they warned there could also be unintended consequences.
"While not the RBNZ's intention, we have concerns that proposed changes will widen rather than reduce the competitive gap between large and small banks."
Specifically the four banks said they had concerns that aligning bank internal risk-weighting models and standardised risk weightings "may not be effective" given the proposed approach which "may still result in significant differences to residential lending, small business banking and agricultural lending risk weightings".
The banks said the range of capital instruments available to New Zealand-owned banks was already too limited.
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"Proposals to further restrict the amount and type of non-common equity tier one capital will continue to advantage the Australian banks and make it harder for the NZ-owned banks to meet the increased capital targets.
"Consequently, this will limit the opportunity of the NZ banks to grow."
The banks said they were not aware of any other country which had disallowed additional tier one and tier two capital or required such a high proportion of common equity tier one.
"Other countries have adopted a more pragmatic approach recognising that some flexibility in relation to allowable instruments is necessary to achieve higher capital ratios."
The four said the additional tier one and two capital should be available to all banks but if the RBNZ was not inclined to do that it should at least be available for the small banks.
They argued this was because it would lessen the current advantage to foreign-owned and listed banks and facilitate a more competitive market while the Reserve Bank's objectives would still be met.
"A differential approach has merit because the regime already comprises two separate regulatory frameworks, and it would be consistent with the approach taken in Australia."
Donna Cooper, chief executive of TSB, said under the current regime the NZ-owned banks were materially and unfairly disadvantaged.
"In residential lending, we have been required to hold on average 45 per cent more capital than Australian-owned banks, for the same risk."
Cooper said it supported the Reserve Bank's view that this shouldn't be allowed to continue.
"However, while not its intention, we are concerned the proposed changes in their current form could widen, rather than reduce the competitive gap between Australian and NZ-owned banks.
"The magnitude of the proposed capital increases, together with a significantly narrower range of allowable capital instruments, could make it challenging for NZ-owned banks like TSB to access additional capital. We want to grow, but the current proposals could limit our ability to do that."
Cooper said other countries had adopted a more pragmatic approach to this, recognising that some flexibility on allowable instruments was necessary to achieve higher capital ratios.
"If the RBNZ is not inclined to increase the scope of capital instruments available for all banks, it should at least allow this for NZ-owned banks."
Cooper said there also needed to be a larger difference between the levels of capital held by systemically important banks and the rest of the industry, to more accurately reflect the potential risks to financial stability.
The Reserve Bank received 164 submissions to its proposals and has said it will make its final decision on the new capital rules by the end of November.
It will publicly release the submissions next month along with its summary.
Implementation of any new rules would start from April 2020 with a transition period of several years.
The Reserve Bank has said it is also in the process of appointing external experts to independently review the analysis and advice underpinning its proposals.