New Zealand Gives Banks Seven Years to Raise Capital Buffers

(Bloomberg) -- New Zealand will require banks to increase capital by NZ$20 billion ($13 billion) to better withstand economic shocks, but extended the time they have to build up their buffers.

The nation's largest lenders will have seven years to raise their high-quality Tier-1 capital to 16% of risk-weighted assets, the Reserve Bank said Thursday in Wellington, up from the five years initially mooted. In another concession, some of the extra capital can be met by redeemable preference shares, which it says will provide a more cost-effective funding option.

For more details on the new capital rules, click here

“The overall decision is in line with previous proposals to increase the overall amount of bank equity, but some aspects are softer,” said Sharon Zollner, chief New Zealand economist at Australia & New Zealand Banking Group Ltd. in Auckland. She pointed to the longer transition period and the expanded definition of allowable Tier-1 capital.

Shares of Australia's big-four lenders, which own New Zealand's biggest banks, rallied in Sydney trading. National Australia Bank Ltd. gained 2% in afternoon trading, Westpac Banking Corp. added 1.3%., ANZ Bank climbed 2.7% and Commonwealth Bank of Australia rose 0.9%.

The final decision is something of a reprieve for the big four after a year they would rather forget. It was book-ended by a report into financial industry misconduct that lashed the banks for a runaway culture of greed, and last week's resignation of Westpac CEO Brian Hartzer after the lender was accused of the biggest breach of anti-money laundering rules in Australian history.

The changes are designed to make New Zealand's banking system safer and and will ensure bank owners have a meaningful stake in their businesses, central bank Governor Adrian Orr said.

“The level and type of bank capital we have decided on we believe hits the sweet spot for New Zealand's financial system,” he said. “We are gaining both increased financial stability and increased economic output.”

Lower Dividends

Banks could reach the new capital levels from retained earnings, for example by paying dividends equal to 30% of profits rather than 70% over the next seven years, Orr said.

ANZ Bank said the changes would amount to about A$4.5 billion ($3.1 billion) of additional capital by 2027, which was less than previously expected. It has already retained about one-third of that at its New Zealand unit in anticipation, the bank said in a statement.

“Given the extended transition period and our strong capital position, we are confident we can meet the higher requirements without the need to raise additional capital,” Chief Executive Officer Shayne Elliott said.

There is still concern that lenders could respond to the new capital requirements by raising borrowing costs and restricting credit to riskier areas of the New Zealand economy, such as the crucial dairy industry.

The fully implemented reforms may push up interest rates by 20.5 basis points, the central bank said in a cost-benefit analysis also released today. The impact on the economy from higher borrowing costs is projected to be more than offset by the benefit of having more secure lenders, it said.

The RBNZ has previously said that, if necessary, it could offset any increase in home-lending rates by reducing its official cash rate, which is already at a record-low 1%. Orr said the central bank doesn't expect the new capital rules to have a significant impact on monetary policy.

The changes will begin to take effect from July 2020.

While comparing capital buffers internationally is difficult because of varying regulatory rules, New Zealand's new requirements will be among the more stringent. The minimum requirement in Australia is 10.5%, while the internationally-recognized Basel III standards mandate a 6% buffer. In Europe, regulators can then set add-ons for particular banks.

In 2019, New Zealand units contributed between 12% to 22% of profit at the Australian banks. Over the past five years, the New Zealand units have paid about a combined NZ$22 billion in dividends to their Australian parents, according to analysts at Morgan Stanley.

--With assistance from Emily Cadman.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editors responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net, Peter Vercoe

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