Reserve Bank of New Zealand Capital Review Consultation Submissions

Page 1 of 4 Capital Review The Reserve Bank The Salvation Army New Zealand, Fiji, Tonga and Samoa Territory Submission BACKGROUND:

1. The Salvation Army is an international Christian church and social services organisation that has worked in New Zealand for over one hundred and thirty years. The Army provides a wide-range of practical social, community and Christian faith-based services, particularly for those who are suffering, facing injustice or those who have been forgotten and marginalised by mainstream society. We are passionately committed to our communities as we aim to fulfil our mission. We have over 90 Community Ministry centres and Churches (Corps) across the nation, serving local families and communities. This service covers numerous Christian spiritual and social (addictions, social housing, prisoner reintegration, foodbanks, social work, community finance, financial mentoring and budgeting and many more) services across the nation. We are passionately committed to our communities as we aim to fulfil our mission of caring for people, transforming lives and reforming society by God’s poweri .
2. This submission has been prepared by the Social Policy and Parliamentary Unit of The Salvation Army. This Unit works towards the eradication of poverty by encouraging policies and practices that strengthen the social framework of New Zealand. This submission has been approved by Commissioner Andrew Westrupp, Territorial Commander of The Salvation Army’s New Zealand Fiji Tonga and Samoa Territory. RESPONSES TO REVIEW :
3. The Salvation Army welcomes this opportunity to offer a brief submission to the Reserve Bank’s Capital Review. The Army’s interest in this review stems mainly from our interest in public policy generally and in the economic and social interests of the most vulnerable New Zealanders more particularly. These broad and specific interests cover concerns we have for the systemic risk associated with our rising levels of indebtedness alongside the role of banks in creating this debt. As well we are concerned about the impact changes in banking regulation may have on economically marginal consumers and communities. A further concern which is discussed also in this submission is the treatment of lending to alternative housing providers such as NGOs like The Salvation Army and to housing co-operatives or community housing providers (CHPs).
4. The Army believes that the systemic or macro-prudential risk associated with a financial crisis or banking collapse has been under-stated in the documents we have seen. We note that the level of capital proposed to be required of banks has been calibrated to avoid the collapse of the banking sector in everything but a one in two hundred year event. The damage listed with any banking collapse includes the production losses, the lingering lack of confidence across the whole society and the risk of increased mental illness associated with

Page 2 of 4 financial loss, unemployment and uncertainty. We accept that all of these types of damage are potentially possible as we saw from events following the GFC. 5. There is however another risk which we believe should also be taken account of and which should be considered alongside any argument against the proposed new capital rules. This is around the distributional impacts of a banking collapse or financial crisis. Any highly geared and risky lending which often precedes a financial crisis offers benefits to the financial institutions undertaking such lending and often to intermediaries and sometimes to borrowers. These benefits come in the form of very high rates of profit and sometimes in lower interest costs for risky borrowers. The money which is lost from the finance sector in financial crises does not of course disappear but instead can be paid out in exceptionally high bonuses or dividends to those involved or in the purchase of over-valued assets. In other words there are beneficiaries from financial crises and these parties are most often the ones who contributed to any financial crisis. In our opinion, this is inherently unjust. 6. The Government bailouts of financial institutions in the United States and in United Kingdom as well as in New Zealand (with South Canterbury Finance) have created a massive moral hazard whereby such behaviour can easily be repeated with reckless disregard for the public good. The Reserve Bank’s proposed increase in the capital requirements of banks is in some ways a response to this moral hazard and is one of the reasons The Salvation Army supports this proposal in principle. 7. The lessons from the GFC show us that the losers from any financial crises which involve Government or Government backed bail-outs are the general public as consumers and tax payers. In particular it is future generations of taxpayers who are straddled with the debt associated with these bail-outs. This is spectacularly demonstrated in the case of the Irish banks’ bailout that have cost Irish citizens €58 billion in additional Government debt or around 31% of the nation’s Gross National Incomeii . 8. In our opinion some of the debate around the need for tighter macro-prudential regulation of the banks and the finance sector should be presented as an issue of equity both across and between generations. Specifically the argument should be made that it is patently unfair that those benefiting from excessive risk taking through lending are almost always older and richer than those being asked to bear these risks through bail-outs. 9. For the reasons both of equity and avoidance of economic losses The Salvation Army supports the Reserve Bank’s proposed six high-level principles for the Capital Reviewiii . 10. The Salvation Army does not have a view on whether or not the Reserve Bank’s proposed capital requirements and the risk profile which attends these are appropriate. The Bank’s research and reasoning certainly appear sound and the proposal to accept systemic risk based on an expected one in two hundred year event appears reasonable. Our concern however is that that in reaching this position the Bank does not appear to have considered the trade-offs attendant with it. In particular the Bank does not appear to have considered the possible costs to consumers of this requirement for the mainstream banks to hold additional capital which has been estimated at around $20 billioniv .

Page 3 of 4 11. We note recent comments by the ANZ Banks Chief Executive Shayne Elliot that the management of the bank did ‘not expect our shareholders to unreasonably subsidise’ the costs of the extra capital requirement on his bank.v The message here is clear – that the mainstream banks expect to be able to pass the additional capital costs on to consumers. 12. In its Economic Note of 17h April 2019 the ASB Economist Nick Tuffley suggests that these higher capital requirements may eventually raise interest rates by 50bps and could contract credit growth by 6% to 30% over the short term. He estimates the net impact of these changes as incurring a loss of around 1.1% of GDPvi . 13. These adjustment costs may be worthwhile and justified somewhat against the lower risks faced by New Zealand society. But no recognition appears to have been given to their distributional impacts. In particular The Salvation Army is concerned that any subsequent credit squeeze or increase in lending rates impacts and the more productive part of the economy such as small and median sized business and on those involved in more risker enterprise such as developers. 14. While the question of how banks determine their risk weightings is not specially covered in the Capital Review, The Salvation Army asks that at some point the Reserve Bank pays closer attention to how banks manage and grade their portfolio risk within their housing related lending. While The Salvation Army is perfectly happy with its relationship with its bank, like several NGO’s, The Army is actively developing social housing as part of its Christian mission to serve the poorest and most vulnerable New Zealanders. This development requires borrowing as does the development of other alternative housing provision such that by housing trusts and co-operatives. In an ideal world the risks associated with such lending should be seen to be similar to that to owner-occupied housing given that the market for affordable housing is both well understood and very stable. Often too it has Government backing. 15. At some point The Army urges the Reserve Bank to work with those banks engaged in housing related lending in order to revise the way the risk associated with NGO and self-help housing providers is assessed and priced. Such revision would assist with these providers having access to lower cost debt and so make the provision of affordable more viable than it is presently. This in turn will increase the availability of social and affordable housing to low￾income New Zealanders. We contend that this is critical and urgent work given the housing crisis throughout the nation. It is baffling that NGOs and CHPs are treated in similar ways to private developers when our housing provision and development is based on need and not profit.

i http://www.salvationarmy.org.nz/our-community/mission/ iiSee Hickey, R. Kane, L and Smyth, D. (2017) The Impact of Financial Sector Support on the Public Finances in Ireland and the EU; Central Bank of Ireland. Available at https://www.centralbank.ie/docs/default-source/publications/economic￾letters/vol-2017-no-12-impact-of-financial-sector-support-on-public-finances-in-ireland-and-the-eu-(hickey-kane-and￾smyth).pdf?sfvrsn=2 iii As outlined on Page 11 of the Bank’s Capital Review Paper 4: How much capital is enough? iv Ibid Table 8 p.38.

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v See article in Interest.co.nz by Gareth Vaughan ‘ANZ Group CEO Shayne Elliott says bank can't expect its shareholders to 'unreasonably subsidise' its ambitions in New Zealand if changes to bank regulatory capital requirements are onerous’. Available at https://www.interest.co.nz/banking/99452/anz-group-ceo-shayne-elliott-says-bank-cant-expect-its￾shareholders-unreasonably vi Available at https://www.asb.co.nz/content/dam/asb/documents/reports/economic-note/bank-capital-requirements.pdf

Sarah Watson Great idea! Any way we can help make our banks more stable is a win for me. Keep up the good work OIA s9(2)(a)

To The Reserve Bank of New Zealand Te Putea Matua Capital Review Consultation Dear RBNZ Thank you for the opportunity and invitation to provide feedback on your review of bank capital. I agree with you that’s this a very important decision and you should take a wide perspective and seek a wide variety of perspectives. The following submission are my personal views and do not necessarily reflect the views of my existing or any previous employers. I have spent the vast majority of my working life in the finance industry, 17 years working in financial markets for the National Bank of NZ Limited, 8 years at the RBNZ and more recently 7 years in funds management with Annuitas Management Limited. I do believe this does give me a broad perspective, and hence why I would like to share my thoughts. Summary of Thoughts

1. I believe you should increase the overall capital to the levels outlined in your Review paper.
2. The short term costs of the increase in Capital will be appropriately shared by the banks and their customers. The NZ banking system is dynamic and efficient enough that the costs will land in the appropriate place
3. Comparing the cost of the counterfactual, (lower cost / lower capital model) is a difficult if not an impossible task as there are a number of key assumptions to be made and any outcome can be construed. Where you have landed seems reasonable see links to William Clines below.
4. Simplifying the calculation method i.e. less Internal Rating Based and a more Standardized approach is very logical. A level playing field is a good outcome.
5. The RBNZ should seriously consider allowing the banks to issues a significant amount of Tier 2 subordinated debt (2%-3%). As the majority of the NZ banks do not have listed equity in NZ, a deep and meaningful sub debt market would aid and assist the RBNZ’s monitoring role and assist with capital markets development. Background Rational
6. The Banking system is a core part of the of the economy and for the NZ economy to operate the Banking system must operate .Fundamentally I do not believe the banks primarily act in the best interests of NZ over the long term and some form of intervention and rules need to be put in place with regard to capital and funding. Despite the RBNZ and Australian regulators efforts, bankers have very short term (annual profit) focus. The Royal Commission has highlighted this and various reforms have been in place to attempt to extend the time horizon of bankers, but fundamentally they are workers for a commercial organization and they are not taking a long cyclical view. There are several examples of this “bank short term focus’. The period of rapid asset growth in the 1980’s, which in the aftermath of the 1987 share market crash required significant capital injections. More recently, the RBNZ introduced the Core Funding Ratios for banks in the early 2000’s when the banks allowed their funding ratios to fall to imprudent levels. The banks would not pay the small cost to extend the term of their wholesale funding

liabilities without the intervention from the RBNZ When the banks were left without rules they clearly chose to act in a manner which increases profit in the short term without having sufficient head room in place when the significant cyclic change happens. When disaster occurs the banks can choose to reinvest or walk away and let the public and /or government pay. Your proposal to change the capital framework by increasing the amount of capital will come at a short term cost which will be partially taken on by the banks and some of this will be passed onto the public via greater margins. The NZ banking system in my view is largely efficient and dynamic so the costs will be shared appropriately over time. I have read several papers and listened to a number of Podcasts highlighting the difficultly of reaching the perfect level in any of these ratios. Refer William Clines book. The Right Balance for Banks: Theory and Evidence on Optimal Capital Requirements Policy Analyses in International Economics. https://piie.com/events/book-launch-right-balance-banks-theory-and-evidence￾optimal-capital-requirements. Clines suggests over several studies that the optimal capital ratio is between 13%- 14% and therefore your suggestion of 16% is acceptable. More amusingly I recall a comment by Meryn King in a speech when he toured NZ a few years ago “How capital does a bank need to operate?? If you believe the markets… before the GFC you could operate with close to 0% capital After the GFC you needed close to 100% The correct number throughout a cycle is somewhere between these two numbers” 2. Moving away from allowing/encouraging the banks to use their internal rating based systems is a good idea. The IRB methods would have been pursued by banks in an effort to produce some calculation that allows them to reduce capital. These methods will be endorsed by clever consultants receiving large fees. The banks will still be able to use their IRB’s to design and perfect their portfolio if they believe their IRB is considerably better than the Standardized approach , but the core capital will be fairer. 3. My only other point of significance is to suggest that differently from the RBNZ proposal is that the RBNZ should seek to establish a decent tranche of subordinated Tier 2 debt for the banks. The main reason for this is that unfortunately very few of the banks have listed equities on the NZ share market. The equity market and the subordinated debt market can assist the regulators of jurisdictions with early market signs of either positive or negative news. It certainly should not be relied on but I feel it is another string to the bow for the monitoring units of regulators. Often the market picks up issues, many which can be trivial, but at times can be significant and observes well before regulators. A liquid market of bank sub debt, will deepen the NZ capital markets, provide another monitoring window and will be attractive to the banks who feel there has been a large increase call on their capital. I am happy to expand on any my thoughts and best of luck with the consultation.

Yours sincerely Simon Tyler Email: Phone

Springwater Ag Limited (SAL) - Submission on Reserve Bank of New Zealand (RB) Bank Capital Controls - By email to CapitalReview@rbnz.govt.nz Prepared by Ray Parker 13 May 2019 1.0 Introduction This paper is a submission by SAL on proposed changes by RB on NZ Bank Capital Requirements (BCR) 2.0 Background 2.1 SAL owns a 222ha Dairy farm milking approximately 600 cows on Otago’s Taieri Plain, under a 50:50 sharemilking agreement. 2.2 SAL has a Committed Cash Advance Facility with ASB, which partially funds SAL’s ownership and operation of the Dairy Farm. 2.3 Any changes to BCR will have a direct impact on SAL, by virtue of funding cost pass through by ASB to SAL. 3.0 Broad Understanding of the proposed changes to BCR 3.1 SAL understands the RB is intending broadly to require NZ Banks to hold capital of the order of 16%. 3.2 Whilst existing levels will vary depending on the big four banks current capital structure composition, I understand the RB suggested that the RB proposal will generally double the capital required to be held by NZ’s big four trading banks. 3.3 The changes are proposed reportedly to strengthen the NZ Banking system to withstand a “one in two hundred year” financial event. 4.0 Likely impact of changes to NZ banking market 4.1 As the capital held increases, the cost of capital to the NZ financial system increases. 4.2 Banks will look to pass on increased capital costs to the NZ Market through higher margins. 4.3 The impact on assets that have higher risk weighting (as may be the case with some bank rural portfolios) will potentially be amplified as the new capital held against those assets will be proportionately higher, resulting in relatively more cost being passed on to those customers. 5.0 Impact on Farming customers 5.1 Farm funding costs will increase as banks seek to charge higher capital costs to farming customers. 5.2 Availability of credit to the Rural Sector is likely to tighten as capital is re-allocated to other assets by the Banks. 6.0 A potential “knock-out blow” to Farmers at a highly vulnerable time 6.1 The BCR changes come at a particularly vulnerable time for farmers. 6.2 This is because farmers are facing huge market and regulatory challenge to their business in the form of: • new environmental regulation – for instance application of the new N-loss regulations in most catchments are now fully in their implementation stage with many farmers having to adjust to new farming methods. SAL has spent well in excess of $200,000 over the last five years to meet increasing environmental regulation by way of new effluent systems, fencing of waterways, and environmental planting. SAL has just fenced off a two ha reserve to revert to natural state and intends to plant such reserve out in native plantings. Increased funding costs will make this desirable (but discretionary) spend less achievable.

• staff and management shortages – farming is hard work and long hours in trying conditions. School career advisors rarely recommend jobs in the Rural Sector. Wage rates are rising. On farm accommodation rules are getting tougher. Funding for primary sector tertiary education is declining and education institutions are at risk (eg Telford). New immigration policy and visa laws are cumbersome and time consuming to administer. Consequently, farming businesses are really struggling when it comes to staffing and management. • increasing Bio-security risk and compliance (eg Myco Plasma Bovis) – the advent of M-Bovis has placed immense strain and cost on the Dairy and Beef sectors, particularly on those directly impacted but also on the sector generally. This has had a mental, physical and financial toll on our rural communities. • local government cost inflation – there seems to be no end to cost increases and burgeoning compliance costs stemming out of local body regulation. SAL’s Otago Regional Council rates alone have increased from $7,300 to $37,600 per annum in the period 2006 to 2019. There must be cost deflation somewhere else in the economy, as we would only hope for the RB headline inflation target of less than 2% in our farming economy! • increased global protectionism – America’s trade war with China, Sanctions on Iran, Brexit and increasing trade blocks are now reversing a thirty year trend of freer trade and globalisation. NZ can be as market orientated and as theoretically idealist as we want, but the fact remains we are a price taker and a minnow on the Global stage, we have a very small domestic market and international policy implementation beyond our control has the ability to impact on our market trade flows. We can come under attack from any amount of overseas policy changes – why accentuate it by a policy change here on our own shores by the RB? • alternative protein disruption (plant based foods) – production of NZ rural sector core products (which make up a large proportion of export revenue receipts) are now continually under scrutiny as inefficient sources of Protein. New plant based proteins and other protein alternatives are being promoted as clean alternatives, and significant capital is being invested in the development and production of protein alternates globally. This is creating uncertainty for farmers of long-term demand for their core products. • lack of capital for succession planning – Many of the above factors, and increased volatility is making the rural sector an unattractive destination for capital. Tighter application of OIO regulations is also having an adverse impact on capital available for the NZ rural sector. This is occurring at a time when farm ownership demographics are aging – a bow wave of aging farmers are looking to retire over the next decade. Who will the buyers of these farms be, and at what price? • uncertain policy frameworks – There are a number of proposed policy reforms that have the potential to impact negatively on the rural sector. These include tax reform that would introduce new taxes on farming operations (eg new water taxes) and the recently announced Carbon Zero policy.

• the ongoing urban/rural divide – We once were proud to say we were involved in the Rural Sector – we are now cautious who we disclose this to given the Dairy sector is being made out to be a selfish, greedy environmental villain. 6.3 Consequently the RB changes come at a time when over-all farming confidence is low and there are many other issues that farmers need to re-allocate resource to, without the additional burden of increased funding costs arising from regulatory change. 6.4 Farming assets by their nature are low yielding long term assets. Any change that imposes increased cost within a short period of time has a disproportionate impact on profitability and asset values, reducing farmer viability. 6.5 This reduction in Farmer viability could result in an escalation of defaults, perversely resulting in exactly the type of financial contagion within the Rural Sector the RB is presumably looking to avoid (with flow on negative effects to the wider economy and adverse socio-economic consequences). 7.0 Why Change? 7.1 Given the potential adverse impact detailed in section 6, one needs to question why change at all? 7.2 My understanding is the NZ Financial system came through the GFC in reasonably good shape. Yes, second tier financial institutions failed (eg South Canterbury Finance), but the top four trading banks were relatively unscathed. Was this a one in two hundred year event? 7.3 If there are concerns about individual client risk profiles, work with the banks to get tough on a case by case basis. Don’t penalise the rest of us to fix a problem that may not exist. 7.4 Given the rural sector is facing a raft of challenges and potential policy changes that will ultimately make the sector more sustainable and competitive in the long term, the impost of yet another un-necessary and costly change should not occur now. Rather it would be better to support a long term transitional policy regime that allows the sector to adjust to new environmental, regulatory and market challenges over a much longer period, without risking the accelerated demise of the sector by rash and unnecessary BCR changes. 8.0 Summary 8.1 In summary, RB changes to BCR could have far reaching negative impacts on the rural sector. 8.2 This is at a time when the sector is facing many other challenges. 8.3 The RB would be better working with the Government in a pan Rural Policy approach to meet the proposed policy changes in regard to environmental and market forces, over a sustainable long term time frame. 8.4 Finally, ask yourself – is there a problem that actually needs fixing? If so, how do we fix it without wide spread disruption to the productive sector? 9.0 About the Author Ray Parker is a director of SAL, and a long time industry participant having previously held positions as CEO of the worlds largest pastoral dairy farmer in the 1990’s (Tasman Agriculture Limited) and director positions on various dairy processing companies. His family Trust is the sole shareholder of SAL.

Stephen Leavy I fully support the RBNZs proposals. They will lead to a much safer banking system and greatly help NZ when the next financial crisis comes along. OIA s9(2)(a)

stephen Ryan I think T1 at 18% needs to be carefully considered in light of the fact that at no time in history have banks had to carry so much capital. The reserve bank is run by people who dont do business and have never been in business. They are statistical minded individuals who have never taken business risk. I would liken it to saying to a dutch sailing fleet in the golden age. Dont sail around the world this month because the winds are higher and there are some waves on the ocean. In other words the reserve bank decided who sails the ocean blue and who does not. But becuase they are not sailors they are always afraid of the ocean. Sorry it just looks like you are a bunch of very scared people. Sorry but you are not the people taking business risk and you Never will be. You are not the people to lead the nation to prosperity. Did the new zealand banking system fail in the GFC? You did not even have to start QE. Not your T1 ratio is to high to go to in one move. And your are effectively nationalising public companies listed on the NZX. The effects of your move to a high T1 in a short 5 year time frame appears to be based on extreme fear. NO, NO , NO!!! I suggest you precede carefully with an economy that is barely growing. You get a D on this one from me. Stephen Ryan OIA s9(2)(a)

Steve Napier I agree with the RBNZ proposal to increase the capital requirements of the banks. With less capital there is a greater likelihood that the NZ taxpayer shoulders an unfair proportion of the risk in a downturn. There are many examples overseas where banks banks expand their loan book in the boom times only to find in a recession that their bad debt are more substantial than expected. As banks borrow short and lend long they can never repay their depositors in a run on the banks. So that their is more confidence in the banks a greater level of shareholder equity is a necessary cushion. I recognise there is a cost to this in interest rate margins, but I think it is a cost worth paying. Thanks. OIA s9(2)(a)

Steve Pryce We need sound money not fiat. Fiat is used to guide/force individuals decisions under the guise of economic betterment. Inflation that is mandated due to this fiat system is also essentially mandated inequality as it arbitrarily increses the wealth of those with assests and decreases the wealth of earnings and savings. Once a fiat system is embarked upon and interest rates are dropped to "stimulate" lending (increase debt) you trap yourself. Once debt passes a certain level it can't be repaid without a recession or depression hence the ever decreasing interest rates world over. This is an unhealthy system akin to a Ponzi scheme as it requires perpetual exponential growth of debt. Our current money system has set us up for failure and increased the incentives away from productive ventures towards speculative borrowing. No amount of capital will change this. The only way forward is sound money. OIA s9(2)(a)

Sue Matthews I am bemused as to why NZ has to go so far in the proposal; an increased % of capital (from current) is generally agreed but lets make it 'fit for purpose'; why are we going further than every other country. Additionally given no cost/benefit study has been undertaken on this proposal I do not believe there is a good understanding of the likely financial impacts from the proposed new capital requirements. For example, an increase in mortgage rates where the Reserve Bank estimates this to be significantly lower than other estimates (eg UBS). I don't understand how the big 4 banks will not pass this on directly to their customers to ensure similar yields for their shareholders continues. Won't also the proposal decrease NZers ability to access capital which is expected to be also at a higher cost. Thanks for the opportunity to give feedback OIA s9(2)(a)

Synlait Milk Ltd · 1028 Heslerton Road, RD13 Rakaia, Canterbury, New Zealand · +643 373 3000 · www.synlait.com Ian Woodford Financial System Policy and Analysis Department Reserve Bank of New Zealand Wellington 16 May 2019 By email: CapitalReview@rbnz.govt.nz REVIEW OF THE CAPITAL ADEQUACY FRAMEWORK FOR REGISTERED BANKS – CAPITAL REVIEW PAPER 4: SUBMISSION The dairy industry makes a substantial contribution to New Zealand, and plays a key role in influencing the economy, the environment, and the well-being and prosperity of New Zealanders. The key to the dairy industry is the farm suppliers of the milk. In our view the farm suppliers are at risk of being unfairly impacted by the proposed changes to the capital adequacy framework for banks in New Zealand. We understand that the Reserve Bank of New Zealand (RBNZ) must consider the soundness of its current prudential management systems to see if anything more can be done to manage risk better. In Synlait’s view, very careful thought needs to be given to whether additional capital is required to be held by the banks in New Zealand given the likely downside to farmers who at this time are suffering numerous pressures, including from the consequences of mycoplasma bovis and additional financial consequences in meeting sustainability requirements. We set out Synlait’s corporate submission below. Background We understand that the proposal to increase the amount of capital held by the New Zealand banks will have a large impact on banks' equity levels in New Zealand. As a result, the impact on the price and/or availability of credit may be bigger than the RBNZ estimates, leading to higher costs to customers and/or lower available loan capital.

2 | Page The impact on different sectors will vary depending on how much capital will need to be applied to each sector. For example, housing has a minimum risk weight of 35% of the drawn amount, whereas Institutional, Agri and Commercial customers are generally 100% under the RBNZ standardised model. The Swiss investment bank UBS has published a research paper outlining the possible impact on consumers of what is proposed, particularly the increased cost of capital. According to UBS, the proposals could add between 80 and 125 basis points to mortgage costs as banks attempt to claw back the added capital costs. Agricultural debt has continued to rise and, we understand, is currently sitting at around $63 billion (up from $12 billion in 2000), with around two-thirds of debt focused on the dairy sector. We are concerned that there is a likelihood that the impact of the proposal will be borne more in some sectors (asset classes) than others as a result of this differing risk weighted capital treatment. In our view this has the potential to see more limited access to credit and higher funding costs in the agri sector vis￾à-vis other areas as bank capital is re-allocated. Whilst we don’t see this having a material direct impact on Synlait (or the Institutional Banking sector), this will have implications for Synlait’s farmer suppliers. The NZ financial system came through the Global Financial Crisis in reasonably good shape compared with many other countries, in no small part reflecting the soundness and quality of New Zealand’s regulatory systems. Certainly, there was fall-out associated with the collapse of several finance companies but overall, the financial system managed reasonably well. Areas of actual weakness have been largely dealt with by imposing greater transparency and reporting requirements on finance companies. The UBS study we refer to estimates the proposals would see New Zealand overtake Norway in having the highest bank capital requirements in the developed world. In December 2018, Fitch Ratings said the proposals were “radical” and “highly conservative relative to international peers” but that the result would ultimately be “significantly stronger buffers” against system shocks. Submission In our view, any moves towards the adoption of increased bank capital requirements should be made with caution, given the likely unintended consequences to certain sectors. As a minimum, we ask that

3 | Page the RBNZ undertake a comprehensive cost/benefit analysis of the proposals as they apply to the agri sector before any further steps are taken. Any significant change in interest rates could be enough to put households and businesses in a difficult position with flow-on effects for creditors and the economy in general through reduced levels of activity. In respect to the agricultural sector, a 100 basis point increase in interest rates would, we understand, add around $630 million in interest costs facing the agricultural sector while a 100 basis point increase in business debt would add in excess of $1 billion to interest costs. Conclusion Given the significance of the agricultural sector to the New Zealand economy (unique in the world compared with most developed countries), it is important restrictions on lending to that sector and/or increasing the cost of capital do not put added pressure on the farming sector; in light of international trading arrangements’ current uncertainty. If you wish to discuss, please contact Deborah Marris. Yours sincerely Deborah Marris Director – Legal, Risk & Governance

Thomas Benham I support the proposal and would welcome further steps that decoupled systemic risks posed by an Australian banks financial collapse. My only reservation is that RBNZ should take into account that the local banking market is starved of new competition and innovation, perhaps there should be a period for new banks to grow before these requirements are imposed? OIA s9(2)(a)

First submission of 2019… Tobi Cohen Subject: Review of Capital Adequacy.... Hello Capital Review, RE: Submission of Ideas on Capital Adequacy I am a dual citizen, Kiwi and USA. Many kiwis and USA ex-pats await decisions by the RBNZ and Crown regarding the safety of our deposits and equities held by Banks. There is no question that we will see more and deeper world financial instability, particularly as The Orange Man on Pennsylvania Avenue wreaks havoc setting lower standards in the area of regulatory responsibility. There is also no question but that USA and world Banks one variety or another, bound with the Trust of their depositors, took high and reckless risks which led up to the GFC as it is referred to in 2008. This precipitated a Great Recession which we're anticipating again in '19-'20. What is to keep us from another newer version of this same type of loss? Since that time depositors have been mostly stripped of earning interest income. Banks USED to provide a place where Depositors had safety plus some small interest income. That is History. It would seem the Banks, RBNZ and the Crown still control too much power with regard to our deposits. Why must we suffer from serendipity at the striped suit level? Many of us have all or a piece of our nest egg secure (?) in cash away from stock markets where volatility is the rule of the day. We don't want to see greed win out over sensible economic policy. But if that's NOT possible in this day and age, then we need a fail-safe place for our hard earned dollars to park until they are needed. We need a structured insurance scheme where this can happen. Here's one possible plan:

1. Make all Banks, who earn $ in the form of interest on loans, pay a percent of that interest to a Crown Depositors Insurance Plan (CDIP). Hold these funds in a trust account operated by a Crown Officer. Make THAT contribution also Crown-insured. Disallow Banks ability to enter into high risk investments with Depositor Funds. CDIP is empowered to set limit and nature of investments Banks make, including Capital Adequacy, Create Transparency by providing public access to all communications within the CDIP, Crown, and RBNZ.

2. Charge the depositor 1/4 of the above percentage based on the amount of funds they keep on deposit. Guaranty a limit of $500,000 per account holder in each Bank. Reimburse Depositor his losses in any Bank failure within 6 months. Let the Crown assess fees to Banks, not to Depositors. Let the Crown absorb deficits if they arise. In the event of a Bank failure, Depositors to that Bank are insured, dollar for dollar, no Cyprus-styled haircuts.

3. Reduce all Bank annual executive salaries by 1/4. Make this a contribution to the CDIP, returned to the executive upon completion of his employment, and part of his pension IF the Bank he was overseeing did not Fail during his employment. Otherwise, his or her loss. Tough love tp apply in all cases.

4. Hold IRD accountable for tracking all interest of Bank's funds and their investments. Empower them to oversee safety and suitability of Bank's use of their investment dollars. Create a website which provide transparency for public viewing of IRD, Crown, and Banks.

5. Any Bank failure, be it a large or small institution, is to be covered equally by all other Banks contributors to CDIP, as a percentage of their total assets. OIA s9(2)(a)

6. Criminal Fines and Imprisonment shall follow conviction of any Bank wrongdoing by its Executives. No Plea Agreements for testimony. Everybody goes to jail if found guilty of Bad Judgement or Misappropriations. Stupidity is NOT a viable defense. No executive pardons.

7. At this time the Crown's decision has yet to be made on what Capital (Adequacy) a Bank needs to keep on hand for its Depositors in the event of its possible failure. While we wait for such assessment it behooves us to get cracking on setting up a CDIP safety net. There are many hindrances to creating a CDIP... but there shouldn't be. We can't wait. We're talking about establishing a safety net for Depositor Funds. Any reluctance to expediting the creation of such a net is strictly greed based and laziness. NZ is not a 3rd world country and it should stop behaving that way. Thank you, Alexander Cohen, PhD

Tracey bowen I believe that the NZ reserve bank should implement the proposed increase in capital reserve requirements. I remember the uncertainty caused by the 2008 crisis and believe that increased capital requirements will help NZ weather the next worldwide financial crisis. OIA s9(2)(a)

Tracey Nieuwelaar I think most new zealanders consider the banks safe. Maybe they dont know about the bail in legislation and ignore the history banks have taking risks with other people's money. But really what other option is there to put your money in an easily accessible and safe place. Under the mattress is probably safer. Banks should make minimal to low risk decisions with the public's money. If they want to move into a more risky and lucrative business then get out of banking and into investments. Keep the day-to￾day banking and Joe public out of it. There are obligations with being called a bank as it implies being safe. On a separate note, i have an offset mortgage/line of credit with the bank and worry that if/when the banks fail they will take my cash and i will still liable for the mortgage. Can you give me any reassurance that my fears are unfounded? Thank you for the opportunity to make a submission and for ynz herald for encouraging submissions. Best, Tracey Nieuwelaar

TSB Community Trust Submission to the Prudential Supervision Department on the Capital Review Paper 4: How much capital is enough? 15 May 2019

BF\58972474\10 | Page 1 This is a submission made on behalf of the TSB Community Trust, the only New Zealand organisation that is the sole shareholder of a bank through the Trust's fully owned subsidiary, TSB Group Limited. About TSB Community Trust

BF\58972474\10 | Page 2 INTRODUCTION The TSB Community Trust ("Trust") welcomes the opportunity to provide feedback to the Reserve Bank of New Zealand ("RBNZ") on the Capital Review Paper 4: How much capital is enough? ("Consultation Document"). The following submission provides feedback on the Consultation Document. If you would like to discuss any aspect of the submission further, please contact: Harvey Dunlop Chair TSB Community Trust and TSB Group Ltd harveydunlop@gmail.com SUBMISSION CONTEXT The Trust holds a unique position in New Zealand. It is the only New Zealand entity that is directly or indirectly the sole shareholder of a bank. Unlike the parents of the Australian owned banks, the Trust is a "not for profit". Any returns from TSB Bank Limited ("TSB") are invested in the local community. In this sense, TSB operates much like a mutual – albeit with the benefits going to wider community rather than its customers. The RBNZ capital proposals will have a direct consequence for the Taranaki community. These differ markedly from the shareholders of the Australian parent banks (or indeed Chinese or Indian owned banks) both because: (a) New Zealand community owned or mutual banks ("Community Banks") (such as TSB) are smaller with either no parent entities or entities with limited resources to fund additional capital compared to the parents of foreign owned banks. Accordingly, they have much less flexibility to raise additional capital from within the group and the relative impact of doing so is much greater on their operations; and (b) The ultimate beneficiaries are different. For the large Australian banks, it is the large institutional investors and generally high net worth individuals who own shares in those banks and whose returns are impacted. Whereas for TSB, it is the community groups and disadvantaged that benefit from distributions from the Trust. While the Trust has made this submission independently, its subsidiary TSB has shared with the Trust an early draft of the joint submission to RBNZ by the NZ￾Owned Banks ("Joint Submission"). The Trust does not propose to reiterate the points they have made in detail but does support the Joint Submission.

BF\58972474\10 | Page 3 However, a couple of key issues raised by the Joint Submission are of particular relevance to the Trust as a shareholder and so are specifically commented on in this submission. KEY THEMES The Trust believes that: (a) The cost benefit of additional capital for Community Banks that are not domestic systemically important banks ("DSIBs") should be separately modelled; and (b) This cost benefit analysis for Community Banks should consider: (i) The much more manageable impact on the financial system should the Community Banks fail; (ii) The loss of competition (and hence efficiency) if the capital requirements limit the growth options for Community Banks; and (iii) The impact on community wellbeing from lower distributions. To further expound on the above points, the Trust has structured its submission to provide more information on the: (a) Role of the Trust; (b) Different economic model needed for Community Banks such as TSB; (c) Impact of the proposed capital requirements for the Trust and wider Taranaki community; and (d) Changes to the proposed Capital Policy the Trust is advocating. OUTCOMES SOUGHT The Trust is looking for the following outcomes from the RBNZ: (a) Retaining the existing capital ratios for Community Banks at least; (b) Alternatively having a larger buffer between Community Banks and DSIBs of, for example, 2-4%; and/or

BF\58972474\10 | Page 4 (c) Allowing Community Banks, at least, to raise capital using alternative tier 1 and tier 2 capital that meet international norms. In effect, the RBNZ should retain its current rules as to what qualifies as capital, at least, for Community Banks.

BF\58972474\10 | Page 5 MORE ABOUT THE TRUST The Trust was established as a charitable trust in 1988. The Trust wholly owns TSB, through the Trust's fully owned subsidiary, TSB Group Limited. TSB has been the only New Zealand bank owned by a community trust since the savings bank mergers in the 1980s. Ensuring TSB is appropriately capitalised is a key function of being an active and responsible asset owner. Taking a long term view of the investment in TSB has enabled it to grow to be the second largest domestically owned bank in New Zealand. The Trust (through TSB Group Limited) is also the majority owner of Fisher Funds Management Ltd (“Fisher Funds”), a leading Investment Manager and KiwiSaver Provider. The Trust took this ownership stake, which was held originally by TSB, largely to separate the risks of a funds management business from the banking business of TSB and to diversify the Trust's funding sources. Fisher Funds assists New Zealanders with improving their individual financial situations through better financial decisions and smart investment approaches. TSB comprises approximately 90% of the Trust's assets on a consolidated basis with most of the balance of its assets being its investment in Fisher Funds. Each year the Trust receives a dividend from TSB (through TSB Group Limited), which it applies towards supporting charitable, cultural, philanthropic, recreational and other purposes beneficial to the community within the Trust's specified area. It also receives a dividend from Fisher Funds which it uses in part to pay down the financing for that acquisition with any surplus also applied to the Trust's community investment and funding. The Trust has been working actively to take a more strategic approach to philanthropy, so it can have a greater positive impact on the Taranaki community. This has involved reviewing its return on investment in TSB with a view to accessing greater funding for the current generation. The Trust introduced a new strategy in 2016 and a new Community Investment and Funding Framework in 2017. The Funding Framework has four tiers – Community Funding, Strategic Philanthropy, Innovative Philanthropy and Impact Investing. That framework is illustrated in the diagram on the next page.

BF\58972474\10 | Page 6 COMMUNITY INVESTMENT AND FUNDING DIAGRAM Strategic Philanthropy - Over the past two years the Trust has been working toward implementing the full framework. In that time multiple partnerships have been formed within the Strategic Philanthropy tier and have resulted in projects such as: • Taranaki Mounga Project - an ambitious conservation project transforming the mountain ranges and islands of Taranaki. Taranaki Mounga is a collaboration between the Department of Conservation (DOC), eight Taranaki iwi, philanthropic investors and the Business community. • Whyora, formerly Whakatipuranga Rima Rau (WRR) - a collaborative partnership between Taranaki District Health Board, Ministry of Social Development, Te Whare Pūnanga Kōrero Trust Inc and the Trust. Whyora (WRR) focuses on increasing the Māori Health and Disability workforce from education through to employment including secondary, tertiary, internships and post-graduate studies. • The Wheelhouse - a single point of contact for Taranaki trusts, clubs, societies and groups to help them grow stronger and be more sustainable. The Wheelhouse is a partnership of nine Taranaki capacity building organisations. • Literacy & Numeracy funding to Primary and Intermediate schools totaling in excess of $850,000 per annum.

BF\58972474\10 | Page 7 Innovative Philanthropy - The key project within the Innovative Philanthropy tier has been Te Raumatomato – a joint project with Te Atiawa Iwi, Taranaki Iwi, Tui Ora and the Trust. This project focuses on Design Thinking principles and working with communities to develop solutions from the ground up. Impact Investment - The first Impact Investment that the Trust has been working on is a Taranaki Whanau Affordable Housing Partnership. This is a partnership with two Taranaki Iwi. The purpose of the project is to deliver healthy and affordable housing and support Taranaki Maori into home ownership through a shared equity model. The over-riding objective is to improve the lives and wellbeing of Taranaki Maori, with a particular focus on child and youth wellbeing. Community Funding - It is the Trust's intention to continue to provide grants at the Community Funding level as well as working with partners to identify Strategic, Innovative and Impact Investing opportunities. Currently the Trust contributes in the vicinity of $7.5 million per annum to the community through Community Funding. These grants are essential to over 650 community organisations and can range from over $1 million for key community capital projects, to smaller $500 grants for small community groups that are key components to the fabric of the Trust's region. In the 2019 financial year alone the Trust funded via the Community Funding tier approximately: $2.1 million to Community Wellbeing organisations, $1.5 million to Learning organisations, $2.1 million to Sport & Recreation organisations, $0.761 million to Arts, Culture & Heritage organisations, $0.408 million to Health & Rescue Services, and $0.558 million to Environmental organisations. Key areas of Funding - The key levers of change that the Trust has identified for the Strategic, Innovative and Impact Investing tiers of the Funding Framework are Housing, Employment, Education and Environment. Working collaboratively and holistically with the community is crucial for the Trust to give true effect to its vision: To be a champion of positive opportunities and an agent of beneficial change for Taranaki and its people now and in the future. All of these initiatives, however, have been predicated on the Trust accessing greater returns from TSB, in particular, to fund initiatives both for the current generation, but also to fund initiatives that will have a positive impact for future generations. The Trust itself only holds reserves of $9.5 million outside of its core assets – reflecting the relatively small size of its operations. While the trustees are satisfied this is a prudent amount to manage cash flow risks for the Trust, no provision has been made to recapitalise the Trust's investments because the Trust has always considered them well capitalised both for the

BF\58972474\10 | Page 8 businesses they operate and in the regulatory environment applying to them. The RBNZ proposal represents a substantial and unexpected change, which the Trust has not provisioned to manage. The following sections explain why the Trust does not believe an increase in regulatory capital should be required for Community Banks like TSB and the consequences the Trust believes the RBNZ should consider when modeling the impact of increased capital on such banks.

BF\58972474\10 | Page 9 DIFFERENT ECONOMIC MODEL NEEDED FOR COMMUNITY BANKS LIKE TSB The international norms around capital ratio requirements indicate that in pursuing the proposed RBNZ capital requirements, New Zealand will be an outlier in terms of the high level of regulatory capital required from its banks. While the Trust notes that the Consultation Document has been guided by high-level principles, including that the capital requirements of New Zealand banks should be conservative relative to those of international peers, the Trust believes if New Zealand is to take a different approach from the international norms, there must be compelling reasons to do so. The starting point should be an analysis of the unique features of the New Zealand financial markets – set out at a high level in the diagram below.1 FEATURES OF NEW ZEALAND FINANCIAL MARKETS DIAGRAM The Trust notes that the nature of the New Zealand banking sector can be distinguished from other jurisdictions because of the very high reliance on the Australian owned banks. The New Zealand banking sector is dominated by Australian banks which have the implicit support of their Australian parents, which in turn have the implicit support of the Australian government. Strategically, the Trust recognises this reasoning behind a DSIB buffer and fully supports the effective cap on the benefit that internal ratings give the Australian owned banks. The Trust accepts that RBNZ has good grounds to focus on the capital requirements for those banks to address the significant structural

1 The diagram shows that New Zealand owned banks make up less than 10% of the systems financial assets. This falls to less than 5% if Kiwibank is excluded.

BF\58972474\10 | Page 10 peculiarities of the New Zealand financial system. However, the Trust believes imposing the same requirement for Community Banks is not only unnecessary but could be detrimental both to the soundness and efficiency of the New Zealand financial system and to New Zealand communities. Risks of Community Banks - Increasing capital requirements for DSIBs in order to make them stronger and more resilient, has a trade-off by potentially negatively affecting these banks' profits and shareholder returns albeit, based on the RBNZ stylised risk appetite statement, not significantly. In contrast, this becomes a notably different equation for Community Banks. The trade-off of soundness and efficiency in the stylised risk appetite statement is probably appropriate for DSIBs. However, that approach arguably does not take into account that Community Banks have a lesser impact on the financial system if they fail (currently they account for less than 5% of the financial system) or at least seems to place excess weight on the intangible public confidence risk in those circumstances (which could be addressed other ways – such as through deposit insurance). While the Consultation Document argued there may be less diversification in the composition of loan portfolios for smaller institutions (suggesting risks could be higher), the Trust notes that capital is a separate matter to credit rating. Rating takes into account diversification. In the case of TSB, its stand-alone rating arguably might be higher than the stand alone rating of the Australian banks (after removing implicit support). There is no evidence its risks are inherently higher. Furthermore, lower profitability is not an inherent issue for Community Banks as their owners are generally prepared to take a lower return in exchange for the other benefits of ownership. Social Cost of Diverting Community Funds - In addition, the RBNZ approach looks at the social costs of bank failures, but it does not look at the social costs of funding provided by Community Banks being diverted away from New Zealand communities, nor does it factor in the risk that these banks could be sold if shareholders simply cannot find the capital. Separate Modelling for Community Banks - The Trust believes a specific economic model is required to establish the position for Community Banks. Thus, any cost benefit work undertaken by the RBNZ for Community Banks should address the counterfactual of the negative impact on: (a) the financial system if the ability for Community Banks to compete is lost or significantly degraded; and (b) community wellbeing if lower distributions are available to them. Given the lower impact a Community Bank problem would have on the New Zealand financial markets, raising capital requirements for those banks is less important than for DSIBs. Furthermore, the market structure or other risks associated with Community Banks in New Zealand are not different from international norms (or at least no evidence has been provided that they are). This is different from New Zealand's unique concentration risk on Australian owned banks. Accordingly, the Trust does not believe there is a case for increasing the capital requirements for Community Banks beyond international norms.

BF\58972474\10 | Page 11 While the Trust believes this is likely to be an issue for all Community Banks, the next section looks specifically at the issues for the Trust and TSB of: a) the impact of the capital requirements on the competitiveness of TSB; and b) the impact on the community of the redirected funding if funds forecast for community use have to be directed into capital.

BF\58972474\10 | Page 12 IMPACT FOR THE TRUST Loss of competition by diluting community ownership – The Trust has traditionally taken a long term community focus on its investment in TSB – accepting returns at around 6% on capital as opposed to the 15% generated by the DSIBs. This has enabled TSB to compete despite its smaller scale and to focus on customer satisfaction. As a consequence TSB has been able to grow from a small savings bank in the 1980s to New Zealand's 6th largest bank today. It has achieved growth throughout New Zealand and proved a competitive constraint to the larger banks, particularly with customers dissatisfied by the impersonal service of larger banks. In short, the Trust as a long term shareholder has enabled TSB to add to both the soundness and efficiency of the New Zealand financial sector. If the Trust continued to require the dividends from TSB that the Trust has projected, TSB will have very limited capacity to grow (and may even have to reduce its balance sheet). It will end up turning away business and thereby being a less effective competitive constraint on the DSIBs. While a potential solution to attaining the new capital level requirements could be to sell down part of the bank to a third party or to bring in new shareholders, for TSB this would be a politically sensitive issue, causing significant challenges for the Trust. The TSB Trust Deed requires the trustees to maintain a controlling interest in TSB unless they have consulted with the community first. Any dilution or change in the ownership or structure of TSB is likely to be a very political decision (as opposed to a purely commercial decision); again a very different position from, for example, an Australian owned bank deciding to do a partial listing. There is a strong sense of community ownership which makes selling a considerably harder option for TSB than for other banks – particularly those part of listed groups. Furthermore, equity investors will also likely be looking for higher returns than the Trust has traditionally accepted resulting in lower retained earnings which in turn will further exacerbate TSB's ability to compete. If the Trust were ultimately forced to consider sale of the whole of TSB, because it could not continue to afford the new regulatory capital requirements imposed by the RBNZ, this would not only be disappointing politically but would potentially have negative consequences for the soundness and efficiency of the New Zealand financial system by removing a key competitor that has provided an effective constraint on large banks for the last 20 years. TSB has regularly had one of the highest customer satisfaction rates of New Zealand banks and sets an example of good conduct in the New Zealand consumer banking market. This potential loss of efficiency should be modelled when assessing whether there is a need to increase regulatory capital for the Community Banks. In addition, any sale of TSB would likely be to another larger bank that would only further add to the concentration risk in the New Zealand market. The loss of diversification will impact negatively on the resilience of the New Zealand financial system. This should also be modelled separately when assessing capital for Community Banks.

BF\58972474\10 | Page 13 Diverting funds away from the community – The Trust believes the impact of the new capital requirements on Community Banks is likely to be very different from the DSIBs given the huge resources of the DSIB Australian parents. In particular, the Trust suspects that increased capital requirements for the large New Zealand banks may not actually result in any change to dividend payouts to their shareholders. While acknowledging the new requirements may affect Australian banks investment appetite in New Zealand, the Trust notes the Australian parents have substantial group resources to fund additional capital requirements in New Zealand. The proposed capital requirements would have a significantly different result on Community Banks and the communities they support. For example, money otherwise paid to communities as dividends from TSB would need to be reinvested to bring TSB up to new capital levels (particularly if TSB wanted to continue to grow). Unlike the large Australian banks, the Trust has a much lower capacity to absorb the capital change. It currently only receives a dividend of $10 million per annum from TSB. If TSB required $50 million additional capital (which the Trust understands is the amount likely needed to give TSB a small buffer over minimum ratios) this could result in the Trust forgoing all of the dividend for the next five years to fund the capital. Even if TSB had 10 years to comply, the impact of losing half the dividend for the Trust is significant (especially as the Trust had been intending to require an increased return of its equity). The increased capital requirements will also significantly constrain growth opportunities for TSB given that the current level of retained earnings each year will no longer support the same level of growth. This will be even more acute if the Trust continues with its plan to require a greater annual dividend from TSB. The Trust believes the low dividend payout has resulted in the current generation being disadvantaged in favour of future generations. The current Trustees have reviewed this approach and are looking to rebalance it by drawing from a gradual increase in the payout ratio of 1% of Trust equity to in excess of 3% of Trust equity. In reliance on this, the Trust has commenced impact investment strategies, including Affordable Housing projects, as a means to make a meaningful difference in community. Unfortunately, the new capital requirements would result in a reduction in dividends such that not only would present initiatives targeted at future generations be at risk, so would any new strategies aimed at assisting and benefiting the current generation. Lower return results from unfair regulatory arbitrage – Currently, DSIBs have the benefit of using internal ratings to determine risk weighted assets for the purposes of allocating capital. This has been the source of considerable competitive advantage for DSIBs with those models potentially allowing them to hold up to 45% less capital for residential loans and up to 60% less capital for business loans. The current proposed approach seeks to address this imbalance by combining Output Floor and increased Scalar when using the internal ratings based approach. As noted in the Joint Submission, the current proposed approach may not achieve a level playing field because it is done on a weighted average basis. As a result, Community Banks such as TSB will continue to be

BF\58972474\10 | Page 14 at a significant disadvantage. As a shareholder, that disadvantage will impact on any returns that the Trust can receive. The Trust believes it is critical that RBNZ address this issue. Other capital relief – The Trust also endorses the Joint Submission made in respect of the adoption of Basel III standardized risk weighting and the capital relief sought for IT and risk system investments. These matters would allow Community Banks such as TSB to invest for the longer term and derisk in a key risk area – being technology.

BF\58972474\10 | Page 15 CAPITAL OPTIONS FOR COMMUNITY BANKS The Trust believes the amount of capital required for Community Banks should be retained at current levels. However, if the RBNZ determines this is not possible, then viable options need to be provided to assist Community Banks, such as TSB, in raising capital without changing control over the bank and thereby diluting community ownership. The Trust notes the intention to consider options for mutual banks to issue regulatory capital and fully supports this approach. However, the Trust does not understand why the RBNZ is proposing to change the requirements for alternative tier 1 capital and potentially to remove tier 2 as qualifying capital. Both of these instruments should be available to Community Banks if capital requirements are increased. They are understood internationally and domestically in the capital markets and therefore, are a much more viable and cost effective form of capital to raise. They can be raised without diluting community ownership of banks and therefore are a politically palatable form of capital for the Trust. As the Trust understands it, alternative tier 1 and tier 2 capital is accepted as regulatory capital by central banks all around the world. These instruments have all of the key legal features to enable them to function effectively as prudential capital. In addition, the moral hazard the RBNZ appears to be concerned about can be largely eliminated through proper disclosure and marketing. Even if the RBNZ is not prepared to accept these instruments for DSIBs, the Trust believes the quantum and hence system risk will be much lower for Community Banks and therefore, these instruments should be permitted specifically for these Community Banks. Further, accepting alternative tier 1 and tier 2 instruments for Community Banks could also ensure that, in substance, there is a more even playing field for access to capital (which most of the larger banks can get from their parents). A more even playing field for access to capital would give Community Banks an ongoing opportunity to grow and hence, only improve the soundness and efficiency of the New Zealand financial system. In conclusion, the Trust sees no market or legal reason for New Zealand to be an outlier internationally with much more restrictive rules on what counts as capital – particularly if New Zealand is also an outlier on capital ratios. If the RBNZ increases capital requirements for Community Banks, the Trust believes it must allow reasonable options to raise that capital through alternative tier 1 and tier 2 capital – especially as those rules simply reflect global practice.

SUBMISSION Review of Capital Adequacy Framework for locally Incorporated Banks Capital Review Paper 4 How much capital is enough?

1. Introduction 1.1 Turley Farms Limited welcomes the opportunity to submit to the Reserve Bank of New Zealand (RBNZ) on the Review of the Capital Adequacy Framework for Locally Incorporated Banks. 1.2 The comments within this submission come from the Shareholders of Turley Farms Limited. 1.3 We reserve the right to be heard in support of our submission and we would be happy to appear to clarify any points if this is required.
2. Stronger Banks and Banking System 2.1 Turley Farms Limited supports the strengthening of the New Zealand banking sector. This should make banks safer for investors and borrowers and ensure the country is better positioned to weather a banking crisis. 2.2 There appears to be much debate as to what level of capital is appropriate for New Zealand banks to hold to achieve the goal of withstanding a one in two-hundred-year crisis. Turley Farms appreciates there is the need to increase the amount of capital banks hold.
3. Potential Increase in Cost of Borrowing 3.1 RBNZ has stated “Interest rates (borrowing and lending) could change – but we don’t expect by much. Lending margins above borrowing cost are likely to expand by 20 – 40 points” 3.2 Our trading bank have indicated directly to Turley Farms Limited that they intend to fully pass onto the customer all the increased cost associated with the RBNZ imposed increased capital requirements. 3.3 In fact, some of the trading banks are already enforcing a lift of up to 50 basis points onto fixed term loans and margins above wholesale floating rates as existing facilities mature over, above what they were charging prior to the capital adequacy debate starting. Banks have seized the opportunity to increase margin before the submission period has closed and well before any costs are incurred on their behalf. 3.4 The increase in margin already being charged is significantly above that signalled by RBNZ.

3.5 With more capital on hand, the New Zealand banking sector would become a lower risk environment and bank shares would become lower risk investments. 3.6 It seems inequitable then that the banks could propose to pay dividends on bank shares at similar yields to today when the risk to bank shareholders from a failure of the banking system will significantly diminish. 3.7 Recommendation 3.7.1 The RBNZ provide guidance to the banking sector as to how the increased cost of capital is to be apportioned in a fair and equitable manner. 4. Swarm Comprehension 4.1 RBNZ states in it supporting material that “Banks make profits from lending. The competitive market will continue and if one banks pulls back in a particular segment of lending, we expect another will step up” 4.2 Turley Farms Limited observation over time is quite the opposite a and that banks very much follow each other’s lead. It is understandable that banks operate this way as they all operate under the same macro influences. These have historically been aligned to agricultural commodity prices or aligned with off shore capital availability. 4.3 Agriculture commodity prices are cyclical and therefore there needs flexibility in phasing the of the capital reserves. 4.4 The lessons of the late 1980’s with rapid monetary policy change should be taken as learning’s, and avoid rapid change in monetary policy again. 4.5 A lack of profitability in a section of the agriculture industry and a material reduction in bank sector appetite has resulted in weak liquidity in the agriculture market. All banks appear to be “pulling back” at present. 4.6 Turley Farms Limited supports the “reset” of the banking industry with regards to lending parameters. 4.7 Turley Farms Limited sees significant risk in the perfect storm materialising where banking margins increase marked (100+ basis points) due to extra capital costs and customer risk ratings increase, bank sector reduction in appetite stifles ability for growth and liquidity in the land market and reduction in agricultural commodity prices sends shock waves causing massive deterioration in all asset values. 4.8 Reccommendation 4.7.1 The RBNZ implement the increase in capital costs over a longer period of time that is currently proposed or at least have the option to extend the time period if required. It is imperative at the same time RBNZ ensures trading banks continue their drive to strengthen Agri sector businesses through improving their profitability.

5. About Turley Farms Limited 5.1 Turley Farms Limited is an arable and vegetable production farm. 5.2 Turley Farms Limited is one of the larger cropping units in New Zealand, farming in three localities in the South Island being Chertsey, Rangitata and Temuka. Just short of 3,000 hectares in total. 5.3 Crops grown are wheat, potatoes, onions, small seeds, and vegetable seeds. 5.4 Produce is processed at business that we hold a shareholding in, including Farmers Mill, Southern Packers and Seedlands. Hybrid vegetable seeds these are all exported through companies like Midland Seeds and DLF. We are not involved in processing on.