Reserve Bank Capital Review

Reserve Bank Capital Review Media Briefing 22 February 2019

2 Housekeeping • Briefing material embargoed until 4pm today – at media’s request. • Draft speech provided under embargo. Final text released at 12.30pm on Tuesday 26th. • Time for questions at the end. • Media and Reserve Bank people on videoconference from Auckland.

3 Opening remarks: Geoff Bascand

4 What we’re trying to achieve • Stronger banks and stronger banking system - better able to survive large shocks. • Protect New Zealand from the significant harm that accompanies a banking crisis. • Protect depositors and potentially taxpayers from failing banks. • Maintain investor confidence in New Zealand’s banking system.

5 A more level playing field • Current Tier 1 capital per $100 of mortgage lending, Tier 1 capital at proposed minimum ratios (estimate using publicly available data) 0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7 ANZ ASB BNZ Westpac Kiwibank Other banks $ $ Current outcome Proposed minimum (estimate)

6 Why we care • The Reserve Bank’s job is to promote a sound and efficient financial system. • If a bank fails, then all of society suffers – not just the bank’s customers. • Our tolerance of bank crises has reduced given evidence of enduring, wide-ranging crisis impacts. • We want banks to have enough capital, and the right quality capital, to withstand significant shocks. • More capital reduces the likelihood of a bank failure.

7 What will it mean for society? • Banks will be safer – the costs and risks of a bank failure are reduced. • Interest rates (borrowing and lending) could change – but we don’t expect by much. Lending margins above borrowing cost may expand by 20-40 basis points. • Banks make profits from lending. The competitive market will continue and if one bank pulls back in a particular segment of lending, we expect another will step up. • 20 banks operate in NZ, with 16 in the retail market.

8 What does it mean for banks? • More and better-quality capital. So that means banks will be safer – so will likely get cheaper credit. • The big four banks would have five years to increase their capital ratio from the current 12% to 16%. We expect a combined increase in capital of around $20bn for the big four. • Other banks have to increase their capital ratio from the current average of 14% to 15%. We expect a combined increase of around $0.9bn in capital for these banks.

9 Clarity on regulator-regulated relationship • More efficient model approval process. • Escalated Supervisory Response (ESR) – greater clarity about supervisory actions with a graduated buffer approach.

10 What will banks do? • Banks will keep making their own decisions about how they manage their balance sheets. They have a number of options to raise the capital they need. • They could retain more profits over several years (rather than paying out dividends to their owners) or they could raise more capital from shareholders. • We estimate the big four banks could get there by retaining 70% of their net earnings over 5 years. • The small bank sector might take a bit longer, around 7 years.

11 • Limitations: NZ application of Basel framework on average is more conservative than other jurisdictions. Peer group includes banks with less comparable business models to NZ banks. International comparison – Basel Committee

12 International comparisons – S&P • Limitation: Standard and Poor’s Risk-Adjusted Capital methodology relies on S&P’s economic risk assumptions (Peer group: 4 largest NZ banks, large retail and commercial banks in each country; NZ (p) = pro forma) 0 2 4 6 8 10 12 14 16 18 0 2 4 6 8 10 12 14 16 18 FI NO CZ NZ (p) SE HK DK PL IE NL MY IL AU AT SG NZ S&P Risk￾Adjusted Capital ratio (%) Range Median

13 Proposed transition Quarter / year Proposal Q3 2019 • Confirm final Capital Ratio decisions • New AT1 instruments need to meet revised standards Q4 2019 • Start of transition to higher ratios • Implement changes to IRB framework (floor / scalar) 2020 • Dual reporting • Revised Standardised Measurement Approach (Op Risk) • Leverage ratio requirements • Transition to higher capital ratios 2021 • Transition to higher capital ratios 2022 2023 2024

14 Timeline – near term • Speech from Deputy Governor Geoff Bascand (26 Feb). • Another industry forum penciled in, Auckland (March). • Analytical note on Risk Appetite Framework (March). • Open to further discussions with industry during the consultation period, including bilateral meetings if desired. • Consultation closes (3 May). • Reserve Bank publishes submissions (June). • Release of final decisions, accompanied by Regulatory Impact Statement (Q3).

15 Further work • Consultation on further elements of the framework:  Near term: – Identification framework for systemically important banks (March). – Internal model change process (workshop with affected banks).  Later in 2019 and beyond: – Mutual capital instrument. – Leverage ratio design (if decision made to proceed). – Escalating Supervisory Response framework and trigger points. – Strategy for setting the countercyclical capital buffer. – Operational risk framework (pending APRA finalisation). – Tier 2 (subject to current consultation). • Dovetail with changes to Banking Supervision Handbook as Capital Review decisions are implemented.

16 Questions ?