Reserve Bank Capital Review

Reserve Bank Capital Review
Media Briefing
22 February 2019

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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.

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Opening remarks:
Geoff Bascand

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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.

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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)

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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.

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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.

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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.

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Clarity on regulator-regulated relationship

• More efficient model approval process.
• Escalated Supervisory Response (ESR) – greater clarity about
  supervisory actions with a graduated buffer approach.

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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.

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• 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

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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

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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

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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).

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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.

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Questions ?