New Zealand’s banking boss scaring off Australia’s Big Four

Adrian Orr. Picture / Dean Purcell

It’s common for defenders of the Rudd Labor government to claim that “Rudd saved us from the GFC”. While there’s no doubt that Rudd’s initial fiscal stimulus package helped pump the Australian economy, the strongest factor in Australia’s ability to weather the banking crisis was that prudential regulation was so much more effective.

New Zealand’s Reserve Bank governor Adrian Orr is proposing to go one better, supposedly to not just earthquake, but tsunami-proof New Zealand’s financial system. But Australia’s “big four” banks, which dominate the Kiwi financial industry, are worried.

If New Zealand’s all-powerful regulator Adrian Orr has his way, the big four will be passing the hat around for the next five years to raise an extra $NZ25billion ($23.5bn) in capital.

Orr’s objective is to effectively shockproof the financial system, making it capable of withstanding the kind of debilitating crisis that only occurs once in several lifetimes.

The scale of his plan for NZ banks to displace their Nordic counterparts as the world’s safest has alarmed the big four, which account for 88 per cent of industry assets across the ditch.

What exactly is Orr proposing that has the banks so worried? Tier-one capital is a bank’s core capital, it’s strongest, safest assets. Tier-one are the lowest of low-risk assets. But high-risk assets are the ones which (potentially) generate the most profit. Too much high-risk investment caused the GFC. But too little risk causes stagnation. The key is to find the right balance.

The RBNZ has proposed hiking higher quality tier-one capital from 8.5 per cent to 16 per cent.

By contrast, the Australian Prudential Regulation Authority has a required tier one ratio of 10.5.

The 10.5 per cent target emerged from the 2014 Financial System Inquiry to ensure that the banks were “unquestionably strong”.

APRA is immovable on the benchmark.

So, if 10.5 per cent is set in stone, the big four look like becoming “unbelievably unquestionably strong”, with group tier one capital ratios in a range of 11.5-12 per cent once Orr has his way in NZ.

So Orr’s proposal would make New Zealand banking secure, but would it kill investment? ANZ Bank and Westpac are unambiguously warning that they may have to clamp down on credit growth in New Zealand and move capital elsewhere.

The banks’ rejoinder — in a report for the NZ Bankers Association lobby group — is that the economic cost of the proposed reforms will exceed the benefit by $NZ1.8 billion.

Westpac chairman Lindsay Maxsted told The Weekend Australian last month that implementation of the NZ proposals would “severely” lower the bank’s return on equity in that country.

theaustralian


The RBNZ’s intention – to shockproof New Zealand’s financial industry – is well-merited. The concern is whether New Zealand’s finances will end up merely safe – or moribund.

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