Proposed Reserve Bank changes will push up mortgage interest

The Reserve Bank has proposed significant increases in the amount of capital that banks are required to hold for 8.5% to 16%.

This would push up  mortgage interest rates, the Reserve Bank thinks by 20 and 40 basis points, but banks say it will be more like 100.

Newsroom: RBNZ proposals ‘will add $6000 a year to mortgage’

Westpac says the Reserve Bank’s bank capital proposals will mean homeowners with an average mortgage in Auckland will be paying about $6,000 a year more in interest.

The Australian-owned bank says the central bank has greatly underestimated the cost of its proposal to near double minimum tier 1 capital from 8.5 percent currently to 16 percent for the big four banks and 15 percent for the smaller banks.

The RBNZ has said its proposals would add between 20 and 40 basis points to the cost of a home loan and that amount would be lost in “noise” around interest rate changes but Westpac says the cost will be more than 100 basis points in its submission on the proposals.

Westpac says RBNZ hasn’t provided “quantitative justification” for the proposals which “go well beyond international norms.”

It criticises the central bank’s failure to produce a cost-benefit analysis, a criticism already levied by many commentators who, like Westpac, have said that should have been the RBNZ’s starting point.

Westpac says the absence of that analysis means “it is unclear that the economic costs of implementing the proposals are justified.” It estimates one of the costs will be to shave 1.3 percentage points off New Zealand’s annual GDP.

GDP in the year ended March was 2.8 percent so, if Westpac is right, the bank capital proposals would reduce that to 1.5 percent.

Westpac’s submission is littered with savage criticism of the analysis RBNZ has done. For example, the consultation paper released in December “does not adequately consider” the adequacy of existing bank capital levels.

RBNZ has said New Zealand banks on average carry about 12 percent tier 1 capital, significantly above the current 8.5 percent minimum.

Westpac says the proposals “are not justified by any supporting data or evidence,” RBNZ’s analysis is “materially incomplete and flawed”, and that the central bank has selectively used academic research to back its proposals while ignoring research that doesn’t support them.

The outcome of this argument could be a big deal – or cost – for people with mortgages.


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  1. Griff.

     /  27th May 2019

    In late news banks try to protect their obscene profits by exaggerating the effects of new regulation.

  2. Russell Ford

     /  27th May 2019

    Why should the cost of additional prudentially be passed onto the consumer anyway. Why not place it where it belongs, with the banks’ shareholders? Did the shareholders help the banks post 2008 when the government bailed them out? No! It was the taxpayer and the bank customers, both borrowers and investors. Bank trading margins have rarely been adjusted downward, perhaps it is time for that to be forced to happen.

    • Duker

       /  27th May 2019

      The banks always leave out in their ‘numbers’ that they should be able to borrow the money more cheaply( now they are a lower risk) to on lend to consumers
      Since this is the money that household interest rates are charged on, the banks are guilty of gross exaggeration by saying consumers would pay more.

      What has happened up till now is banks have relied on an ‘too big to fail’ ethos and their shareholders have reaped the benefits, by changing to a ‘too strong to fail’ poor shareholders will have to forgo some profits for a while to build up reserves.

      • Kitty Catkin

         /  27th May 2019

        Nobody sells a product for the price they paid for it; why would a bank do this ?

  3. Blazer

     /  27th May 2019

    As we have seen the ANZ has been in breach of the existing Capital requirements for the last 5 years.
    It makes you wonder about these other foreign owned banks.
    Since the embracing of Friedman economics and importantly the repeal of the Glass Steagal Act by Clinton,western banks have become a law unto themselves.
    NZ Banks unlike their parent banks in Australia do not have depositors insurance,in fact they have provision to have their deposits levied should a bank need ‘help’.

    Given the existing tacit Govt guarantee to banking , their threats and aggressive stance is well out of line and should be met with determined decree.

    The banks are making huge profits,their return on actual capital is obscene.

    The bonus and remuneration structure of these parasites is an insult to hardworking NZ’ers.

  4. Tom Hunter

     /  27th May 2019

    Fromer Treasury economist Michael Reddell has been studying these proposals for some time now on his Croaking Cassandra.

    Aside from many other problems with the NZ Reserve Bank analysis, Reddell points out that it would see NZ subsidiary banks with higher requirements than exist in Australia for many of the parent banks, which makes no sense, since any banking crisis that took them down would take the NZ ones with them,

    There’s also a paper he quotes, The 30 billion dollar whim, which summarises the problems with the Reserve Bank’s regulatory proposals for private NZ banks increasing their capital requirements and has the following conclusions (with reasoning excluded here for space purposes):

    1. Capital increases unnecessary.
    2. Risk tolerance approach is actually a backward step.
    3. Modelling analysis is embarrassingly bad.
    4. Bank missed a double counting: capital requirement already increased by 20%.
    5. Impact of foreign ownership continues to be ignored.
    6. The Economic cost of crisis substantially overstated.
    7. Misrepresentation of the social costs of crises.
    8. Fiscal risks benefits overstated.

    A whole lot of extra cost caused by regulation with no measurable increase in economic safety. In fact it might even reduce that safety factor across the whole economy because any extra money paid in interest is not money being used to reduce private exposure to debt, which means borrowers are more exposed in the next recession.

    • Blazer

       /  27th May 2019

      ‘NZ subsidiary banks with higher requirements than exist in Australia for many of the parent banks, which makes no sense, since any banking crisis that took them down would take the NZ ones with them,’

      yet the very same banks insist they are 2 completely different markets…with independent policy!

    • Blazer

       /  27th May 2019

      ‘Principal Ian Harrison (B.C.A. Hons. V.U.W., Master of Public Policy SAIS Johns Hopkins) has worked with the Reserve Bank of New Zealand, the World Bank, the International Monetary Fund and the Bank for International Settlements’

      can’t take his view as being impartial.

      How do the banks spend $1billion complying with the OBR?

  5. Duker

     /  27th May 2019

    NZ Banks dont have a gurantee as the government didnt continue the scheme after the GFC, includes NZ operating bank of Main Australian owner
    Australian banks have the government guarantee but they have a ‘Big Bank Tax as well

    ‘Australian banks face A$6.2bn balance sheet tax’


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