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.