Stopping banks from failing – and Kiwis from losing their hard-earned cash – is the aim of one of the largest changes in recent banking history, unveiled today.
Banks will have to hold more capital, possibly leading to a small rise in interest rates, the Reserve Bank has revealed.
Following the global financial crisis, the Reserve Bank wanted to ensure our banks were better prepared in the advent of a one in 200 year financial shock.
So after a lengthy consultation period, it’s decided banks will have to hold more capital, because it sees that as the best way to make sure banks and the public are protected.
For the four major banks it means they’ll be forced to go from holding the current minimum of 10.5 per cent to 18 per cent. Smaller banks will need to hold 16 per cent.
There’ll also be stricter reporting requirements for banks and more monitoring by the Reserve Bank.
But it has provided one concession. The original five-year time frame has been extended to seven years, starting in July 2020. That’s aimed at reducing the economic impact of the changes.
“Following the global financial crisis, many regulators around the world have been taking steps to improve the safety of their banking systems,” Deputy Governor Geoff Bascand says.
“We’re confident we have the calibrations right for New Zealand conditions.”
It’s predicted that will see banks' interest rates rise by about 20 basis points – or 0.2 per cent - once fully implemented. On a $100,000 mortgage, that’s about $5 a fortnight on current low interest rates.
The Reserve Bank says banks can also make decisions about how they hold more cash – including reducing profits or returning less cash to shareholders via dividends.
“We have amended our original proposals in a number of ways so we achieve a high level of resilience at lower potential cost, with a smoother transition path for all participants,” Mr Bascand says.
A significant cost benefit analysis was carried out and found the benefits outweighed costs.
It’s estimated it will add 0.4 per cent to GDP because it provides a more stable economic environment for New Zealanders.