Banks warn interest rates could rise by up to 1 per cent if Reserve Bank makes them hold more cash

The big banks in New Zealand are spreading the word that interest rates will go up by as much as one per cent under Reserve Bank plans to strengthen the country's financial systems.

The Reserve Bank wants to force retail banks to hold more cash. Under the proposals, banks would have to hold $20 billion more in capital, meaning they'd need to double the minimum amount of money they keep in the safe.

"Capital is really important for keeping banks safe," said Geoff Bascand, Reserve Bank Deputy Governor.

The 2008 Global Financial Crisis saw banks collapse, and so New Zealand's central bank wants to ensure if - or when - that happens again, we're ready for the shock.

"This is really about a long-term policy to try and make sure we don't have another crisis," Mr Bascand said. 

Economist Cameron Bagrie says there is a global move towards making the banking sector more resilient. 

"New Zealand is just part of the crowd that's looking at building up those safety buffers in anticipation of what could be a low probability event, but if it does occur, could have pretty disastrous consequences," he said.

The four big banks are pushing back against the proposed increase in their capital, warning it could lead to an interest rate rise of up to one per cent.

Claire Matthews of Massey University is sure rates would rise.

"I have absolutely no doubt that if banks are required to hold more capital, then the cost of borrowing will go up," she said. 

Andrew Bascand of Harbour Asset Management said the higher estimates of interest rate rises "would have an impact significantly on GDP, on employment".

If banks have to hold more cash, someone has to pay for it - whether it be savers or borrowers.

Mr Bagrie says some of the figures being thrown around by the banking sector are "scaremongering sort of figures". 

"But certainly borrowers can expect to pay a little bit more. And of course shareholders I suspect going forward can expect a slightly lower return," he said.

The smaller banks say it'll give the Australian banks an even bigger advantage.

Despite their objections, none of the banks would be interviewed by 1 NEWS today. And neither would the Bankers Association.

But there are submitters in favour of the proposals, including international organisations like the OECD, who say it's the right move.

Banks would have five years to implement the proposals.

"Many of the submissions said seven to 10 years, and actually let's pause on the way through to see if we're having a significant detrimental impact on higher interest rates, or on the other hand lower lending," Andrew Bascand said. 

Geoff Bascand of the Reserve Bank said, "We will review our cost benefit work and publish it in due course. But we think these proposals are net benefit for New Zealand." 

The Reserve Bank will release its final decision in November.

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But the country’s banks are fighting the central bank’s move. Source: 1 NEWS