Banks will likely forward the costs onto borrowers in an attempt to "claw back capital"
BusinessNZ has urged caution on the Reserve Bank’s risk reduction proposals, saying they could potential drive up mortgage costs.
The Reserve Bank has proposed that New Zealand banks should reduce the risk of failure to a one-in-200 year event, which would mean banks having to hold up to $20 billion in additional funds. BusinessNZ says this would result in New Zealand business owners having to pay “unnecessary additional capital” and would add borrowing costs “where this is not commensurate with risk.”
According to BusinessNZ Chief Executive Kirk Hope, the requirements would also mean increased mortgage costs for borrowers or banks having to ration their credit, making financing more difficult and expensive across the board.
“Reducing risk always comes at a cost, and we should ensure the costs involved don’t outweigh the risks,” Hope stated.
“New Zealand’s risk of bank failure, given the quality of our regulatory systems, would be comparatively low, while the costs to the economy of the proposed requirements could be high. BusinessNZ recommends a cost/benefit analysis of the proposals before any further steps are taken.”
BusinessNZ noted investment bank UBS’s research paper, which outlined the potential impact on customers if the proposals were to go ahead. The paper stated that such requirements could add between 80-125 basis points to mortgage costs as banks “attempt to claw back the added capital costs,” and BusinessNZ says the Reserve Bank Governor has already acknowledged that the requirements would add 20-40 basis points additional premium between the costs at which banks borrow and lend.
“While the Reserve Bank has been keen to promote the argument that borrowing costs might actually be lower and returns on capital might not need to be so high if investors have confidence their investment is very secure, it is noteworthy that at least 2 credible international credit rating agencies have questioned whether in fact this would be the case if capital requirements were increased,” Business NZ stated.
