Don't believe what banks say about capital – Reserve Bank

Geoff Bascand, deputy governor at Reserve Bank of New Zealand (RBNZ), says it’s not wise to believe what banks say about how much capital they should have to hold.

“Shareholders’ view of capital will always be lower in the banking sector than is good for the country. If a bank says it should be this much, know that it should be more than that,” Bascand told New Zealand Shareholders’ Association (NZSA) in its annual conference.

RBNZ has proposed increasing the minimum amount of tier 1 common equity capital the four major banks in the country have to hold – from 8.5% if risk-weighted assets to a much higher 16%. Smaller banks, on the other hand, will have to hold only 15%.

“Broadly speaking, they borrow 93 percent of the money they lend and only about 7 percent is their own money, and you might be a little bit worried about that. We want that level to go up to about 10 or 11 percent,” Bascand said.

Read more: “Nothing's too big to fail” – Reserve Bank governor

Currently, larger banks can use their own internal models to calculate how much capital they should hold while smaller banks can only use standardised models – resulting in larger banks being able to have a lower amount of capital to hold compared to smaller banks.

In February, Bascand released information showing that ANZ needs to hold just below $3 of capital for every $100 of mortgages on its books while Kiwibank needs to hold around $5.70.

RBNZ aims to help smaller banks by proposing changes that will give them a more level playing field.

Bascand admitted that more capital will lower returns to bank shareholders but explained that those investors should expect a lower return from a safer investment. He also pointed out that holding more capital will help banks continue their operations, even in a crisis.