RBNZ's bank capital proposal: impact on lending rates

by Krizzel Canlas18 Jan 2019

The Reserve Bank of New Zealand’s (RBNZ) proposal that banks hold more capital will mean upward pressure on lending rates – including home mortgage rates, it has been suggested.

In a bulletin, Westpac New Zealand assesses the impact of the bank capital proposal on lending rates. It highlighted that more capital will increase banks’ cost of business.

“Banks might absorb some of this as a lower return on equity,” Westpac said. “But to at least some extent, higher costs will be passed on to customers in the form of a wider margin between deposit rates and lending rates.

“With higher lending rates, New Zealanders will choose to borrow less,” it noted.

Westpac explained that RBNZ’s rule of thumb is that for every one percentage point increase in bank capital, the cost of bank credit would rise by 6 basis points. Meaning, if banks lift their capital ratios from 11.6% to 18%, this implies roughly a 40 basis point widening of the spread between bank lending rates and deposit rates.

“Our own reading emphasises that the impact is highly uncertain, with estimates varying wildly between studies,” it added.

RBNZ is still seeking feedback on proposed reforms to the amount of regulatory capital required of locally incorporated banks. Submissions close March 29.

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