Three independent experts have agreed that proposed requirements are not excessively risk averse
The Reserve Bank has released three independent expert assessments of its Capital Review, all of which have agreed that the proposals are fair, reasonable and do not demand levels of capital which are “clearly higher than they should be.”
The three experts also agreed that the Reserve Bank has conducted a “sensible analysis” of the risks present in New Zealand’s financial system, and that this analysis is well-reasoned and not biased. Professor David Miles in particular noted that rather than being excessively risk averse, the Reserve Bank has actually presented a view which is “closer to risk neutrality.”
Commenting on potential gaps in the analysis, Professor Ross Levine said that the proposals did not sufficiently consider banker incentives, which can impact the stability and efficiency of a bank. However, he acknowledged that this wouldn’t necessarily give the Reserve Bank reason to recommend higher or lower capital ratios.
Professor Miles noted that some modelling inputs were set to levels which could be considered “too pessimistic” – however others were overly “optimistic,” so they ultimately offset each other and the resulting analysis had no upwards bias.
Reserve Bank deputy governor Geoff Bascand says that RBNZ will work on the suggestions given by each expert, and will be continuing its stakeholder outreach programme on the costs and benefits of the Capital Review.
“Each independent reviewer signalled their support with the direction proposed in the Capital Review,” Bascand said.
“They all acknowledged the quality of analysis underpinning our proposals, the transparency of our process, and the care we have taken to consider the points raised by submitters during the consultation process to date.
“Along with the external expert reports and submissions received, these inputs will help us to make robust, well-calibrated policies and decisions that best represent society’s interests.”
Banks had the opportunity to air their views on the proposed capital requirements earlier this year, with most taking a strong stance that they go “significantly further than required” for a financially sound system.
Implementation of any new capital requirements is proposed to start from April 2020, with a transition period of several years. Final decisions are expected in the first week of December 2019.
