Every time New Zealanders apply for a mortgage or business loan, they pay the price for the Reserve Bank’s controversial 2019 bank capital decision to increase capital requirements for major banks by almost 100 per cent.
The decision made our banks much more heavily capitalised than most of their international peers. This extreme conservatism targeted a novel ‘one-in-200-year’ risk of bank failure. The standard benchmark is one-in-100-years.
The RBNZ finally acknowledged the need to review its approach in March – just four weeks after Governor Adrian Orr’s shock resignation.
Submissions on the RBNZ’s consultation paper have closed. Yet, what is on offer are only cosmetic tweaks.
The 2019 decision came with acknowledged costs. The RBNZ estimated it could reduce GDP by up to 0.32 per cent annually. Independent analysts put the figure higher. Tellingly, no other central bank has followed New Zealand’s extreme approach.
The bank’s decision-making process was controversial at the time and remains so now. The RBNZ failed to include its cost-benefit analysis in the consultation process. Its dramatic departure from international norms required rigorous justification. The cost-benefit analysis should have been tested through public consultation.
The current review includes valuable international analysis. Oliver Wyman’s RBNZ-commissioned report confirms New Zealand banks hold around 21 per cent in capital buffers. This will increase to 25 per cent when the 2019 decision is fully implemented. Most peer countries hold 13–19 per cent. Yet the RBNZ’s review proposes maintaining New Zealand as a comparative international outlier.
When bank capital requirements are excessive, the real victims are New Zealand borrowers. The banks themselves will adapt. But borrowers will face higher costs and constrained credit. The question is whether this serves New Zealanders’ economic interests.
Earlier this year, parliament’s Finance and Expenditure Select Committee heard extensive evidence about these concerns. The committee recommended an independent review of the 2019 decision.
The RBNZ released its consultation document just days later, pressing ahead rather than pausing to consider parliament’s concerns.
Finance Minister Nicola Willis has the tools to demand better. Her December 2024 Financial Policy Remit directs the RBNZ to “encourage efficient provision of financial services”.
The RBNZ’s review should be paused to allow Willis to commission Treasury to conduct the independent review parliament requested.
This article was originally published in the NZ Initiative weekly Insights newsletter.
