8 May 2012

Basel III rules may cost local banks money - ANZ

7:14 am on 8 May 2012

ANZ New Zealand chief economist Cameron Bagrie says implementation of new international capital-adequacy rules for banks may cost domestic bankers the equivalent of a half percentage point rise in the Official Cash Rate.

BASEL III is a global regulatory standard for capital adequacy, stress testing and market liquidity risk, and international regulators are debating how to implement the accord.

New governance rules would require banks to hold more liquid assets, with and rules forcing lenders to match more closely the term of their lending with their funding in an bid to make banks safer in the wake of the global financial crisis.

A previous approach, Basel II, allowed banks to invest in some risky securities, including sovereign debt, as though they were risk-free, a practice since seen as a factor in the global financial meltdown.

Now banks look set to be asked to maintain higher levels of equity capital, with an added buffer, and a minimum limit for equity as a proportion of total assets.

Mr Bagrie says the costs involved need to be passed on to borrowers if returns to bank shareholders are to be maintained.

He says passing those on could be equivalent to the effect of a hike in the Official Cash Rate of between a quarter and half a percentage point.

But Mr Bagrie also predicts the resulting higher bank margins will be taken into account by the Reserve Bank when it sets the OCR.

This could mean a lower rate than would otherwise be the case, which should have an offsetting effect on mortgage rates, as well as the added benefit of taking pressure off the dollar.