21 Aug 2019

Australian regulatory squeeze could affect NZ banks

10:13 am on 21 August 2019

Australia's big banks may have to make do with less money from their New Zealand operations, as Australia's banking regulator moves to improve their financial strength.

Stack of New Zealand Dollar

Australian banks will have to limit the amount of capital they send to its overseas businesses to 25 percent, down from 50 percent. Photo: 123RF

The Australian Prudential Regulatory Authority (APRA) is to limit the exposure Australian banks have to related entities, including their New Zealand banking operations.

ANZ Group said it was likely to impact its New Zealand business.

"ANZ could have limited capacity to inject capital into ANZ New Zealand," it said in a market announcement.

"As a result, ANZ New Zealand may be required to retain a higher proportion of its earnings to meet any potential increased capital requirements and any future capital required in New Zealand may also need to be held at a group level."

ANZ said the impact would depend on a range of issues, including the outcome of the Reserve Bank of New Zealand's capital proposal.

APRA said it was going ahead with the change to make Australia safer in the possible event of another financial crisis, by reducing the 'contagion' effect from any damage at entities in other jurisdictions.

"Banks' dealings with related entities can introduce the potential for material contagion risks," an APRA statement said.

"As demonstrated in the global financial crisis, deficiencies in controls to mitigate these risks can result in severe financial and reputational contagion within the financial system more broadly."

The change meant APRA would halve the amount of capital Australian banks could send to related entities, to 25 percent of Tier 1 capital, from 50 percent.

Banks would need to report any risks associated with those entities, such as if it was expected to finance it if it hit trouble, and hold more information on them, including about their directors and substantial shareholders.

APRA would require the information in 2021.

ASB Bank said it had enough capital to meet the requirements, and the National Australia Bank, which owns the BNZ, said the APRA changes would not result in any extra disclosures from NAB, or its subsidiary in New Zealand.