14 Dec 2018

Banks should hold onto profits to back loans - Reserve Bank

4:07 pm on 14 December 2018

The Reserve Bank wants banks owners to hold more of their profits in reserve to back the loans they make.

Labour wants the Reserve Bank to have a broader economic role.

Labour wants the Reserve Bank to have a broader economic role. Photo: RNZ

After a review of bank capital rules, it has now released a consultation paper proposing to almost double the minimum requirements.

Banks currently get most of their money, usually more than 90 percent, from borrowing, with less than 10 percent coming from the owners.

The Reserve Bank's Deputy Governor Geoff Bascand said insisting shareholders had a meaningful stake in their bank would provide a greater incentive to make sure it is well managed.

"Having shareholders able to absorb a greater share of losses if the company fails also provides stronger protection for depositors."

He said the changes would make the system resilient to shocks, thereby reducing the chance of a banking crisis in New Zealand to only once every 200 years.

"Bank crises happen more often than many people care to remember and the economic and social costs of bank failures can be very high and persistent."

How much extra capital banks will have to hold would depend on their size, current capital levels, and how much capital banks choose to hold above the minimum.

The minimum requirements would be almost doubled under the proposal, and in practice, that would mean an increase of between a 20 and 60 percent.

That is believed to add up to about 70 percent of the banking sector's expected profits over the proposed five year transition period.

Mr Bascand said it could mean a minor impact on how much banks charge for borrowing.

"While borrowing costs may increase a little, and bank shareholders may earn a lower return on their investment, we believe these impacts will be more than offset by having a safer banking system for all New Zealanders."

The Reserve Bank is asking for feedback on its proposal between now and March next year.

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