The Reserve Bank plans to reduce the amount of capital banks are required to hold against their loans. Photo: RNZ / Dom Thomas
Changes to bank capital requirements may mean home loan interest rates are lower than they could otherwise have been, but the impact is likely to be small, economists say.
The Reserve Bank announced on Wednesday it would go ahead with its plans to reduce the amount of capital banks are required to hold against their loans by about $5 billion overall.
The rate has been increasing in stages since 2019, to shore up the ability of banks to withstand a shock.
But there have been concerns that the rules make it hard for smaller banks to compete, and could be making borrowing more expensive.
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The changes also introduce more granular risk weights, simplification of capital instruments, and greater alignment of instruments for the big four banks with Australian settings. The final package further refines risk weights consulted on in August.
Reserve Bank Governor Anna Breman said it expected there to be a positive impact on borrowers.
"These new settings will reduce the overall cost of deposit takers' funding, which we expect to see passed on as benefits to New Zealanders through increased lending and reduced rates, which we will monitor closely."
Infometrics chief forecaster Gareth Kiernan said the change could mean a small impact on interest rates, of possibly 40 to 60 basis points.
"Business and farm lending was a bit more impacted [by the increased requirements in 2019] than residential stuff from what I remember. If you're unwinding that then we might be talking 10 or 15 basis points. It's a little but maybe it just helps things run a bit smoother in terms of the economy and reducing some of those costs. But it's not even an entire OCR move."
David Cunningham, chief executive of Squirrel, said because the peak capital requirement had not yet been reached the change could just mean that rates did not increase further.
"I think it's at the margins because the banks have all increased their capital quite significantly anyway."
Simplicity chief economist Shamubeel Eaqub agreed the impact would be small.
He said Breman's effort this week to push back against wholesale markets pricing in OCR increases in future, which have led to higher retail rates, was not likely to be successful.
"You can't publish a set of forecasts that's clearly showing rising interest rates and then say the markets are wrong. It's one or the other. I think they've got a real problem in terms of they seem to keep on snatching defeat from the jaws of victory… the reason that swap rates are up is that the markets think there will be a recovery."
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