By Shamubeel Eaqub*
Analysis - The RBNZ's finalised capital review will make banks safer, borrowing more expensive, deposit rates lower and lending more conservative.
The RBNZ wants to make banks safer against shocks. Banks will hold more capital, so when there is a shock, the banks' shareholders will lose their money rather than needing a public bailout, as happened in many countries during the global financial crisis.
However, there are no free lunches. A safer banking system reduces the risk of an unknown and extreme event in the future, for some real costs now. The real costs are likely to come from three sources: more expensive mortgages, lower deposit rates and fussier lending by banks.
$765 a year for 30 years for the average mortgage
Mortgage costs will rise by around 20bp or 0.2 percentage point according to the RBNZ. For the average New Zealand house this means $29 more per fortnight or $765 per year for 30 years, with a 20 per cent deposit and 30 year term. The impact on each district of New Zealand is shown in the table below.
Some analysts think the increase may be closer to 100bp or 1 percentage point. That would increase costs by $121 a fortnight or $3151 a year.
The increases will vary by region, because house prices differ so much. The ability to afford it will also vary, becomes incomes tend to be lower in the provinces than in urban centres. In places like Gisborne, Auckland and Queenstown for example, where house prices are nearly 10 times incomes, this will put houses even further out of reach for many locals.
Lower deposit rates
Deposit rates could go lower as a result of the new rules, but the amount is uncertain. Banks need a minimum level of deposits, and if they lower interest rates too much, people may put their money elsewhere. That would force banks to raise mortgage rates more.
Lower deposit rates, even small amounts, will hurt retirees who are relying on the interest on their deposits. At current low interest rates, those with savings in deposits will need to think about other ways to invest, such as in managed funds or variable annuities. Retirees should seek personalised financial advice, because they must manage their money prudently in the current very low interest rate environment, so that their money doesn't run out before they do.
As the banks become safer, they are likely to make their lending safer too. Meaning, they will ration credit for those with high risk, such as poorer people, and riskier businesses and farms.
Right now, more careful bank lending will mean increasing pressure on existing borrowers to pay down debt. This is likely to hit farmers for example, although current very high prices for milk (dairy payout this season is forecast to be the fourth highest on record) and meat is welcome opportunity to pay down debt.
The new policies will make banks safer. It will cost borrowers more - around $765 a year for 30 years for the average New Zealand house today. It could make it a little harder to borrow for farms and businesses. Some reckon the banks' owners will take the hit and not much will change. In reality, it will be a mix. Banks' shareholders will hurt, but so will borrowers, savers and those looking to grow their farms or business.
It is like insurance. We will pay the premiums every year, to ward off a calamitous risk. We will all pay more for banking to make it safer in the longer term.
Is it worth it? Its marginal. My personal preference would have been to see much greater reworking of banking regulation that not only how much capital they hold, but how they lend and to whom - with an aim to direct more lending towards entrepreneurship, where new lending creates sustained economic growth, not just a more expensive way for us to buy and sell houses from each other.
* Assuming 20 per cent deposit, 30-year term.
Sources: House price data from QVNZ, remainder author's calculations