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Big banks brace for shock and Orr of the New Zealand kind
The Australian 12:00am April 11, 2019
Richard Gluyas
For the major banks, last year was a tale of two Orrs.
After being skewered by Rowena Orr QC in the Hayne royal commission, they are now on the hook for much deeper capital buffers courtesy of a December consultation paper from Reserve Bank of New Zealand governor Adrian Orr.
If anyone thought a proposal to almost double tier-one capital requirements could be dismissed as a central bank thought bubble, it’s time to think again.
The potential implications are serious, including large capital shortfalls by the 2023 financial year, possible abandonment or delays in capital management plans, and dividend cuts to more sustainable levels.
Submissions on the consultation paper, which was released last December, are open until May 3, with a final decision not expected until September.
Already, there’s been a few hiccups along the way.
Last week, for example, a background paper released by the RBNZ said there had been no cost-benefit analysis of the proposal, with a full assessment to be undertaken in a regulatory impact statement.
This was described as “hilarious” by a former RBNZ official, who said a serious cost-benefit appraisal should have completed at the outset.
While the process could have been better, the point is that there’s been absolutely no sign of a retreat from the fundamental proposition that the banks should put a lot more skin in the game and take on a much greater share of the financial system’s risks.
In fact, if RBNZ deputy governor Geoff Bascand has a choice of two middle fingers; he raised at least one of them to the big four banks in a recent speech.
Bascand conceded that the capital hike had been described as “radical” in some quarters.
“While we recognise that the proposals may not align with the interests of the banks’ shareholders, the key question is whether they are aligned with the best interests and wellbeing of New Zealanders,” he said.
The plan is to lift the minimum capital requirement for systemically important banks from the current level of 10.5 per cent to 18 per cent, with higher-quality tier- one capital to be raised from 8.5 per cent to 16 per cent.
The headline numbers suggest a massive hike, but the RBNZ played down the significance, noting that the banks were currently operating in New Zealand with about 12 per cent of tier-one capital, on average.
The banks, it said, could meet the new requirements by retaining about 70 per cent of their expected profits over the proposed five-year transition period.
Further, there was no need to slow the rate at which they’ve grown their lending in recent years.
UBS bank analyst Jon Mott has reached a different conclusion.
In a note released today, Mott estimates a total capital shortfall for the big four of $NZ21 billion ($19.8bn), up from his previous estimate of $NZ15bn.
While ANZ has the biggest exposure to NZ, its capital position was “strong”, according to Mott, although buybacks were now less likely, or on the backburner.
The same applied to Commonwealth Bank, which expects to release about $5.6bn from asset sales.
NAB’s capital position, according to Mott, is “very thin”, with its Bank of NZ unit forecast to require $NZ2.4bn in tier-one capital in 2020, rising to $NZ5.9bn in 2023.
Any capital shortfall at Westpac, he says, could be offset by repricing of its NZ book or some level of credit rationing.
All in all, it’s not a pretty picture.
Open banking
Now that proposed legislation that was integral to open banking has lapsed, there’s talk in the major banks that the reform marketed by Scott Morrison as competition-enhancing is going to get kicked down the road.
An incoming Labor government will have a long list of other priorities, and privacy and security concerns pushed by the banking sector have been resonating strongly in Canberra.
The big banks have not been shy in pointing to the Facebook scandal, where the personal data of 50 million users was harvested, sold to a data analytics firm and weaponised to influence the 2016 US presidential election.
While the Farrell report recommended a high bar of fully informed customer consent before any sharing of financial information, Commonwealth Bank’s submission specifically referred to the now-notorious Facebook data breach.
“The current privacy concerns surrounding Facebook’s use of customer data highlights the need for increased customer control,” CBA said.
For its part, the competition watchdog ACCC is reportedly pushing ahead with a planned open banking trial from July.
That’s despite the bill establishing consumer data rights failing to progress through the federal parliament before MPs returned to their electorates for the coming election.
If Morrison were to come from behind and secure a remarkable victory, then the cloud now enveloping open banking might lift.
But a Coalition victory looks unlikely.
A senior banker predicted that the reform will get “kicked down the road” and was unlikely to reappear in a serious way until 2021, perhaps later.
The fintech community has been a strong supporter of open banking.
It continues to argue that the consent requirements and approach to management of customer data mean that comparisons with the Facebook debacle are pretty much useless.