The Reserve Bank has made few concessions in making the country's banks hold more capital to strengthen their finances for any future crisis.
Reserve Bank governor Adrian Orr. Photo: RNZ / Dom Thomas
The central bank has confirmed that the big four Australian-owned banks - ANZ, ASB, BNZ, and Westpac - will have to raise the amount of capital they hold from 10.5 percent of their loans to 18 percent.
Smaller banks, including Kiwibank, SBS, TSB, and the Co-op Bank, will have to hold a minimum of 16 percent of capital.
The average minimum for the sector at present is about 14 percent.
The decision was largely in line with the RBNZ's original proposals, aimed at making the banks stronger to withstand a one-in-200 year financial crisis, and to protect depositors' money.
"More capital also reduces the likelihood of a bank failure," RBNZ Governor Adrian Orr said.
"Our decisions are not just about dollars and cents. More capital in the banking system better enables banks to weather economic volatility and maintain good, long-term, customer outcomes."
The new rules will force the sector to raise as much as $20 billion to meet the new minimum capital levels.
The RBNZ said this could be done by the banks selling shares, getting more money from their parents, holding onto more of their profits and paying lower dividends, or through a mix of other financial instruments involving debt or different types of shares.
The banks have warned of higher borrowing costs, lower deposit rates and credit rationing.
The RBNZ accepted its decisions would raise borrowing costs, but it said the rise should be minimal.
It gave an example of the cost of a $100,000 mortgage over 30 years at the current 3.45 percent two-year rate rising $5 a fortnight.
Finance Minister Grant Robertson said the original proposal had been modified after public consultation.
"What I think's really important now is that both the trading banks and the Reserve Bank work together to get back to what this is really about, which is the safety of New Zealanders' money in the bank," he said.
He did not ascribe to the view this will slow the economy, or that it would be "a blow" to rural communities.
"New Zealand's banks, particularly the four Australian-owned ones do very well here, they're very profitable here, there is no need for a particular sector to bear the brunt of this."
His message to the sector was that "no bank uses this as an opportunity to target a particular sector, there is no need for that, there is now a seven year timeframe in which banks are able to work with the Reserve Bank on a plan... these are very profitable entities".
Some concessions
The RBNZ made some concessions to lessen the impact on the economy, and improve the position of the small New Zealand owned banks, including Kiwibank, SBS, TSB, and the Co-op Bank.
It has allowed a different mix of securities to be counted as second level capital.
It said its new requirements would in essence mean bank owners had to put up $12 of their own money to back $100 of lending from the previous $8.
The RBNZ also reduced the minimum amount smaller banks would have to hold to 16 percent of capital from a proposed 17 percent.
The new requirements will come into force from July 2020, but the RBNZ extended the time for the changes to be made from five to seven years.
"With seven years to transition to the new requirements, banks will be able to maintain their lending growth, reach higher capital ratios, and continue to pay dividends."
The banks had said the proposals might cause them to raise interest rates to ensure they were able to keep paying dividends to shareholders.
They have also said they might ration credit to risky sectors such as farming or small businesses, or reduce their operations.
"Where some banks may choose to limit their lending growth, it is likely that others will be able to grow their lending to fill any gap in the market," the RBNZ said.
Retail banks' reaction
Shortly after the RBNZ's announcement, the New Zealand Bankers' Association said it welcomed the conclusion of the review.
"Today's announcement provides our banks with certainty on the amount and type of capital they will need to hold in future, and brings an end to a robust consultation," chief executive Roger Beaumont said.
"We are pleased the Reserve Bank has engaged with a wide range of stakeholders and made some changes to its original proposal. In particular we acknowledge the longer implementation timeframe of seven years instead of five, which commences in July 2020.
"We're also pleased to see a recognition of the differences between the larger and the smaller banks.
"Today's announcement will have an economic impact and each bank will now consider the implications for their business and customers, and will be developing their own commercial response."