Analysis - The biggest shake-up for the country's banking system in more than a decade looms on Thursday when the Reserve Bank unveils its decisions on how much more money the retail banks need to put into their businesses.
Photo: RNZ / Alexander Robertson
A year long review is expected to result in banks - especially the big four Australian-owned banks - being forced to strengthen their finances by putting billions of dollars more of their own money into their businesses.
What is the Reserve Bank proposing and why?
The ghosts of the global financial crisis (GFC) still haunt bank regulators more than a decade after the event.
The rationale for regulators is that rather than be forced into scrambling with ad hoc emergency measures it's better to strengthen the institutions.
The Reserve Bank wants retail banks to be in a position to cope with a one in 200-year financial calamity.
To achieve that, it wants banks to have more capital to back their lending so in the event of a major crisis, the banks are better placed to withstand loan defaults, falling asset values.
At the moment the banks support most of their operations by using depositors' money to fund new lending, by getting money from their parents, or by borrowing on international financial markets. At present the big banks have little of their own money in the game.
It's proposed the big banks should invest as much as $20 billion in new capital over five years to strengthen themselves.
They could do this by selling new shares to investors, or holding on to more of their profits by reducing the amount they pay their shareholders.
But aren't the banks secure already?
New Zealand and Australian banks are some of the financially strongest and most profitable in the world.
The big four Australian-owned banks - ASB, BNZ, ANZ and Westpac - control more than 85 percent of the local market. Their collective profit over the past year was more than $5bn.
They came through the GFC largely unscathed because they had not got into the questionable lending, unfathomable financial products, and did not have the weak finances of big banks overseas.
The current rules require the banks to have minimum capital of 10.5 percent of their assets, which have been assessed for the risk they carry. In reality most of them already hold more than 13 percent, and some of the smaller banks are even stronger.
The RBNZ proposals would make them hold capital equivalent to 18 percent of the assets.
Along with some other types of capital support, the RBNZ says the retail banks will be in a stronger position to absorb losses if a big crash occurs reducing the danger to depositors' funds.
Smaller, mostly New Zealand-owned banks such as TSB, SBS, and the Co-op Bank argue they do not have tens of thousands of shareholders to tap for more cash, no big parent banks to pump in more money, nor the ability to go on global markets to raise the hundreds of millions it would cost them.
They want the RBNZ to be flexible in allowing them to use different types of capital so the gap between them and the "Big-Four" does not get wider.
Reserve Bank governor Adrian Orr. Photo: RNZ / Dom Thomas
What do the banks say?
Everyone agrees the need for strong, resilient, well funded banks.
But beyond the headline, they have been hinting at dire consequences, such as raising interest rates for borrowers and cutting them for depositors. Rationing credit so they do less to risky borrowers such as farmers and small businesses.
There's even been a suggestion from Australia that the big banks might either shut up shop in New Zealand or sell off some or all of their operations here.
They have been adamant that their mainly Australian shareholders should not have to pay for the New Zealand changes by accepting lower dividends.
A sprinkling of outside commentators have criticised the RBNZ's proposals as being unnecessary, heavy handed, not thought out with likely impacts on economic growth and putting off foreign investors.
Some have suggested that a rise in interest rates to pay for the proposals might hit some heavily indebted farmers and home owners - possibly sending them to the wall.
The RBNZ commissioned three independent academics from outside this country to assess the plans - they largely backed the RBNZ.
What's likely to happen?
The RBNZ has shown no inclination to back off, but it will no doubt compromise.
It may be willing to reduce slightly the amount of capital it wants the banks to hold. It may extend the time the banks have to bring in the new limits by a year or two.
It is also likely to be flexible on what can be classified as capital, which would help the small, local players.
The RBNZ also has to be mindful of what its counterparts across the Tasman - the Australian Prudential Regulation Authority (APRA) - are doing, they are moving to limit the amount the big Australian banks can pump into their overseas operations.