RBNZ plots new course on capital
More capital is better in the banking system and much, much more capital is even better, the Reserve Bank of New Zealand declared on Friday.In a provocative speech, Adrian Orr, RBNZ governor revealed the central bank "makes the explicit assumption that New Zealand is not prepared to tolerate a system-wide banking crisis more than once every 200 years. "We have calibrated our sweet spot thinking about economic output and financial stability benefits."With New Zealand prone to experience distress in banking more frequently than Australia, Orr explained that "the Reserve Bank needs to ensure there is sufficient capital in the banking system to match the public's risk tolerance. This is because it is the New Zealand public - both current and future citizens - who would bear the social brunt of a banking mess."The most a bank owner can lose is their capital. The wider public loses a lot more."Orr did not reference any current or recent indicator that might suggest any one bank in New Zealand is a particular worry to regulators, but rather emphasised that preparing for the worst would maximise the welfare of citizens of New Zealand over generations."Bank failures also happen more often and can be more devastating than bank owners - and credit ratings agencies - tend to remember. The costs are spread across the public and through time."Many large banks are foreign owned - especially in New Zealand." Their mostly Australian-based owners are subject to capital requirements in their home and host country, Orr said. "This creates continuous tension as to who gets the lion's share of capital and failure management support. It would be naïve to expect a foreign taxpayer to bail out a domestic banking crisis."Hence, New Zealand needs to assess its own risk tolerance, and decide who pays to clean up any mess and the scale of that mess."Over the last year the RBNZ conducted a Review of the Capital Adequacy Framework for locally incorporated banks, one looking more to technocratic approaches around risk-weighting rather than a material shift in sector capital as Orr is now promoting. The median total capital ratio in the sector is around 13 per cent, based on total equity in the New Zealand banking system of NZ$42 billion, an increase of $NZ3 billion since 2017.