RBNZ's final decision on banks' capital requirements supports financials & Kiwi

The Reserve Bank of New Zealand today announced its final decision on banks' capital requirements. The decision has appeared to have been the cause for a sudden spike in the Kiwi, regardless of the negative implications for Gross Domestic Product. the move could even be considered being more of a defensive move which would be arguably bearish for the Kiwi considering the undertones of a weak economy requiring such capital control adjustments.

"New Zealand's banks will be required to hold substantially more capital over the coming years, which is likely to result in wider bank margins and a lower level of economic activity,"

analysts at Westpac said. 

Nontheless, it is a relief for the financials, such as Commonwealth Bank which shares rose 1.4% after the release of the new capital requirements - (National Australia Bank shares rise 1.4% and Westpac shares rise 0.6%). "The overall decision is in line with its previous proposals to increase the overall amount of bank equity, but some aspects are softer," analysts at ANZ Bank explained, adding ...

The total required level of Tier-1 capital for the major banks will be 16%, as proposed, but the transition period has been extended to seven years (from five). Importantly, the definition and amount of allowable Tier-1 capital has been expanded from the original proposals.

Meanwhile, the decision will take effect from July 2020. The RBNZ also offered more flexibility to banks on the use of specific capital instruments.“Our decisions are not just about dollars and cents,” said RBNZ Governor Adrian Orr. “More capital in the banking system better enables banks to weather economic volatility and maintain good, long-term, customer outcomes,” he said. 

RBNZ outlook

The analysts at ANZ Bank continue to see a lower OCR in time and said these changes will contribute to that, though less than previously expected.

A softening of the proposals, combined with a more positive domestic outlook (and in particular upside to government infrastructure spending), mean we are changing our OCR call to only one further 25bp OCR cut in May next year, taking the OCR to 0.75%. We will review once we have more detail in the fiscal update next week.

Impact on the economy

The RBNZ suggests the impact on the economy will be negligible, with an impact of around 20bps on lending rates. "We expect a larger impact on both retail interest rates (30-60bp, spread unevenly by sector and subject to considerable uncertainty) and credit availability than the RBNZ does, and therefore more of a negative impact on GDP," the analysts argued. "However, any impact will be difficult to separately identify, since it will occur over a long time period where many other offsetting forces will be at play."