Review of the Capital Adequacy Framework for Registered Banks

Introduction

• As a member of Business NZ, we support their submission. We particularly support their view that increasing banks’ cost of capital will result in higher borrowing costs to our members. In addition, we have included below additional feedback particularly important to our members.
• The fundamental trade-off being considered is risk versus cost. How much risk is New Zealand prepared to carry of a bank failure, and how much cost is the country prepared to shoulder to mitigate this risk? Relatively recent domestic and international experience demonstrates this is not a hypothetical risk. However, while the costs of a bank failure were clearly illustrated by the South Canterbury Finance experience, among others, it must be acknowledged that mitigating this risk is also very costly.
• The best way to analyse trade-offs is to conduct a cost-benefit study and publish the results for stakeholders to consider. Unfortunately, such analysis of higher bank capital requirements is lacking to date in the Reserve Bank’s document.
• This lack of analysis leads to the question of what has been the Treasury’s role in prudential policy setting to date? It is understandable that the Reserve Bank does not have this expertise in-house. This makes it even more important for the Treasury to be able to analyse the policy proposals, such as the Treasury does for many other government policy proposals with an economy-wide impact.

We recommend the Treasury is invited to conduct a thorough cost-benefit analysis as soon as possible and the Bank Capital Review process is paused while this takes place.

Download to read the full submission.