S&P warns of costs for Australian banks from NZ move

  • By Kate Weber

Recent proposals by the New Zealand central bank to increase regulatory capital requirements for the country's banking system are significant for the four major New Zealand-based banks and their Australian owners, according to a report from Standard & Poor's.

Under the proposed changes, from the Reserve Bank of New Zealand, S&P estimates that the higher Tier 1 capital requirement would see an increase of about 43 per cent of the existing capital base for the system and 47 per cent for the four major New Zealand banks.

According to S&P this would mean that banks in New Zealand would need to raise their Tier 1 capital levels by a minimum of about NZ$13.7 billion.

The potential implications for their Australia-based parents are also significant and complex given cross-border regulatory issues.

S&P estimates that if the big four Australian banks wanted to maintain their overall level 1 Tier 1 capital ratios at their current levels, they would have to inject $8.1 billion.

However, the measure will likely strengthen the assessment of the credit profile of the four major New Zealand banks on a stand-alone basis.

The report also noted that New Zealand's non-banks and smaller banks could benefit from a standardised approach to regulatory capital.

"The capital impost for smaller banks - that operate on the standardised approach - will be less than that on the New Zealand major banks," S&P said.

Head of equities at Nikko Asset Management, Brad Potter called the raise in capital an “annoyance”.

“Everyone is just piling on. Just when Australian banks finalised their capital requirements [under the so-called Basel IV regulatory framework]  – now there is a little uncertainty around the impact of what New Zealand’s move will mean to their capital position.” Potter said.