The Times Australia
The Times World News

.
Men's Weekly

.

Will the next Reserve Bank governor relax capital requirements for banks?

  • Written by Claire Matthews, Associate Professor and Head of School, School of Accountancy, Economics and Finance, Te Kunenga ki Pūrehuroa – Massey University

Adrian Orr has so far not spoken about the reasons for his recent and unexpected resignation[1] as Reserve Bank governor, but the sudden departure caused understandable speculation.

One suggestion has been that Orr was at odds with the government over his requirement that the Australian-owned New Zealand banks hold high levels of capital[2] compared to other countries.

Whether this was indeed a reason for Orr’s resignation we can’t say. But it does raise important questions about Reserve Bank – and government – policies.

Set by the Reserve Bank, capital requirements[3] specify the amount of equity banks need to have to cover future losses. Since 2022, banks have been required to hold enough equity to be able to survive a 1-in-200-year event.

But holding onto this much capital is expensive for banks. The higher requirements have led to higher interest rates – making it more expensive for people and businesses to borrow.

The government has long criticised the current capital requirements. Last August, Finance Minister Nicola Willis said she was open to making the Reserve Bank ease its regulation[4] of banks – if a strong enough case could be made that it would improve competition and efficiency without undermining the stability of the financial system.

Adrian Orr standing at branded podium
Reserve Bank governor Adrian Orr has resigned, leading to questions about what happens next for his much-criticised capital requirements. Hagen Hopkins/Getty Images[5]

Making lending attractive again

The 2022 capital requirements meant the “big four” banks (ANZ, Westpac, ASB and BNZ) had to increase equity from 10.5% to 18%[6] of their risk-weighted assets over the next seven years. Smaller banks had to increase their equity to 16%.

The new requirements were met with some resistance. This was due, in part, to concerns about how the move would affect bank customers.

To meet higher capital requirements, banks focused on lending that generated higher returns. They also charged higher interest rates to compensate for the increased levels of capital required for the loans.

Financial analytics company S&P Global described the rules as the toughest bank capital requirements in the world[7] and noted the risk of reduced access to credit, particularly for smaller businesses.

Calls for change

Even before Orr’s resignation, members of the coalition government had called for changes to the capital requirements.

In January, ACT leader David Seymour sought information from the Ministry for Regulation on the issue[8].

Seymour has said going back to the former levels of bank capital would support economic growth by enabling more lending to business at more affordable interest rates.

In its study on the banking sector, the Commerce Commission also suggested revising bank capital requirements[9] to address competition issues.

The 2022 capital requirements have influenced the type of lending banks do and the interest rates they have applied.

The more capital banks have to hold against a loan, the higher the interest rate required to cover that cost. This means home loans are more expensive under the current rules. If the requirements reduced (and nothing else changes) home loan interest rates would reduce.

At the same time. other types of lending – such as business loans – would become more attractive if capital requirements drop and banks have to have less equity on hand.

With a limited pool of funds available to lend, this may mean banks make fewer home loans and more personal and business loans.

Careful consideration needed

In the end, there is no guarantee a new Reserve Bank governor will reduce the capital requirements. And, under the current rules, the governor is the one who gets to make that call.

While the government has some say in the appointment process[10], the Reserve Bank board is responsible for recommending the next appointee.

Whoever finally takes the post will have to weigh up the benefits of any rule changes with the potential risks – including what the uncertainty of frequent rule changes do to the wider economy.

They will also need to take into account why Orr pushed for the higher capital requirements to begin with. He worried that in the event of a global financial disaster, the four major Australian-owned banks might abandon New Zealand customers[11].

Having the higher levels of capital forced the banks to have a greater financial cushion against losses and reduced the risk of bank failure. And ultimately, no government wants a bank to fail, with the personal and economic costs that would entail.

Read more https://theconversation.com/calculated-risk-will-the-next-reserve-bank-governor-relax-capital-requirements-for-banks-251713

Times Magazine

Effective Commercial Pest Control Solutions for a Safer Workplace

Keeping a workplace clean, safe, and free from pests is essential for maintaining productivity, protecting employee health, and upholding a company's reputation. Pests pose health risks, can cause structural damage, and can lead to serious legal an...

The Science Behind Reverse Osmosis and Why It Matters

What is reverse osmosis? Reverse osmosis (RO) is a water purification process that removes contaminants by forcing water through a semi-permeable membrane. This membrane allows only water molecules to pass through while blocking impurities such as...

Foodbank Queensland celebrates local hero for National Volunteer Week

Stephen Carey is a bit bananas.   He splits his time between his insurance broker business, caring for his young family, and volunteering for Foodbank Queensland one day a week. He’s even run the Bridge to Brisbane in a banana suit to raise mon...

Senior of the Year Nominations Open

The Allan Labor Government is encouraging all Victorians to recognise the valuable contributions of older members of our community by nominating them for the 2025 Victorian Senior of the Year Awards.  Minister for Ageing Ingrid Stitt today annou...

CNC Machining Meets Stage Design - Black Swan State Theatre Company & Tommotek

When artistry meets precision engineering, incredible things happen. That’s exactly what unfolded when Tommotek worked alongside the Black Swan State Theatre Company on several of their innovative stage productions. With tight deadlines and intrica...

Uniden Baby Video Monitor Review

Uniden has released another award-winning product as part of their ‘Baby Watch’ series. The BW4501 Baby Monitor is an easy to use camera for keeping eyes and ears on your little one. The camera is easy to set up and can be mounted to the wall or a...

The Times Features

Running Across Australia: What Really Holds the Body Together?

How William Goodge’s 3,800km run reveals the connection between movement, mindset, and mental resilience As a business owner, I’ve come to realise that the biggest wins rarely com...

Telehealth is Transforming Healthcare Services in Australia

It has traditionally not been easy to access timely healthcare in Australia, particularly for people who live in remote areas. Many of them spend hours on the road just to see a...

Launchd Acquires Huume, Strengthening Creative Firepower Across Talent-Led Marketing

Launchd, a leader in talent, technology and brand partnerships, has announced its acquisition of influencer talent management agency Huume from IZEA. The move comes as the medi...

Vietnam's "Gold Coast" Emerges as Extraordinary Investment Frontier and Australian Inspired Way of Life

$2 Billion super-city in Vung Tau set to replicate Australia's Gold Coast success story A culturally metamorphic development aptly named "Gold Coast" is set to reshape Vietna...

Choosing the Wrong Agent Is the #1 Regret Among Aussie Property Sellers

Selling your home is often one of the largest financial transactions you’ll make, and for many Australians, it’s also one of the most emotional. A new survey of Australian home se...

Travel Insurance for Families: What Does it Cover and Why it’s Essential

Planning a family trip is exciting, but unexpected mishaps can turn your dream vacation into a stressful ordeal. That’s where travel insurance comes in—it’s your safety net when ...