Key warns capital move would mean 20% GDP cut

Thomas Coughlan

John Key warns the Reserve Bank’s proposed capital increase would cut GDP by collective 20% in the long term.

Prime Minister Jacinda Ardern describes the forecast as ‘rhetoric’ and points to official inquiries into ANZ’s governance failures.

ANZ has forecast a total fall in today’s money terms of 20% of GDP if the Reserve Bank of New Zealand (RBNZ) goes ahead with its proposal to hold more risk capital.

20% of 2019 GDP works out to be roughly $70 billion over the very long term.

The arguments

The modelling, undertaken by ANZ, was included in a submission from Bank Chairman and former Prime Minister Sir John Key on the RBNZ proposal to force the big Australian-owned banks to hold enough capital to withstand a one in 200-year shock.

The Reserve Bank argues holding more capital will make banks safer and reduce the risk of depositors or taxpayers wearing the effects of a banking crisis.

However that comes at a cost. RBNZ estimates that banks will have to stump up 70% of profits over the next five years, equating to roughly $20 billion.

ANZ’s submission said its own estimate of the long-term costs would be a collective 20% of GDP in net present value terms, which was far ahead of the Reserve Bank’s own estimate of 4% to 12% of GDP.

The RBNZ view

RBNZ said it estimated GDP being between 1% and 3% lower over the next 10 years as a result of the changes. A scenario modelled by the Bank and published in the submission suggests GDP growth will fall by as much as 0.7% per year four years out from the bank capital changes.

Treasury’s latest figures forecast 2.6% growth over the next five years.

Knocking 0.7% off that forecast would still put New Zealand ahead of the average growth rate for OECD economies, which is expected to be 1.8% out to 2020.

Key also said the Bank was concerned about “the absence of cost-benefit analysis of the proposals” and “the degree to which the RBNZ has under-estimated the potential impact of its proposed capital regime on both the New Zealand economy and New Zealand bank customers.”

The Bank said that the increased costs to banks of holding extra capital would result in higher borrowing costs, reduced borrowing, and reduced economic growth.

Banks raise concern

The other banks also raised concerns with the proposals.

Westpac’s economists team said if it increased loan rates by 40 to 80 basis points, house prices could fall by between 4% and 8%, creating an economic shock of between 0.5 and 0.9 percent of GDP. That figure also takes into account a likely cut in the Official Cash Rate.

ASB was also sceptical.

It said its modelling suggested consumer interest rates would likely rise by 50 to 75 basis points, nearly double the Reserve Bank’s own estimate of a rise of 20 to 40 basis points.

ASB also notes that the changes could see credit conditions tighten.

The big Australian-owned banks had funded over $373 billion of lending assets to New Zealanders, representing 86% of all customer lending by New Zealand-registered banks.

Ardern sees ‘rhetoric’

Prime Minister Jacinda Ardern would not comment on the changes, noting that RBNZ is yet to finalise its plans.

However, she said that she had “heard some of the rhetoric coming out of ANZ.”

She also noted that “just for context,”… “the Reserve Bank is doing work with ANZ in other areas,” referring to the work that RBNZ was doing in the wake of the David Hisco scandal and the Bank’s failure to comply with its existing capital requirements.

When asked about whether a Banking Royal Commission was required following the Hisco affair, Ms Ardern reminded banks that they needed to maintain their social licence, while maintaining her position that a Royal Commission was not required.

Thomas Coughlan is a Newsroom Reporter based in Wellington. He writes on Policy and Economics. The above article, which appeared on the Newsroom website (www.newsroom.co.nz) has been reproduced here under a Special Arrangement.

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Photo Caption:

Antonia Watson and former Prime Minister John Key announcing the departure of David Hisco at ANZ’s Auckland office on  June 17, 2019 (Photo: Nikki Mandow)

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