Local investment funds may help fill the lending gap if Australian institutions back off NZ in the wake of substantially higher capital ratio requirements, according to Harbour Asset Management chief, Andrew Bascand.
In a paper published last week, Bascand says the Reserve Bank of NZ (RBNZ) plan to increase bank capital ratios by 40 per cent would inevitably see Australian-owned institutions scale back credit supply in the NZ market.
As banks, particularly the Australian-owned institutions that cover almost 90 per cent of the NZ market, recalibrate to meet the RBNZ capital rules other providers would likely move into the lending space.
“The NZX, KiwiSaver Funds and fund managers more generally could have a much larger role to play in the financial system,” Bascand says.
But the RBNZ rules might also trigger a reprise of the NZ finance company debacle as other less-capitalised non-bank players rush into the credit vacuum left by the departing Australian institutions.
“Typically, the non-bank sector has not coped well with defaults, recessions, interest rate volatility and liquidity risk,” the paper says. “Capital in the non-bank sector has typically proven to be inadequate at times of economic stress.”
Overall, Bascand says the RBNZ proposals requiring banks to lift capital backing to 16 per cent (amounting to extra funding of up to $20 billion across the four Australian-owned NZ institutions) would have substantial consequences for the local economy.
He says feedback from “banks, analysts and institutions” suggests the ‘big four’ Aussies would likely reduce exposure to riskier NZ sectors including “agriculture, small business lending and unsecured consumer loans” if the RBNZ capital rules were put in place.
Furthermore, Australian banks would probably hike mortgage rates and lower term deposit rates for their NZ subsidiaries in the wake of higher capital requirements.
Australian institutions may also “look to sell down equity exposures over the long term (albeit the banks were obviously silent on this aspect)”, Bascand says.
The Harbour report echoes similar sentiments published in a UBS note last week, which concludes banks would run NZ institutional business from Australia in addition to repricing, rationing credit and spinning out their Kiwi subsidiaries.
“We believe that each of these options is likely to have an economic impact on New Zealand which is larger than currently assumed by the RBNZ,” the UBS analysis says.
Bascand says given the Australian banks have enough problems at home “the desire to allocate fresh capital to New Zealand was not a preferred option”.
“One striking issue for the banks is that management teams remain very stretched working on remediation, Royal Commission out-takes, restructuring, selling wealth management businesses, taking costs out of their core operating functions and generally moving back to core banking,” he says in the paper.
The RBNZ bank capital review consultation closes on May 3 with governor Adrian Orr expected to deliver the final decision sometime in the third quarter of this year.