NEW Zealand’s central bank has defended its position on bank capital requirements after claims they may be contributing to a lack of competition between lenders.
The Reserve Bank of New Zealand (RBNZ) sets risk weights, which determine how much capital banks must hold against their exposure to different industries such as residential home loans or rural lending. But they are only a small factor in determining the price or volume of credit to those industries, the RBNZ said on Thursday (Sep 26) in a submission to an upcoming parliamentary select commission inquiry into banking competition.
“In our view, risk weights have little impact on whether a bank decides to target growth, or a reduction in lending, to a particular sector,” it said. “Other factors, such as the respective economic prospects, perceptions of riskiness, demand for credit, competition among lenders, and how it fits with the bank’s overall business strategy, are likely to be more influential in banks’ decisions to grow lending to particular sectors.”
Finance Minister Nicola Willis last month said she is preparing a new Financial Policy Remit this year to make clear the government’s expectation that the RBNZ supports a more competitive banking sector. She said the government also backs a Commerce Commission recommendation that the RBNZ should review its settings for standardised risk weights, taking into account impacts on competition, after a finding that the four Australian lenders dominating its banking sector is behaving in an uncompetitive manner.
Farmer groups have been vocal in claiming the interest rates they pay are too high because there is a lack of competition among rural lenders and because of a higher risk weight.
The RBNZ said its analysis found the contribution of regulatory capital requirements to differences in overall loan pricing is small -in the order of 50 basis points between residential mortgages and rural lending, for example. It also said lending rates to large corporations and small-to-medium enterprises are significantly different even though they carried almost identical risk weights.
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“These illustrate that loan pricing reflects a far wider range of factors than regulatory capital requirements alone,” the RBNZ said.
In a separate statement, RBNZ deputy governor Christian Hawkesby said the central bank agrees a more competitive banking market is desirable and it is considering how to progress the Commerce Commission’s recommendations.
“The Deposit Takers Act requires us to take into account competition, and we are doing so by ensuring we take a proportionate approach to regulation while focusing on managing the biggest risks to banks and the financial system,” he said.
“We keep our rules and standards under review to ensure they can best deliver on our mandate. This includes striking the right balance between stability and competition.” BLOOMBERG
