New Zealand’s Willis Seeks Advice on Changing Bank Capital Rules

(Bloomberg) — New Zealand Finance Minister Nicola Willis said she is taking advice on how to compel the central bank to loosen bank capital rules.

Her comments, first reported by the New Zealand Herald and confirmed by her office Friday in Wellington, follow the surprise resignation of Reserve Bank Governor Adrian Orr earlier this week. Orr championed the capital rules. 

Willis said she was taking advice on the amount of capital banks hold “as it’s something that I believe could make a difference to the productivity and growth of the New Zealand economy, and therefore to New Zealanders’ incomes.”

“My focus is on, how can we take further steps to reduce the cost of living for New Zealanders and give them opportunities to get ahead, and I think that could be an opportunity,” she said.

Asked if she was open to changing legislation to require the RBNZ to loosen the rules, Willis said: “whether or not I need to do that is something I’m taking advice on.”

Orr gave no reason for his resignation in a brief statement on Wednesday and has not commented since. He is on leave until his employment officially ends on March 31. The RBNZ said Orr left for personal reasons and Willis has refused to be drawn on what prompted his decision. 

In 2019, the RBNZ said it would require banks to increase capital to better withstand economic shocks, with the nation’s largest lenders given seven years to raise their high-quality Tier-1 capital to 16% of risk-weighted assets. The start of the increase was deferred during the pandemic until mid-2022.

The banks opposed the changes and Orr became embroiled in a spat about them with the New Zealand Initiative think tank, whose members include the four biggest banks.

The Initiative claimed the capital rules deterred banking competition and had prompted banks to seek higher margins at a cost to customers. Orr countered that laying the blame for a lack of competition in banking at the RBNZ’s feet was “tired, misleading, and needs to be called out.”

Willis last year said she was prepared to alter legislation if changes she made to the RBNZ’s financial policy remit didn’t achieve the improvement in bank competition she was seeking.

Willis has also asked the RBNZ to review risk weights, which determine how much capital a bank must hold for different types of loans such as residential, rural or commercial. Products with higher capital requirements result in higher interest rates.

Orr told a select committee in December that “mucking around with the bank risk capital weights will not create a noticeable, meaningful difference in competition in banking.”

He also said that new capital requirements had enhanced competition because they reduced the difference between what the big and little banks had to have, saying “it’s made the smaller banks more competitive relative to the larger banks.”

New Zealand’s four biggest banks are all Australian-owned. 

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