When will the RBNZ admit its capital ratio definitions are bent? (And copy APRA’s plan to straighten them?)

Once in a while I meet bankers and bank regulators, sometimes over a cup of coffee, sometimes over a glass of Pinot Noir. In fact, I will attend an event with RBNZ’s Adrian Orr tomorrow. He will speak at the brand new PwC centre in Wellington.

When it comes to bank capital, the narrative shared among folks attending New Zealand bankers conferences is invariantly the same. Yes, our capital ratios are not ‘unquestionably strong’. …. And then there is always a smarty-pants pointing out that the New Zealand risk-weights are conservative. “The true ratios are actually much higher.”

Yeah right.

The question then is, how much higher are these ‘true’ New Zealand bank capital ratio’s?

Any guess is as good as mine. This PwC study, for example, claims the ratios should be at least 6 percentage points higher. That, of course, is outrageous. If that were to be true, then there would be flags waving on top the Reserve Bank’s asbestos affected building declaring that New Zealand is “Home of the best capitalised banks of the world.”

Grant Spencer, in his speech of March 2017, offers a more reasonable estimate. He thinks we should elevate the ratios by one to two percent.

Apples and oranges

So, here we have it: any uplift between 600 and 100 basis points will give you a true bent picture of NZ bank resilience.

This is confusing. International investors want to compare like for like – not apples and oranges.

In the West Something New

Perhaps it is time for the RBNZ to look to the West and follow the Ozzie prudential regulator. The APRA recently issued an interesting discussion paper. Dated 14 August, the paper expresses the concern that the differences between APRA’s and international capital ratio definitions are not well understood: “… the capital strength of Australian ADIs may be underestimated, which could in turn make it more difficult or costly for ADIs to raise funds and access international capital markets (particularly in times of market disruption or other financial stress).”

The current APRA definition of capital ratios is so conservative that some banks now report ‘internationally comparable’ CET1 capital ratios. However, these ratios are hardly comparable, because the regulator does not support them.

The APRA discussion paper offers two alternative solutions to end the problem of confusing capital ratio calculations. Whichever one is used, any standardised definition will demonstrate even more clearly APRAs desire to supervise banks that are unquestionably strong.

Instead of tinkering with the ratio definition, as the RBNZ currently seems to do (in the pursuit of imaginary perfection), perhaps the RBNZ should follow suit.