On bank capital, what should the RBNZ do now?

Yesterday’s interest.co.nz featured an article summarising the work the RBNZ has done to support our economy. The article shows a long list of actions taken by the Reserve Bank, and yes, it looks impressive. On the other hand, the text appears to serve as a mouthpiece for Assistant Reserve Bank Governor Christian Hawkesby, offers little more than the RBNZ website does, and sports no hard questions, which is disappointing altogether.

Loosened capital rules?

Halfway the article, under the heading Loosened capital rules, Jenée Tibshraeny lists the steps taken by the RB regarding bank capital. The heading, by the way, is awkward because the RB, perhaps inspired by that famous quote of Jo Moore, decided to abandon postpone its controversial capital plans as soon as the first signs of economic stress appeared. But the RB does not really loosen these capital rules, because they weren’t in force.

Plus ça change

While writing the two paragraphs on capital relief, Jenée must have realised that the RBNZ did not action a lot on this important subject. In fact, plus ca change: the Reserve Bank encourages banks to use buffers, but banks could do so anyway. The communication about capital relief is also vague. “We also gave the banks a clear go-ahead to use the capital they have stored for rough times. We estimate this gives banks an extra $47 billion of lending capability to assist New Zealanders. They have a similar amount again to lend if needed without reaching their minimum capital reserves. In normal times this is about three years of borrowing demand.

There is no clear explanation for the $47 billion extra lending capacity. Neither is there a clear explanation of the buffers the RBNZ refers to. Is this the conservation buffer, or is it bank’s own buffers? What about any capital penalties imposed on naughty banks? Investors want to know the headroom offered by the RBNZ capital relief decisions, numbers, not vague statements. My research shows that headroom matters, even if capital ratios are high.

Use buffers, but not to distribute earnings

What should the Reserve Bank do? Most importantly, it could pay attention to actions taken by other regulators and supervisors. These are pressuring banks not to distribute earnings.

This week, for example, the European Banking Authority doubled down on its expectations regarding dividend and remuneration policies: The EBA reiterates and expands its call to institutions to refrain from the distribution of dividends or share buybacks for the purpose of remunerating shareholders and assess their remuneration policies in line with the risks stemming from the economic situation.

The editorial board of the Financial Times chimes in: “Bank dividend payments should be suspended“. Among many European banks, Dutch banks ING and Rabobank published statements updating us on their dividend plans.

The next step would be limiting bankers’ pay, as suggested by ECB’s Supervision Chair Andrea Enria, in an FT.com interview: he has warned banks to exercise “extreme moderation” on their bonus payments this year and threatened to intervene if they failed to show restraint with payouts.

Spanish lender Santander has already decided to limit executive pay, with senior management cutting pay by 50% for 2020.

Yesterday, the Bank of England sent letters to their largest lenders, asking them to stop paying dividends and bonuses. See here the letter to HSBC’s Noel Quinn:

In short: why the wait?

Other helpful measures

Regarding the denominator, the RBNZ could quantify the difference between New Zealand Risk-weighted assets and those of international banks to improve the transparency, comparability of the RBNZ capital framework. Our like-for-like ratios are bound to be higher than those of many international banks. This APRA discussion paper can serve as an example.

Lastly, the RBNZ could clarify its position on non-performing loans and the IFRS forward-looking provisioning model. See an excellent comment by Nicolas Véron on this nerdy, but important topic.