NZ banks scrutinised for increased lending rates due to RBNZ rules

New Zealand’s financial sector is under the microscope as the Parliamentary Finance and Expenditure Committee delves into the impact of the Reserve Bank’s (RBNZ) capital requirements on lending rates.

During recent proceedings, top banks were compelled to submit further data on how these regulations are affecting loan costs, Bloomberg reported.

RBNZ capital rules in focus

Finance Minister Nicola Willis (pictured) is currently reassessing the capital held by banks, contemplating directives to adjust these benchmarks if deemed necessary.

This review follows the unexpected resignation of Adrian Orr, RBNZ governor and proponent of the stringent capital rules implemented in mid-2022 and set to continue through 2028.

In New Zealand, banks must meet minimum capital ratios of 7% for Tier 1 and 9% for total capital, with additional prudential buffers of 4.5% for major banks and 2.5% for others.

Banks’ response to capital requirements

Responses from the country’s leading banks suggested that RBNZ’s heightened capital requirements have indeed led to increased lending rates.

ANZ Bank New Zealand disclosed that the phased implementation of these rules has already raised credit costs by approximately 0.25%. The bank said that adopting the Australian Prudential Regulation Authority’s (APRA) standards could potentially lower these costs by 0.15%.

Projected impact on lending rates

The Bank of New Zealand predicts that by 2025, the average lending rate across all loans could rise by 28-35 basis points due to RBNZ’s policies, with a further increase to 48-61 points by 2028.

Conversely, alignment with APRA’s standards could reduce rates by 29-37 basis points.

Future outlook and economic implications

ASB Bank forecasts that the full adoption of the new capital requirements could widen the cost disparity to 0.5%, compared to rates in June 2018.

Westpac also acknowledged the upward pressure on lending rates, estimating an increase of 20-40 basis points by 2028.

Willis emphasised the significance of these capital assessments in enhancing New Zealand’s economic productivity and growth. The ongoing scrutiny of capital rules by the Parliament aims to ensure a balanced financial environment conducive to sustainable economic progress.