Just How Well Capitalised are New Zealand Banks?

A thought provoking opinion piece appeared on Interest.co.nz this week by Dr Martien Lubberink, Associate Professor in the School of Accounting and Commercial Law at Victoria University. He looked at the somewhat differing opinions of the Reserve Bank of New Zealand (RBNZ) and the Australian Prudential Regulatory Authority (APRA) on our largest banks and their Australian parents.

“APRA’s Wayne Byres cautioned his audience: yes, Australian banks are resilient, but only just.They will struggle in a housing market downturn.In fact, if you read between the lines of Byres’ speech, you will notice that Australian banks just managed to scrape through the latest stress tests.Our Reserve Bank, however, is much more upbeat and confident.This month’s Financial Stability Report commends our banks for capital levels that are well above regulatory minima. New Zealand’s banks are resilient, profitable, and healthy.This worries me.How can New Zealand’s banks be healthy while their counterparts across the Tasman are fragile?I don’t think they can.”

He thinks there are 3 reasons why NZ banks aren’t quite as strong as the RBNZ would like us to think they are.

1. He delves into various risk ratios etc, but in a nutshell he notes that APRA believe the Australian housing sector poses significant risks given it makes up such a large proportion of the banks loan book. So he wonders why the RBNZ is much more modest in its response, given the NZ banks loan books are quite similar to their Australian parents.
2. While the RBNZ believes our Capital Ratios are “comfortably high”, Lubberink notes they are only just above those of Europe. And they are actually only around two thirds of comparable EU countries of Denmark, Finland, Norway, and Sweden. He states: “the Reserve Bank’s Financial Stability Report reveals that this year’s stress tests made banks dip into the conservation buffer: Under stress, CET1 ratios would drop by 3%, which presents an ominous sign of bank resilience.”
3. His third worry “is that Australian parent banks likely manage the location of capital and respond to high requirements imposed on them by our Reserve Bank. They may move capital from home to host, from Australia to New Zealand. As a consequence, the home banks look poorly capitalised, but their New Zealand subsidiaries look healthy… Where New Zealand banks report healthy solvency ratios, the parent holding banks look feeble.”

He wonders whether Australian Banks may find ways to get some capital back home, given their poor performance in the APRA stress tests, and so the New Zealand subsidiaries may end up having less capital soon. In such a case their numbers would look much less rosy.  

So hardly a ringing endorsement of the state of NZ banks.

One of the commenters at the end of the post went to the trouble of looking up some bank stats from the RBNZ website so we don’t have to. They make the point that NZ bank equity is $31 billion, NZ Bank liabilities are $391 billion (total liabilities less equity). Leverage is  x12.6. “So…. if they should ever have 5% bad debts…  $20 billion, [or] if they should have 5% of depositors running for the doors…   $18 billionTHEN….   they have no equity left…..?????     they would have to stop lending…and recapitalize…get their balance sheet in order…AND… considering , they borrow short term and lend long-term….   they look about as robust and solid as all those failed finance companies did…. A loss of trust would kill them.”

So what happens when a bank fails?

So in the case of a bank failure (or “failing bank” as the central planners prefer to call it) a bail in (a.k.a. a haircut for bank depositors) means your deposits would be frozen and potentially a decent chunk used to “recapitalise” the bank. See all these previous articles of ours if you need to learn more about this topic. A topic which most New Zealanders remain completely oblivious to.

An important difference between New Zealand and most other nations

Unlike most other western nations, New Zealand has no deposit insurance at all. So regardless of whether you have $1,000 or $1,000,000 in a bank account your deposits are at risk.  

The bail in model made famous by Cyprus is now going global.

After Cyprus (and New Zealand!) led the way, changes have been quietly happening in a number of other jurisdictions as well. The recent G20 smoozefest in Brisbane saw bail-in provisions get quietly bedded in officially, with a redefinition of deposits as part of a commercial bank’s capital structure. Each country will introduce its own legislation to effect the ‘ bail-in’ agreed by the G20. No worries for us here in NZ though, as we are ahead of the game, with our bail in provisions in place since last year! We think the fact that this “Bail In” policy is now being put in place globally should not be under estimated. Could the central planners be preparing for the next financial system shock perhaps?  

Will cash become more sought after as a result of a global “bail in” policy?

Russell Napier on ZeroHedge reported extensively on the G20 meeting changes. Noting that the:

“bank deposits are just part of commercial banks’ capital structure, and also that they are far from the most senior portion of that structure. With deposits then subjected to a decline in nominal value following a bank failure, it is self-evident that a bank deposit is no longer money in the way a banknote is. If a banknote cannot be subjected to a decline in nominal value, we need to ask whether banknotes can act as a superior store of value than bank deposits? If that is the case, will some investors prefer banknotes to bank deposits as a form of savings? Such a change in preference is known as a “bank run.”

He then goes on to outline how there might be a business opportunity for someone to vault massive sums of banknotes for those worried about a haircut to their deposits. Could be, although you’ll not be surprised to hear what we would prefer to have over a vault of cash! Hint – it’s either yellow or grey and much denser than paper and ink. In case you can’t guess we’ll borrow a line from the Daily Bell that we recently read on this same topic to finish on:

“Remember… that it is a good deal more difficult to confiscate home-based physical gold and silver than a bunch of electronic digits nominally parked in “cloud.”

With prices low you can get quite a lot more physical gold and silver in exchange for your electronic digits currently. Check out our products page for today’s pricing: Get a Quote. 

For more on this topic see:Why Buy Gold? Here’s 14 Reasons to Buy Gold Now