Financial Sovereignty

The last few weeks have been interesting for the financial markets in Australia and NZ.

The Australian regulator, APRA made a shock move by changing the rules on bank capital, essentially ruling out future issues of convertible bonds. This takes away the options for high-yield options for investors who are expected to understand how these instruments work.  

This means that Australian banks will be allowed to operate with higher leverage as they will not be required to step their senior capital up to replace these bonds.

Over the last five years, Adrian Orr, Governor of New Zealand’s Reserve Bank has come under considerable critique for increasing the regulatory capital applicable to New Zealand Banks from Australia’s standard Basle approach at 8% to between 16% and 18%.

In light of this recent change across the Tasman - Orr’s decision seems somehow prescient but nonetheless expensive for New Zealand business borrowers. Whilst Governments have reviewed the impact on Retail customers (residential mortgages only use 10% of regulatory capital), and now Agriculture (a special lending class under RBNZ rules), they’ve managed to miss the sector really affected - business borrowers.

Whilst the Commerce Commission (COMCOM) has focused on competitiveness in transactional banking and residential mortgages - they’ve completely missed the level of subsidisation for these asset classes by every New Zealand business borrower.

Whilst you can’t argue the increased capital seemed sensible and a protected New Zealand sovereignty - the unwillingness of New Zealand banks to differentiate between regulatory and economic capital means we all end up paying more for goods and services.

Would you support a review into bank capital and a relaxing of prudential capital levels as protection for depositors is now enhanced through the deposit insurance scheme?