14 Sep 2010

New world banking rules may raise loan costs in NZ

7:05 am on 14 September 2010

A banking expert says new international regulations requiring banks to hold more cash to protect against future financial crises, may push up the cost of borrowing in New Zealand.

Regulators from 27 countries have decided banks must double the amount of quality capital over the next eight years.

The goal is to ensure banks have bigger reserve cushions to avoid another bank meltdown like the panic of 2008, which led to the credit crunch and fuelled the recession.

Under current international rules, the world's banks must have a capital ratio of at least 8%, meaning they must have $8 in their vaults for every $100 in customers' accounts.

Half of this is held in good quality capital, like cash or Government bonds, which are seen as more secure, while the other half can be held in riskier capital, like equity.

Under the new 'Basel Three' rules, banks must hold a greater proportion of their reserves in good quality capital. They will be required to have a tier one capital ratio of at least 4.5% by 2013 and 7% by 2019.

They must also hold an additional emergency reserve buffer of 2.5% to protect against financial shocks.

The Reserve Bank says it's studying the new guidelines in detail, so it's too early to say whether they might be adopted here.

Even if they are, New Zealand banks will fare better than their international peers.

PricewaterhouseCoopers financial services partner Paul Skillender says that's because New Zealand banks are already well capitalised compared to other countries.

The Reserve Bank also requires banks to have higher capital ratios for residential and rural lending, which is seen as more risky.

But Mr Skillender says if more good quality capital is required, then it could potentially make borrowing more expensive for consumers.

The 'Basel Three' guidelines will be finalised at a meeting of G20 leaders in Korea in November.