(Bloomberg) -- New Zealand’s Treasury has backed calls for the Reserve Bank to better explain how the benefits of a proposed increase in bank capital will offset the economic toll of higher borrowing costs and tighter lending.
“In our view a comprehensive cost-benefit analysis is necessary to inform decisions on the final proposals,” Treasury officials say in a July 26 report to Finance Minister Grant Robertson, released to Bloomberg after an official information request. “This analysis should consider the extent to which alternative options” are likely to achieve the objectives of the policy.
Banks and the government are waiting for the RBNZ’s final decisions on its review, which are due in early December. The central bank has been consulting on a plan to boost levels of high-quality Tier-1 capital to 16% of lenders’ risk-weighted assets over five years, but has said the transition period and other details are still up for discussion.
Banks and other submitters have called on the central bank to publish a cost-benefit analysis of its proposals, but the RBNZ has said it will only do so in a regulatory impact assessment when its final decision is reached.
“Not publicly consulting on the comprehensive cost-benefit analysis creates challenges for the public and stakeholders to provide feedback on the assumptions the RBNZ ultimately relies upon,” Treasury says.
Neither the finance minister nor the Treasury have a formal role in setting bank capital requirements, which is the responsibility of the RBNZ. Robertson has urged banks and commentators to engage in a mature, constructive debate over the proposals.
The Treasury will not subject the RBNZ proposals to a peer review, despite some lenders requesting an independent analysis, according to notes prepared for a May 24 meeting between the Treasury Secretary and some local bank executives.
In the report to Robertson, Treasury says higher bank capital will support resilience during an economic shock and makes lenders less likely to fail. Still, the costs are also likely to be significant.
“Holding more capital will have ongoing economic costs and wider impacts on interest rates, overall economic activity, particular sectors, the market landscape and the Crown’s balance sheet,” it said. “The extent of these impacts is uncertain.”
