Economy

Key warns capital move would cut GDP by 20%

John Key warns the Reserve Bank's proposed capital increase would cut GDP by collective 20 percent in the long term. Prime Minister Jacinda Ardern describes the forecast as 'rhetoric' and points to official inquiries into ANZ's governance failures. 

ANZ has forecast a total fall in today's money terms of 20 percent of GDP if the Reserve Bank goes ahead with its proposal to hold more risk capital.

Twenty percent of 2019 GDP works out to be roughly $70 billion over the very long term.

The modelling, undertaken by ANZ, was included in a submission from bank chair and former Prime Minister Sir John Key on the Reserve Bank’s proposal to force the big Australian-owned banks to hold enough capital to withstand a one in 200-year shock. The Reserve Bank argues holding more capital will make banks safer and reduce the risk of depositors or taxpayers wearing the effects of a banking crisis. 

However that comes at a cost. The Reserve Bank estimates banks will have to stump up 70 percent of profits over the next five years, equating to roughly $20 billion. 

ANZ’s submission said its own estimate of the long-term costs would be a collective 20 percent of GDP in net present value terms, which was far ahead of the Reserve Bank’s own estimate of 4-12 percent of GDP.

The bank said it estimated GDP being between 1 and 3 percent lower over the next 10 years as a result of the changes. A scenario modelled by the bank and published in the submission suggests GDP growth will fall by as much as 0.7 percent per year four years out from the bank capital changes. 

Treasury’s latest figures forecast 2.6 percent growth over the next five years. Knocking 0.7 percent off that forecast would still put New Zealand ahead of the average growth rate for OECD economies, which is expected to be 1.8 percent out to 2020. 

Key also said the bank was concerned about “the absence of cost-benefit analysis of the proposals” and “the degree to which the Reserve Bank has under-estimated the potential impact of its proposed capital regime on both the New Zealand economy and New Zealand bank customers”. 

The bank said the increased costs to banks of holding extra capital would result in higher borrowing costs, reduced borrowing, and reduced economic growth.

The other banks also raised concerns with the proposals. 

Westpac’s economists team said if it increased loan rates by 40 to 80 basis points, house prices could fall by between 4 and 8 percent, creating an economic shock of between 0.5 and 0.9 percent of GDP. That figure also takes into account a likely cut in the Official Cash Rate.

ASB was also sceptical.

It said its modelling suggested consumer interest rates would likely rise by 50 to 75 basis points, nearly double the Reserve Bank’s own estimate of a rise of 20 to 40 basis points.

ASB also notes that the changes could see credit conditions tighten. The big Australian-owned banks had funded over $373 billion of lending assets to New Zealanders, representing 86 percent of all customer lending by New Zealand-registered banks. 

Ardern sees 'rhetoric'

The Prime Minister wouldn’t comment on the changes, noting the Reserve Bank had yet to finalise its plans.

However, she said she had “heard some of the rhetoric coming out of ANZ”.

She also noted that “just for context,”… “the Reserve Bank is doing work with ANZ in other areas,” referring to the work the Reserve Bank was doing in the wake of the David Hisco scandal and the bank’s failure to comply with its existing capital requirements. 

When asked about whether a banking royal commission was required following the Hisco affair, Ardern reminded banks they needed to maintain their social licence, while maintaining her position that a royal commission was not required. 

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