Growing consensus on capital requirements

Sounds like the Massey University panel on banking regulation was good times – with Don Brash, David Tripe, and Bevan Graham all largely in agreement.

For what it matters I also agree with a lot of what they said 😛

On a side note Brennan McDonald linked to a Radio NZ piece on LVR restrictions which he recommends.  I haven’t heard it – but I wouldn’t be suprised if it goes down the same road as the panel.

So what seem to be the main points from the panel (from the article – I was not at the panel presentation):

  1. LVR restrictions are not “best policy” they are just what is readily available and understood now – in a similar situation in the future the RBNZ may do things differently, as they will have the systems and communication in place!
  2. Counter-cyclical capital buffers have a place here.
  3. Ensuring banks have sufficient capital is the key issue here – are capital requirements at the right level?

Now the RBNZ has said plenty of similar things themselves – their background paper lays this all out very neatly for everyone.

One thing I do have to correct from the stuff article though, the title “Banks need more cash – Brash” isn’t quite correct.

From the quotes he is saying the banks need more capital relative to risk weighted assets.  Banks could do this by holding retained earnings sure – but they could also get equity financing, or reduce their risk-weighted assets (reduce lending, which is an asset to banks).  This is a bit different to just holding cash reserves!

The question is, does the implied regulatory minimum for capital requirements (or the changes to counter-cyclical requirements) account for two things:

  1. A systemic externality on other firms in the banking system
  2. The implicit subsidy banks are getting with regards to the existence of bailouts and a lender of last resort

For me the second issue is really the key one!  And in this context that could justify a bank levy – as Aussie is looking at (ht Bernard Hickey), and as we’ve mentioned in the past.  Interesting stuff!

To anyone who has read “The Banker’s New Clothes” this must sound quite familiar.  This is true!  We are lucky to be in a country where the central bank is already on top of, and relatively clear about, these issue – party times.