Risk Weights in Banking: A Call for International Comparability
[Wellington] New Zealand needs to reassess the risk weights that banks are required to apply to lending to ensure they are not too conservative compared to other nations, according to ANZ Bank New Zealand.
A Conservative Approach
New Zealand chief executive officer Antonia Watson told a parliament select committee on Monday (Mar 10) in Wellington that the country’s risk weightings are too conservative. "If I had a magic wand, I would ask the government and regulators just to take a step back and look at our risk weightings on an internationally comparable basis," she said.
Prudential Settings Under Scrutiny
The spotlight is on prudential settings for the industry as part of the inquiry into banking competition. The Finance Minister Nicola Willis has revealed she is taking advice on the amount of capital banks hold, following the unexpected resignation of Adrian Orr, who championed the rules when they were introduced, as Reserve Bank of New Zealand (RBNZ) governor last week.
Capital Ratios and Risk Weighted Assets
Watson explained to the committee, "Our overall capital ratio is our capital divided by our risk-weighted assets. As well as having conservatism compared to other countries in our capital, we have conservatism in our risk-weighted assets."
Balancing Prudential Risk and Competition
She emphasized the need for decision-makers to assess how much prudential risk they want banks to take compared to allowing more competition.
A One-in-200 Year Event
The RBNZ made its decision on new capital rules in 2019, aiming to make banks resilient to shocks that might occur once in every two hundred years. The new requirements, introduced in mid-2022, have pushed up borrowing costs. "We have chosen a one-in-200 year event," Watson said. "Is that the level of financial stability we want? That’s not a question for us. It’s a question for you and our regulators."
Conclusion
The debate surrounding risk weights in New Zealand’s banking industry highlights the need for a more nuanced approach. As the country’s largest lender, ANZ Bank New Zealand’s concerns about the current risk weightings cannot be ignored. It is essential for regulators to consider international comparisons and strike a balance between prudential risk and competition to ensure the stability of the financial system.
FAQs
- What are risk weights in banking?
Risk weights are the percentages of a bank’s assets that are considered high-risk and need to be held in reserve to ensure the bank’s stability. - Why are risk weights important?
Risk weights are crucial in determining a bank’s capital requirements, which affect its ability to lend and the cost of borrowing for customers. - What is the current risk-weighting approach in New Zealand?
New Zealand has a conservative approach to risk weightings, which may be too stringent compared to other countries. - What is the impact of risk weightings on the economy?
The current risk weightings can lead to higher borrowing costs, which can have a negative impact on the economy and businesses.
