Sharad Jain, Melbourne-based director, financial institutions ratings at S&P, tells KangaNews that because the New Zealand subsidiaries only have one shareholder – an Australian major bank – for which the impact is likely minimal, there should be no justification for wholesale scale-back of lending activity in New Zealand.

The RBNZ suggests the major banks will need to raise NZ$12.8 billion (US$8.4 billion) of common equity tier-one (CET1) capital to meet the requirements. The major banks themselves estimate the requirement to be NZ$18-22 billion.

The ultimate cost to the Australian parent banks has been a subject of debate. Some believe the parents will inevitably mitigate any cost impost and lower return on equity by scaling back lending to marginal sectors in New Zealand.

However, the S&P report suggests this is unlikely because APRA already requires the major banks to hold more capital for their New Zealand subsidiaries on a level-two basis than they would need to under the RBNZ proposals.

APRA requires Australian banks to meet capital requirements on a level-one and a level-two basis. The former includes the parent bank, its offshore branches and APRA-approved extended licensed entities. The latter focuses purely on capital at consolidated banking-group level.

According to S&P’s report, in the level-one approach the computation of the regulatory capital ratio is driven by equity investment in the New Zealand banks, whereas it is derived from underlying risk exposures in the level-two calculation.

In a February report, S&P suggested that in order for the Australian major banks to maintain their level-one capitalisation they would need to inject a total of around A$8.1 billion (US$5.6 billion) of capital into their New Zealand subsidiaries.

If the banks demur, the result could be a reduction in the availability of credit from the New Zealand banks so less capital needs to be held against risk-weighted assets.

However, in its new report, S&P suggests the effect of the RBNZ’s capital proposals on the availability of credit in New Zealand should be negligible.

The report says: “In our opinion, capital earmarked for the New Zealand banking subsidiaries of the Australian major banks on a level-two basis already exceeds the amount of capital they would need to allocate on a level-one basis even if the RBNZ implements the current proposal.”

It continues: “Consequently, we believe implementation should not reduce credit availability across the board.”

While S&P believes an overall reduction in credit availability is unlikely, the agency acknowledges that lending to sectors requiring higher regulatory capital could still be restricted due to the parent banks no longer being able to meet capital-return hurdles without increasing interest rates.