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Major bank announces new risk weight floors

by Annie Kane6 minute read

A big four bank has announced new risk weight floors for some of its mortgage and farm lending portfolios in New Zealand, following an increase in weights applied by the RBNZ.

ANZ has said it is adopting new risk weight floors to its New Zealand mortgage and farm lending portfolios for Level 2 reporting, following notification by the Australian Prudential Regulation Authority (APRA).

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The move, which will take effect from 30 September, is reportedly equivalent to a 20 basis point reduction in ANZ’s Level 2 Common Equity Tier 1 (CET1) capital ratio.
It follows on from an increase in risk weights applied by the Reserve Bank of New Zealand (RBNZ) for these portfolios.
According to ANZ, there is no impact on ANZ’s Level 1 capital ratio (the bank excluding subsidiaries), and the higher risk weights for New Zealand were “effectively incorporated into the Level 1 ratio as at 31 March 2019”.

As of 30 June 2019, ANZ’s Level 2 CET1 capital ratio was 11.8 per cent.

APRA’s unquestionably strong requirement is for it to be higher than 10.5 per cent.

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On a pro-forma basis, ANZ said its Level 2 CET1 ratio is 11.3 per cent.

RBNZ and ANZ New Zealand background

In June, the RBNZ called for two reports from ANZ New Zealand “to provide assurance it is operating in a prudent manner”.

ANZ Bank New Zealand Ltd (ANZ NZ) is to be subject to a review of its capital adequacy requirements and its director’s attestation and assurance framework, following requests from the country’s central bank.

The Reserve Bank of New Zealand (RBNZ) is looking to drastically increase capital requirements for banks operating in the country – with an ongoing consultation expected to come to a head in the September quarter of this year.

The proposals put forward by RBNZ, designed to protect the economy from financial shocks, would almost double the required amount of high quality capital that banks will have to hold (however, it says it expects that it will generally be an increase of between 20 and 60 percent).

ANZ – New Zealand’s largest mortgage lender – has been a vocal opponent of the proposed changes, and RBNZ last month revoked the ability of ANZ’s local unit to autonomously assess its risk capital requirement, citing persistent shortcomings.

ANZ Bank New Zealand Ltd will reportedly have to raise its minimum capital by about 60 per cent to NZ$760 million ($721 million).

RBNZ has now revealed that it has requested two reports from ANZ New Zealand to “provide assurance it is operating in a prudent manner”.

Under the Reserve Bank of New Zealand Act 1989, the central bank has the power to require a bank to provide a report by a Reserve Bank-approved independent person.

These reviews can investigate such issues as risk management, corporate or financial matters, and operational systems.

RBNZ has called for a report to cover ANZ New Zealand’s “compliance with the Reserve Bank’s current and historic capital adequacy requirements” and another to assess the effectiveness of ANZ New Zealand’s director’s attestation and assurance framework, focusing on “internal governance, risk management and internal controls”.

Reserve Bank governor Adrian Orr said at the time: “We continue to engage constructively with ANZ New Zealand’s board, and they remain focused on these important issues. These formal reviews will allow us to work with the bank to ensure the public, and we as regulator can have continued confidence in the bank and that it is operating in a prudent manner.

“Section 95 reports are part of our supervisory toolkit and provide independent assurance and insight about banks’ systems and practices. We have used them effectively in the past, and we will continue to do so.” 

[Related: NZ mulling Hayne’s recommendations]

Major bank announces new risk weight floors
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Annie Kane

Annie Kane

AUTHOR

Annie Kane is the editor of The Adviser and Mortgage Business.

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