WELLINGTON (Reuters) - New Zealand's central bank is expected to announce tougher bank capital ratio requirements on Thursday, a move that could tighten credit conditions and hurt the bottom line of the major Australian lenders who dominate the market.
The Reserve Bank of New Zealand (RBNZ) has proposed doubling minimum Tier 1 capital ratios to 16% of risk-weighted assets as it seeks to bolster the country's financial system.
That would require the top four Australian-owned banks to raise as much as NZ$20 billion ($12.81 billion) in new capital over the next five years, the timeframe the RBNZ has proposed for the introduction of the new ratio.
Most analysts expect RBNZ to stand firm on its proposal following several months of industry consultation, although RBNZ Governor Adrian Orr has indicated he may be willing to give lenders more time to make the changes.
"There is no doubt that banks will have to hold more capital against loans," Kiwibank Chief Economist Jarrod Kerr said in a note about the impending decision.
"The capital review may set the tone for economic growth next year. The need for banks to boost capital is likely to constrain credit growth."
Kiwibank said credit conditions have already tightened for higher risk agriculture and commercial property in anticipation of increased capital requirements.
Most vulnerable to the changes are the local units of Australia and New Zealand Banking Group <ANZ.AX>, Commonwealth Bank of Australia <CBA.AX>, National Australia Bank <NAB.AX> and Westpac Banking Corp <WPC.AX>, the top four Australian lenders which make up about 90% of New Zealand's market.
The quartet are already under pressure back home amid the fallout of a government-backed inquiry last year that found widespread misconduct in the financial sector.
RBNZ earlier this year revoked the licence of ANZ Bank New Zealand to calculate its own operational risk capital due to persistent control failures.
Westpac's former chief executive, Brian Hartzer, warned in his written submission on the proposal that the tighter ratio would force Australian banks to consider "whether to reduce the size of the business, demerge, or sell."
Governor Orr has dismissed such concerns as scaremongering. The RBNZ has said lending margins could expand by about 20 to 40 basis points after the capital hike.
John Key, the former New Zealand prime minister and chairman of the New Zealand unit of ANZ, said in his submission that the hike would cost around 20% of New Zealand's GDP in present value terms, far higher than the Reserve Bank's 4-12% estimate.
(Reporting by Praveen Menon; editing by Jane Wardell)
