Bank non-equity funding source (locally incorporated banks)
Wholesale funding
To the extent that deposits become more volatile, and as the RBNZ-mandated capital requirements ratchet up to 16-18% by 2028, wholesale funding sources (both domestic and international) will become increasingly important.
These markets are typically a deep source of capital but an increased reliance on them will make New Zealand banks more susceptible to downturns in overseas markets and the lessons of the Global Financial Crisis, reinforced by very recent experience, will be front of mind.
In addition:
- Some of the biggest unknowns and divergences from international practice in the Deposit Takers Bill relate to the treatment of creditors - from the absence of statutory bail-in, to the interplay between the depositor compensation scheme and bank resolution, and the lack of clarity around the framework for the RBNZ’s preferred open bank resolution (OBR) process; and
- The RBNZ has indicated that it will be making further changes to the design of regulatory capital, potentially brought forward by the recent international bank crises, adding further uncertainty.
The fallout from Credit Suisse’s merger with UBS, beyond the direct losses suffered by AT1 bond holders, is a general loss of confidence in regulatory capital investments.
Credit Suisse’s AT1 products were designed to be written-off in exactly the circumstances that ultimately occurred, and appear to have functioned as intended - but they were valued similarly to ‘contingent convertible’ instruments.
We expect a very strong investor focus in future on how products will shake out in a crisis.
This can be partially addressed by issuers in disclosure, but clear legislation, definitive central bank guidance, and approaches comparable to international norms, are likely to be highly valued. At this stage it is too early to tell how the RBNZ and other central banks will view these considerations.
