Not long ago, Reserve Bank of Australia (RBA) Governor Philip Lowe stated that we are clearly living in “extraordinary and challenging times”. Resonating his statement was Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr, who recently stated that this is an “uncertain time”. Meanwhile, RBNZ Deputy Governor Geoff Bascand, who is also General Manager for Financial Stability, reverberated that this is a “period of economic uncertainty”.
These esteemed representatives from central banks of two very productive regions of the Asia-Pacific realm are referring to the pandemic that is currently wreaking havoc on the world economy. The novel coronavirus, COVID 19, is first and foremost a major public health problem that has evolved into a major economic problem, posing deep ramifications for financial systems around the world.
The closure of borders, country lockdowns, trade disruptions and social distancing/ quarantine measures have been affecting us all and changing the way we live. Consequently, communities and financial markets are sharing the same trouble- dealing with a rapidly unfolding situation that they have not seen before!
Let us gauge through recent news doing its rounds in ANZ, wherein RBNZ has ordered NZ banks to stop paying dividends on ordinary shares and this order will also impact the big four Australian banks as they will be required to suspend dividend payments to their parent banks in Australia. But what was the central bank’s motive behind this move? Let’s deep dive-
It is imperative that in the current situation, wherein recession fears are looming, and the world economy seems to be in a dwindle, banks need to maintain solvency and adequate capital all across the globe.
The RBNZ has ordered all New Zealand banks to suspend their respective dividend payment schedules amid the financial battle due to the coronavirus crisis, to further support the stability of the financial system. The period of economic certainty has forced both banks and regulatory authorities to make unexpected amendments to help their respective economies from entering a financial crisis, majorly to ensure that the banking system retains the level of liquidity required in times of financial and economic crunch.
With no payment of dividends on ordinary shares and the restriction to not redeem non-CET1 capital instruments, the stability of New Zealand’s financial system can be maintained and there is a possibility of higher levels of available capital. The banks have agreed to adhere with the central bank’s orders and are likely to keep any profits they make in the country to support lending to the Kiwis, as and when needed amid the pandemic.
However, once the economic outlook, noticeably and sufficiently, shows a sign of recovery, these restrictions could be lifted.
How Does RBNZ Order Impact Aussie Big Four Banks?
Australia’s big four banks, Westpac Banking Corporation (ASX:WBC), Commonwealth Bank of Australia (ASX:CBA), National Bank of Australia Limited (ASX:NAB) and Australia and New Zealand Banking Group Limited (ASX:ANZ), dominate lending in New Zealand. The order of RBNZ equally applies to them, wherein they have to stop paying dividend back to their parent banks in Australia, with the intent to build up more capital and safeguard New Zealand’s economy.
RBNZ’s move is likely to be a rough tide for Australian-owned banks, especially when in Australia, the Fed does not seem to be directing the banks to suspend their respective dividend payments (though the policy is under consideration) and the bank dividends are projected to be fairly safe currently.
Moreover, statutory authority of the Aussie Government, the Australian Prudential Regulation Authority (APRA), which is the prudential regulator of the Australian financial services, reportedly opines that currently, Australian banks are well capitalised.
Banks in Australia (and across the world) have been advised to manage their capital cautiously and wisely. Their moves and decisions in the current scenario should ideally remain coherent with their capability to provide ongoing credit backing to the broader economy.
RBNZ & RBA Move to Support Respective Economies
The NZ central bank recently rolled out a Term Lending Facility (TLF), which is a new funding scheme (longer-term) for the banking system, ensuring access to funding for banks at low-interest rates for a maximum duration of three years. TLF is in support of the Business Finance Guarantee Scheme by the Government, aimed towards promoting business lending.
The RBNZ has already introduced a Term Auction Facility (TAF). Both these facilities (TLF and TAF) are likely to provide liquidity to the banking system.
Besides this, the Monetary Policy Committee has implemented a Large Scale Asset Purchase programme and reduced the Current Official Cash Rate (OCR) to 0.25%, as part of efforts to mitigate the COVID-19 severe economic effects. In order to ensure that the banks focus on lending to the Kiwis amid the crisis, the RBNZ has also deferred the commencement of increased capital needs while postponing planned regulatory initiatives.
In Australia, the central bank has further reduced the official cash rate to 0.25%. The RBA is targeting a yield on 3-year Australian Government Securities at around 0.25%.
Besides this, a Term Funding Facility for the banking system with support for business credit has been announced to lower funding costs for the entire banking system and provide an incentive for lenders to support credit to businesses (especially SMEs).
The interest rate on Exchange Settlement balances has been planned to increase to 10 basis points from zero, to ease pressure on the banking system.
As per the WHO statistics from 2 April 2020, the world has more than 827k confirmed cases of the virus along with ~41k confirmed deaths in 206 countries. A JHU CSSE dashboard demonstrates that Australia has over 5k and New Zealand has close to 800 confirmed virus cases.
As these countries acknowledge the pandemic’s severity, they aim to not lose sight of the fact that they will come through this. As Governor Lowe mentioned- the virus will be contained at some point and the economy, along with financial markets, will then recover.