Cash injection ‘needed to restore BNZ’s ratio’

Press, 23 February 1989, Page 7

Cash injection ‘needed to restore BNZ’s ratio’

Signs are emerging that the Government intends to sell the Bank of New Zealand as quickly as possible, partly to avoid the need to make further injections of capital into the bank. Financial market sources said yesterday that the. BNZ’s capital ratio had now fallen to about 25:1, meaning the bank needs more capital to balance its portfolio of loans against its ability to guarantee them.

At 25:1, the ratio is now higher than at the time of the BNZ’s share float in 1987. The float was made to

allow the ratio to come closer into line with international norms.

Treasury papers obtained by “The Press” under the Official Information Act show the BNZ was asking the Government for a capital injection in 1985 and 1986 when its capital ratio was about 23:1.

The capital ratio measures the size of shareholders’ funds against the bank’s liabilities, and the Treasury reports say norms in Britain were around 20:1 or lower, and as low as 15:1 in the United States.

Creating further pres-

sure for the Government is the fact that the BNZ must soon move to improve its ratios to fall within new capital adequacy rules drawn up by the Reserve Bank.

The key ratio in this respect is a risk-adjusted ratio of on and off-bal-ance sheet items.

By the end of 1990, a ratio of 7.25 per cent is required, rising to 8 per cent by the end of 1992.

If the Government were forced to find the estimated $1 billion required to meet that target, it could put severe pressure on its Budget for either this year, or in election year.