All other banks in New Zealand currently use what is known as the ‘standardised approach’. For many years, we have observed that banks using their own internal models produce lower capital requirements relative to the other banks, which provides them with a competitive advantage that we don’t think can be fully justified based on differences in their underlying risk profiles.
To be sure, even with the increased flexibility implied in a paradigm of expanding globalization and innovation, the combination of exceptionally low saving rates and historically high ratios of household debt to income can be a concern if incomes unexpectedly fall. Indeed, there is little doubt that virtually any debt burden becomes oppressive if incomes fall significantly.