Higher bank capital means safer banking system for all New Zealanders

The Reserve Bank of New Zealand today released its final decisions following its comprehensive review of its capital framework for banks, known as the Capital Review.

Governor Adrian Orr said the decisions to increase capital requirements are about making the banking system safer for all New Zealanders, and will ensure bank owners have a meaningful stake in their businesses. The changes will be implemented over seven years, giving plenty of time for banks to manage a smooth transition and minimise any adjustment costs.

“Our decisions are not just about dollars and cents. More capital in the banking system better enables banks to weather economic volatility and maintain good, long-term, customer outcomes,” Mr Orr says.

“More capital also reduces the likelihood of a bank failure. Banking crises cause not only harmful economic costs but also distressful social issues, such as the general decline in mental and physical health brought about by higher rates of unemployment. These effects are felt for generations,” Mr Orr says.

The key decisions, which start to take effect from 1 July 2020, include banks’ total capital increasing from a minimum of 10.5% now, to 18% for the four large banks and 16% for the remaining smaller banks. The average level of capital currently held by banks is 14.1%.

Relative to the Reserve Bank’s initial proposals, the final decisions also include:

  • More flexibility for banks on the use of specific capital instruments;
  • A more cost-effective mix of funding options for banks;
  • A lesser increase in capital for the smaller banks consistent with their more limited impact on society should they fail;
  • A more level capital regime for all banks – with the four large banks having to measure the risks of their exposures (lending) more conservatively, more in line with the smaller banks; and
  • More transparency in capital reporting.

The adjustments to the original proposals reflect our analysis and industry feedback over the past two years. All of these changes will be phased in over a seven-year period, rather than over five years as originally proposed, in order to reduce the economic impacts of these changes.

Deputy Governor and General Manager of Financial Stability Geoff Bascand says the decisions were shaped by valuable public input and insight received through an unprecedented number of submissions as well as public focus groups. Three international experts also provided supportive perspectives on the proposals.

“We’ve listened to feedback and reviewed all the data, and are confident the decisions are the right ones for New Zealand,” Mr Bascand says.

“We have amended our original proposals in a number of ways so we achieve a high level of resilience at lower potential cost, with a smoother transition path for all participants. Our analysis shows that the benefits of these changes will greatly outweigh any potential costs.”

“Following the Global Financial Crisis, many regulators around the world have been taking steps to improve the safety of their banking systems. We’re confident we have the calibrations right for New Zealand conditions. These changes will be subject to monitoring, with the Reserve Bank reporting publicly on implementation during the transition period,” Mr Bascand says.

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