Reserve Bank announces next steps in Capital Review

The Reserve Bank has today announced the next steps in its Capital Review, following the closing of written submissions on Friday last week.

The review proposes changes to regulatory capital requirements for locally incorporated banks. These include requiring bank shareholders to increase their stake so that they absorb a greater share of losses should their bank fail, and ensuring banks more accurately calculate how much capital they have.

Deputy Governor Geoff Bascand says he is encouraged by the number of, and the effort put into, submissions received on the proposals to make New Zealand’s banking system safer.

“It is important that the public understands how higher levels of capital better protect their deposits. It is pleasing to see stakeholders’ interest in the proposals reflected in the 164 responses received as well as in feedback received through our briefings with banks, industry bodies, investors, the news media, and social sector groups.

“The proposals are consistent with steps taken by other banking regulators after the Global Financial Crisis. There is increasing evidence that the costs of bank failures – both economic and well-being costs – are higher than previously understood.”

The submissions will now be collated and published along with a summary in June. The Reserve Bank will continue its stakeholder outreach programme, which includes conducting focus groups to understand how New Zealanders feel about risks in our financial system, how these risks could affect them, and how the risks should be managed.

An important part of the consultation process involves seeking relevant information from industry and broader stakeholders to better understand costs and benefits, Mr Bascand says.

“The proposals were designed around a net benefits framework, where more capital was required up to the point that financial stability gains were matched by increases in costs.

“Our policy development process is to develop policy options, lay out our thinking on the nature of the costs and benefits of the policy being consulted on, seek input from affected parties, and produce a full cost benefit around any modified proposals before making final policy decisions.”

The Reserve Bank is also in the process of appointing external experts to independently review the analysis and advice underpinning the proposals. Their reports will be part of the suite of information considered in the final decision-making process of the review.

An announcement is planned by the end of November, with implementation of any new rules starting from April next year. There will be a transition period of a number of years before banks are required to fully comply with any new rules.

The review began more than two years ago, when the Reserve Bank published an issues paper and opened the first of four public consultations.

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