29.05.2019

Changes ahead for capital requirements

The biggest ever review of New Zealand’s banks’ capital requirements is working its way towards conclusion. The Reserve Bank has proposed to increase banks’ regulatory capital requirements by about $20 billion over five years. Under current proposals, the required Tier 1 capital ratio for the ‘big four’ (ASB, BNZ, Westpac, and ANZ) will be substantially increased as a percentage of risk-weighted assets.

Reserve Bank Deputy Governor Geoff Bascand says 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."

Analysis and advice behind this proposal will undergo an external and independent review before implementation. Submissions on the proposal closed earlier this month, and these will be collated and published in June. 

Bank lobby group the New Zealand Bankers' Association (NZBA) publicly issued its submission on Monday arguing that banks are already well-capitalised and strong by international comparisons, and describes the proposals as excessive, saying they will cost our economy around $1.8 billion a year. NZBA says the regulator's assumption that bank shareholders will be happy to increase equity in banks via retained earnings and lower dividends as “implausible”.

For background information on this issue, read Gareth Vaughan’s three-part series here: https://www.interest.co.nz/banking/97677/against-backdrop-rbnzs-review-bank-capital-requirements-gareth-vaughan-explains-how