Reserve Bank proposes new capital rules

The Reserve Bank of New Zealand has proposed that banks should hold between 20% and 60% more capital on their balance sheets, a move likely to increase borrowing rates and put more pressure on major lenders.

The central bank issued a statement on the new rules today. The proposed capital adequacy requirements would represent about 70% of the banking sector's expected profits, the RBNZ said.

As part of the proposal the central bank has issued a consultation paper. The RBNZ has been reviewing capital adequacy rules since early 2017, as the central bank looks to eradicate risk from the New Zealand banking system. 

RBNZ deputy governor Geoff Bascand said: "“Bank crises happen more often than many people care to remember, and the economic and social costs of bank failures can be very high and persistent. These proposals are designed to make bank failures less frequent. With these changes we estimate the banking system will be resilient to shocks that might occur only once every two hundred years."

Bascand added: "The proposal would see banks’ capital levels increase materially. We are proposing to almost double the required amount of high quality capital that banks will have to hold. In practice, actual changes to the amount that they hold will be less than double and will vary. The increase will depend on their current levels of capital, how much extra they choose to hold above the required minimum, and whether they are a large or small bank."

Bascand said borrowing costs "may increase a little" if the changes are introduced. The Reserve Bank has launched a five year consultation period of the proposed changes. The deadline for feedback is March 2019.

Most Read

Get TMM delivered to your inbox each week

Sign Up