RBNZ proposes easing bank capital ratios

The Reserve Bank of New Zealand (RBNZ) has opened public consultation on its capital settings for deposit takers, as part of a wide-ranging review into whether current prudential requirements are set at the right level to support a stable and resilient financial system.

RBNZ Governor Christian Hawkesby said capital settings were one of the most important tools we have to protect and promote the stability of the financial system. “However, it’s essential we strike the right balance – protecting depositors and the wider economy, while supporting competition and economic efficiency,” he said.

The review was announced in March following inquiries by the Commerce Commission and Parliament’s Finance and Expenditure Select Committee into banking competition.

Possible easing of capital ratios

The RBNZ's consultation paper sets out two options for overall capital ratios, both materially lower than those set in the last major review in 2019 – which RBNZ Chair Neil Quigley said reflected a higher risk appetite than in 2019.

“Under the Deposit Takers Act, we will have stronger tools for supervision and crisis management, as well as additional capacity and capability as a regulator. That means we can responsibly ease capital requirements, while still protecting financial stability,” he said.

The Reserve Bank said New Zealand’s current Tier 1 capital requirements were relatively high by international standards, though lower than average on some other measures.

Submissions for the consultation close on 3 October, with the RBNZ expected to make its final decision by the end of the year.

Government backs review

Finance Minister Nicola Willis welcomed the review. “Since 2019 concerns have been raised that the Reserve Bank’s capital settings may be undermining competition and efficiency in our banking industry, increasing the cost of lending to New Zealanders, imposing excessive restriction on lending to important sectors such as agriculture and community housing, and creating headwinds for economic growth,” she said.

Ms Willis said the RBNZ’s proposals could help “better align granular capital requirements with actual risk”, potentially resulting in better lending terms for home buyers, farmers, small to medium businesses and community housing providers.

She said these measures “would also help even the playing field between larger banks and their smaller competitors” and could lower lending rates to New Zealanders.