Reserve Bank to review capital requirements of banks and other deposit takers by year's end, Chairman Neil Quigley says

The Reserve Bank (RBNZ) will review its requirements for banks' regulatory capital by the end of the year, Chairman Neil Quigley says.

Appearing before the Parliamentary Banking Inquiry on Monday, Quigley said the RBNZ Board had; "agreed to an evidence-based framework for a review of our capital regime utilising international experts and assessing it against the regimes in other countries."

"Capital is the buffer that allows a bank to absorb losses while still being able to pay its depositors and other creditors in full. We have heard the claims that our bank capital regime is unreasonably conservative, and that it is undermining competition and growth in the New Zealand economy. We think that at least some of those claims are incorrect, but ultimately all of the claims can be tested empirically," Quigley told MPs.

"At present our banking system is profitable and not capital constrained, so lending could be increased if there was demand. Of course, there may be some individual borrowers who would like a larger loan and/or at a lower rate, but that is an individual commercial bank assessment rather than being driven by system-wide capital constraints."

"The Reserve Bank board has agreed to an evidence-based framework for a review of our capital regime utilising international experts and assessing it against the regimes in other countries," said Quigley.

"This international view is important as a robust capital regime is critical to maintaining international confidence in our financial system. This was highlighted just two weeks ago with the visit of the International Monetary Fund who said the primary objective of prudential regulation should be to safeguard financial stability, calibrated to New Zealand’s unique risks."

Willis welcomes review

Finance Minister Nicola Willis welcomed news of the capital review.

"Submissions made to the finance and expenditure committee’s banking inquiry have raised concerns that New Zealand’s bank capital regime is too conservative, and that this is undermining banking competition, driving up the cost of lending and reducing growth in the New Zealand economy," Willis said.

"I share these concerns and welcome the Reserve Bank Board’s decision to conduct an evidence-based review of its capital regime, using international experts, and comparing New Zealand’s requirements with those in comparable countries."

The RBNZ decision to review banks' capital settings follows the recent resignation of Governor Adrian Orr, who had been on the central bank and prudential regulator's helm for seven years. 

Below is an RBNZ press release accompanying the appearance by Quigley and RBNZ Acting Governor Christian Hawkesby at the banking inquiry. Their opening remarks are published here, and there's more to come from interest.co.nz.

RBNZ outlines work to support competition

Today the Reserve Bank of New Zealand, Te Pūtea Matua appeared before the Finance and Expenditure Committee (FEC) for their banking inquiry and discussed the wide range of initiatives underway to support and improve competition in the banking sector.

Chair Neil Quigley, Acting Governor Christian Hawkesby, Director Prudential Policy Jess Rowe, and Financial Stability Adviser Charles Lilly appeared before the committee.

The RBNZ’s statutory purpose is to promote prosperity and wellbeing for all New Zealanders. This is achieved through its three core objectives: price stability, financial stability and central banking, which includes managing monetary policy, overseeing payment systems and ensuring access to cash. Competition is important across all these objectives.

“We have never had more focus on competition across our functions, including addressing the recommendations of the Commerce Commission’s market study,” Mr Hawkesby said.

Key initiatives likely to support competition include developing proportionate prudential standards, launching the depositor compensation scheme, expanding access to the payments system, investigating a digital currency and working with CoFR partners on system-wide issues such as a payments vision for New Zealand.

“Advancing competition and innovation in the financial sector is a team effort across government agencies, regulators and the industry itself," Mr Hawkesby said.

The RBNZ’s submission to the FEC outlines that the greatest gains to be made are through advancing open banking, customer data rights, digital identity, and the retail payments infrastructure to deliver an eco-system where competition can flourish.

“Through our consultation on the new Deposit Takers Act and submissions to the FEC, we have heard the claims that our bank capital regime is unreasonably conservative, and that it is undermining competition and growth in the New Zealand economy. We think that some of those claims are incorrect, but most of the claims can be tested empirically and we consider that it is important that we respond by undertaking this assessment,” Professor Quigley said. 

“The Reserve Bank Board has agreed to an evidence-based review of key aspects of our deposit takers capital settings, utilising international experts and assessing it against the regimes in other countries,” Professor Quigley said.

What is capital?
Capital is the buffer that allows a bank to absorb losses while still being able to pay its depositors and other creditors in full

What will the review cover?
The Reserve Bank intends to conduct a reassessment of key capital settings. We intend to engage independent international experts to support this process.
The review will build on work currently underway to review more granular risk weights for residential mortgages and corporate (including rural) lending, community housing and whenua Māori lending, as well as development of a new crisis management framework. The review will expand the work programme to include consideration of additional evidence and the calibration of other foundational aspects of the regime including:

• Reviewing submissions or statements made at the FEC banking enquiry regarding our prudential capital framework
• An assessment of how our capital settings compare internationally
• A reassessment of the appropriate risk appetite for capital settings in New Zealand
• Reviewing the degree of proportionality in the framework and considering changes
• Considering the balance between going concern and gone concern capital and the role of ‘Additional Tier 1’ capital.  

What does this mean for the planned increase in capital requirements on 1 July?

• Following a review over 2017-2019, the Reserve Bank announced higher capital requirements, a long transition period to 2028. For Domestic Systemically Important Banks (D-SIBs), total requirements are scheduled to go from 10.5% to 18%. Current requirements are 13.5%.
• Requirements for smaller banks are scheduled to go from 10.5% to 16%, and current requirements are 11.5%.
• There is a scheduled increase in capital requirements on 1 July 2025 of a 1% of risk weighted assets increase in the Prudential Capital Buffer (PCB) for all banks.
• Banks are well advanced in their plans to meet the new requirements. On average, banks’ total capital levels are currently above 16%.
• Accordingly, we intend to proceed with the 1 July increase, taking total requirements for D-SIBs to 14.5% and other banks to 12.5%.
• The review will be conducted promptly to allow for any changes to be well signalled ahead of next year’s scheduled increase and to minimise the impact on the implementation of the Deposit Takers Act.

And here's a statement from Finance Minister Nicola Willis.

Reserve Bank capital review welcomed 

The Reserve Bank’s decision to review its capital requirements has been welcomed by Finance Minister Nicola Willis.

“Submissions made to the finance and expenditure committee’s banking inquiry have raised concerns that New Zealand’s bank capital regime is too conservative, and that this is undermining banking competition, driving up the cost of lending and reducing growth in the New Zealand economy.

“I share these concerns and welcome the Reserve Bank Board’s decision to conduct an evidence-based review of its capital regime, using international experts, and comparing New Zealand’s requirements with those in comparable countries. 

“It’s important that the Reserve Bank’s prudential regime preserves the stability of our financial system, while taking care not to not impose excessive costs in the process.

“Higher capital requirements increase the cost of borrowing. This can reduce economic activity and drive up the cost of living. I want to see settings that preserve financial stability while encouraging investment, job creation and income growth.

“Submitters have argued that other countries have less onerous bank capital requirements and that New Zealand is becoming an outlier internationally.

“The Reserve Bank’s decision to conduct a prompt review is a good opportunity to objectively assess New Zealand’s settings and consider whether the Bank’s intention to keep increasing capital requirements still makes sense.” 

The Reserve Bank increase in minimum capital requirements followed a review in 2017-2019 and is being implemented over seven years with annual increases on 1 July each year. 

The big banks are currently required to maintain minimum capital of 13.5 per cent and the smaller banks minimum capital of 11.5 per cent. The Reserve Bank has been planning to, by 2028, lift those requirements to 18 and 16 per cent respectively.

“I welcome the Reserve Bank’s willingness to step back and consider whether decisions it made several years ago are still in step with domestic and international developments.”

Decisions about bank capital requirements are taken independently by the RBNZ Board in accordance with the Bank's financial stability objective.