The Reserve Bank’s recent announcement of an upcoming review of banks’ capital requirements aim to continue to encourage efficiency and ensure confidence in the solvency of the country’s banking system.
Reserve Bank deputy governor Grant Spencer said in a speech to the New Zealand Bankers Association in Auckland, that in the wake of the global financial crisis, banks and regulators around the world have been reviewing capital buffers for banks to maintain to guard against the risk of losses. Describing it has a very complex area which is full of trade-offs, the Bank intends to comprehensively assess if New Zealand’s capital framework is still fit for purpose.
“In broad terms, higher levels of capital will improve the soundness of the financial system as the likelihood of bank failures is reduced. However, the capital regime may reduce the efficiency of financial intermediation if ratios are pushed too high or standards are made overly complex.
"An appropriate capital regime will ensure a very high level of confidence in the solvency of the banking system, while avoiding unnecessary inefficiencies.”
Spencer said the Bank release an issues paper in April outlining the broad areas of the capital framework to be examined in the capital review. The capital review will explore the definition of capital, how banks measure the risks they face (e.g.: risk weights) and the minimum capital ratios and buffers.
“The issues paper will provide the opportunity for stakeholders to give preliminary views on the areas we intend to cover in the review, as well as identify any other issues in the capital framework that could be examined.
"Any detailed policy positions and options for changes to the capital framework would be outlined in consultation papers later this year. We aim to conclude the review by the first quarter of 2018.”