The Reserve Bank of New Zealand (RBNZ) is seeking feedback on a proposal to raise the amount of capital that banks must hold.
“Insisting that bank shareholders have a meaningful stake in their bank provides a greater incentive to ensure it is well managed,” RBNZ deputy governor and general manager of financial stability Geoff Bascand said. “Having shareholders able to absorb a greater share of losses if the company fails also provides stronger protection for depositors.”
Since early 2017, RBNZ has been reviewing bank capital rules. It is now proposing to almost double the required amount of high-quality capital that banks will have to hold, which will mean an increase of between 20 and 60%. This represents about 70% of the banking sector’s expected profits over the transition period.
“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,” Bascand noted. “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 200 years.”
RBNZ expects only a minor impact on borrowing rates for customers as it believes these impacts “will be more than offset by having a safer banking system for all New Zealanders.”
Submissions close March 29, 2019.