The Reserve Bank has released its final decisions on bank capital following its Capital Review.
The four main banks will now be required to hold a minimum of 18% total capital – increased from 10.5% - while the remaining smaller banks will be required to hold 16%. The average total capital currently held by banks is 14.1%.
Smaller banks will be required to hold less minimum capital as their failure would have a “more limited impact on society” than the failure of the big four.
The new requirements will take effect on 1 July 2020, and banks will have seven years to implement the changes. Reserve Bank governor Adrian Orr says the decision will make the banking system safer, and banks more resilient in the face of economic difficulty.
Deputy governor and general manager of financial stability Geoff Bascand says the decisions were shaped by the feedback received from bank submissions, and a number of adjustments were made to the initial proposal to reflect this. These adjustments include more flexibility for banks to use specific capital instruments, a more cost-effective mix of funding options, and more transparency in capital reporting.
“Our decisions are not just about dollars and cents,” Orr said. “More capital in the banking system better enables banks to weather economic volatility and maintain good, long-term, customer outcomes.
“Banking crises cause not only harmful economic costs but also distressful social issues, such as the general decline in mental and physical health brought about by higher rates of unemployment. These effects are felt for generations.”
New Zealand’s biggest bank ANZ has responded positively to the changes, with acting CEO Antonia Watson saying that the consultation process with the Reserve Bank was “thorough.”
“While the increase in capital remains significant, we acknowledge that as a result of the consultation process there have been changes to the capital instruments and the transition period to the new regime,” Watson said.
“We welcome the conclusion of the RBNZ’s review.”