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    RBNZ Releases Final Decisions Related to Capital Review for Banks

    December 05, 2019

    RBNZ released a paper that sets out its final decisions following the comprehensive review of its capital framework for banks, known as the Capital Review. The expected impact of the decisions under the Capital Review is outlined in the Regulatory Impact Assessment accompanying the paper. The key decisions, which start to take effect from July 01, 2020, involve increase in the total capital from a minimum of 10.5% to 18.0% for the four large banks (ANZ, ASB, BNZ, and Westpac) and 16% for the remaining smaller banks. The average level of capital currently held by banks is 14.1%. RBNZ also published a go-to-guide and questions and answers (Q&As) related to the capital review.

    The following key decisions have been taken:

    • The minimum capital ratio would be significantly increased, to improve the resilience of New Zealand’s banking system
    • What is acceptable as the "middle tier" of capital would be expanded to provide banks with greater flexibility
    • The lowest tier of capital would remain in the framework
    • The large four banks could not have capital lower than 85% of what they would have if they used the RBNZ models to measure capital

    Relative to the initial proposals of RBNZ, the final decisions also include:

    • More flexibility for banks on the use of specific capital instruments
    • A more cost-effective mix of funding options for banks
    • A lesser increase in capital for the smaller banks consistent with their more limited impact on society should they fail
    • A more level capital regime for all banks—with the four large banks having to measure the risks of their exposures (lending) more conservatively, more in line with the smaller banks
    • More transparency in capital reporting

    The adjustments to the original proposals reflect the analysis and industry feedback over the past two years. All of these changes will be phased in over a seven-year period, rather than over five years as originally proposed, to reduce the economic impact of these changes. During the course of the Capital Review, RBNZ had released four consultation papers. The first consultation asked what topics should be considered as part of the Review and also set out six high-level principles for the Review. The second consultation asked what should be eligible as bank capital while the third one asked how to measure a bank’s assets. The fourth and last consultation proposed that the minimum capital ratio be increased significantly. The extensive consultation process over 2.5 years has involved a submissions process that attracted more than 200 responses, many meetings with the public and industry groups, and an independent international review by three industry experts. 

     

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    Effective Date: July 01, 2020

    Keywords: Asia Pacific, New Zealand, Banking, Capital Adequacy Framework, Capital Review, Basel III, Q&A, Regulatory Capital, RBNZ

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