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July 06, 2018

RBNZ published its "in-principle decisions" on capital requirements for registered banks, as part of the review of capital adequacy in the New Zealand banking system. In this context, RBNZ also published a summary of submissions and its responses to the submissions on the consultation on calculation of risk-weighted assets (RWA). The consultation had closed on March 19, 2018.

The components of RWA are credit risk, operational risk, and market risk. Qualifying banks are permitted to use models to calculate RWA, while the remaining banks use the standardized approach. After considering the feedback received, RBNZ has made the following in-principle decisions:

  • The capital framework will continue to permit qualifying banks to use internal models to estimate credit-risk-related RWA (the internal ratings-based, or IRB, approach), although there will be more restrictions on modeling
  • The IRB approach will not be permitted for any credit exposure with an external rating (for example, sovereigns, banks, some large corporates)
  • An RWA floor will be imposed on IRB models. This floor will be a proportion of the equivalent standardized calculation RWA value
  • All banks will calculate the RWA arising from operational risk in the same way, using the Basel Standardized Measurement Approach
  • IRB banks will be required to report RWAs (and associated credit ratios) calculated using the standardized approach, along with the RWAs arising from the IRB approach (dual reporting).

The in-principle decisions are designed to bolster the capital that banks need to hold, to make it easier for investors to assess capital adequacy, and to minimize any unintended competitive advantages. The next phase of the capital review will be a quantitative impact study of the in-principle decisions made by RBNZ so far. The final phase will address the setting of minimum capital ratios. RBNZ aims to conclude the key elements of the capital review in 2018.

 

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Keywords: Asia Pacific, New Zealand, Banking, In-Principle Decision, Capital Adequacy Framework, Basel III, Risk Weighted Assets, RBNZ

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