RBNZ Issues Independent Analysis of Capital Review for Banking Sector

By Regulatory News

October 01, 2019

Basel III, Regulatory Capital

RBNZ released assessment reports, of the three independent international experts, on its Capital Review for banks. Post the fourth consultation on Capital Review, which was published in December 2018, RBNZ commissioned external experts to independently review its analysis and advice underpinning the Capital Review proposals. The reports by these experts will be part of the collection of information considered in the final decision-making process of the Capital Review. The implementation of new capital rules is proposed to start from April 2020, with a transition period of a number of years before banks would need to meet the new requirements.

The experts were asked to take into account the objectives of the Capital Review as well as the domestic context, the available literature, the international debate, and global policy developments relating to the role of bank capital. Dr. James Cummings, Professor Ross Levine, and Professor David Miles, who provided the independent assessments, offered certain suggestions and concluded that the RBNZ review was balanced, sound, unbiased, and well-reasoned in general. Dr. Cummings suggested that RBNZ should investigate the extent to which the Internal Ratings-Based (IRB) models provide a more accurate prediction of unexpected losses than the standardized models. If the IRB models do not outperform, then the role of IRB should be reconsidered. Additionally, Professor Levine is skeptical about the ability of RBNZ to accurately assess when to turn the countercyclical capital buffer (CCyB) on and off while Professor Miles suggests that RBNZ should consider making the CCyB a part of the rest of the prudential buffer, to remove direct allocation of part of the buffer to the CCyB.

In response to the assessments, RBNZ will consider all the comments and suggestions of the external experts. The issues raised by the experts will also be addressed in the regulatory impact analysis, including the cost-benefit assessment. RBNZ has a number of processes underway to address the points raised by the external experts as well as points made in submissions on the Capital Review. This includes refining estimates of the costs and benefits of the proposals, considering a range of perspectives about possible interest rate impact, assessing the impact of incentives on the various groups that make up the financial ecosystem, and additional analysis of the definition of capital and processes for determining the level of risk-weighted assets.

The RBNZ Capital Review is intended to identify the most appropriate framework for setting capital requirements for banks in New Zealand. The review is also considering the way the current framework operates and the international developments in the capital requirements of banks. As part of the Capital Review, which began more than two years ago, RBNZ has, so far, published four consultation papers. The first consultation was an issues paper that discussed, at a high level, the scope and key issues that should be covered by the Review. The second consultation discussed the definition of regulatory capital instruments while the third one addressed questions related to the measurement of risk for bank exposures. The fourth and last consultation so far is titled "How much capital is enough?" and it seeks views on the proposed capital requirements for banks and on the other proposals in the Capital Review to date.

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Keywords: Asia Pacific, New Zealand, Basel, Banking, Capital Review, External Expert Assessment, Capital Requirements, Regulatory Capital, RBNZ

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