IMF published its staff report and selected issues report in context of the 2019 Article IV consultation with New Zealand. Directors highlighted that the scope for easing macro-prudential restrictions is limited, given the still-high macro-financial vulnerabilities. RBNZ has also proposed an increase in capital requirements for banks, in line with the recommendation under the 2017 Financial Sector Assessment Program (FSAP). Directors believe that the proposed higher capital conservation buffers would provide for a welcome increase in banking system resilience.
The staff report highlights that RBNZ has proposed an increase in capital requirements to lower the probability of bank failure. The proposed increase would entail a rise in the required capital conservation buffer from 2.5% to 7.5% of risk-weighted assets (RWA) and increases for other buffers. The proposed increase would raise the tier 1 minimum capital adequacy requirements from 8.5% of RWA to 16% for domestic systemically important banks (D-SIBs) and 15% for smaller banks. The proposed increase in the ’ capital conservation buffer of banks would result in a welcome reduction in systemic financial risks. The material increase in the requirements is consistent with the 2017 Financial Sector Assessment Program (FSAP) recommendation to raise capital buffers in view of the systemic financial risks emanating from the dominance of the four large banks in the financial system. RBNZ is reviewing the proposed changes to the capital framework and a decision is expected in November 2019.
There is scope for some flexibility in the final settings for key parameters in the new bank capital framework. The IMF staff believes that there is a strong case to double the new buffer for domestic systemically important banks (D-SIB buffer) to 2% since much of the structural systemic financial risks identified in the FSAP arise from the D-SIBs. There would also be scope for a somewhat smaller increase in the general conservation buffer, given that other regulatory changes since the global financial crisis are also likely to have lowered the probability of bank failure. Alternatively, RBNZ could evaluate whether a mix of tier 1 and tier 2 capital could provide for a similar strengthening of the loss absorbency provided by capital buffer of banks. Finally, the phase-in period could be set flexibly to ease the transition. However, staff noted that a stronger bank supervision regime would still be needed, to complement the higher capital requirements.
The report highlights that RBNZ relaxed macro-prudential policy as macro-financial risks continued to ease. The loan-to-value (LTV) ratio restrictions on the new mortgage loans of banks were relaxed on the assessment that both mortgage credit growth and house price inflation had eased to more sustainable rates, reducing the riskiness of new housing lending of banks. Ongoing Phase Two of the review of the RBNZ Act focuses on updating the regulatory, supervisory, and macro-prudential functions. The government has announced its in-principle decision after Phase 2A of the public consultation to introduce a deposit insurance framework as part of the overhaul of the crisis-management framework. The staff welcomes the in-principle decision to adopt a deposit insurance framework, a move recommended by the 2017 FSAP. The staff report also emphasizes the importance of continued operational independence and additional resources to strengthen the supervisory and regulatory functions of RBNZ.
The selected issues report focuses on the role and interaction between monetary policy and other policies affecting financial stability, particularly the macro-prudential policy. Another focus is structural vulnerabilities in the housing sector, as these vulnerabilities are the origin of much of the current financial stability concerns.
Keywords: Asia Pacific, New Zealand, Banking, Macro-Prudential Policy, FSAP, Article IV, LTV, Systemic Risk, Capital Buffer, RWA, Capital Adequacy, Deposit Insurance, RBNZ, IMF
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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