April 16, 2019

RBNZ is consulting on the capital adequacy framework for banks and the consultation was initially expected to end on May 03, 2019, although the consultation period has been extended to May 17, 2019. This is the fourth public consultation opportunity in the ongoing review of bank capital adequacy. The proposals are intended to increase the capital requirements for banks to make bank failures less likely.

RBNZ is consulting on the following proposals:

  • Limit the extent to which capital requirements differ between the internal ratings-based (IRB) approach and the standardized approach, by recalibrating the IRB approach and applying a floor linked to the Standardized outcomes. This reflects one of the principles of the Capital Review: where there are multiple methods for determining capital requirements, outcomes should not vary unduly between methods. In essence, there should be as level a playing field as possible, both between IRB banks and between IRB and Standardized banks.
  • Raise risk-weighted assets (RWA) for the four IRB-accredited banks to approximately 90% of what would be calculated under the standardized approach.
  • Set a tier 1 capital requirement (consisting of a minimum requirement of 6% and prudential capital buffer of 9%-10%) equal to 16% of RWA for banks that are deemed systemically important and 15% for all other banks.
  • Assign 1.5 percentage points of the proposed prudential capital buffer requirements to a countercyclical component, which could be temporarily reduced to 0% during periods of exceptional stress.
  • Assign 1 percentage point of the proposed prudential capital buffer requirement to domestic systemically important bank (D-SIB) buffer, to be applied to banks deemed to be systemically important.
  • Retain the current tier 2 capital treatment, but raise the question of whether tier 2 should remain in the capital framework.
  • Implement a staged transition of the different components of the revised framework over the coming years.

The expected effect on banks’ capital is an increase of between 20% and 60%. This represents about 70% of the banking sector’s expected profits over the five-year transition period. RBNZ expects only a minor impact on borrowing rates for customers. In the consultation paper, RBNZ also outlined the risk appetite framework used to arrive at the proposed capital requirements. This framework incorporates a specific, two-part policy goal. This includes ensuring that the banking system has the confidence of depositors and other creditors, even when subject to extreme shocks (delivering soundness), and having identified the level of capital needed to achieve soundness and enhance soundness if it can be done without any adverse impact on expected output (delivering efficiency). Submissions will be made public after the consultation closes. Final decision is expected to be communicated in the third quarter of 2019.

 

Related Links

Comment Due Date: May 17, 2019

Keywords: Asia Pacific, New Zealand, Banking, Capital Adequacy Framework, IRB Approach, Standardized Approach, Regulatory Capital, Basel III, RBNZ

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