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    RBNZ Releases Materials and Response to Submissions on Capital Review

    December 19, 2019

    RBNZ released background materials and papers on the final decisions on the comprehensive review of the capital adequacy framework for locally incorporated registered banks in New Zealand, along with its response to submissions on the fourth and final consultation paper on the capital review. To account for the transitional impact, the first changes resulting from the capital review will come into effect on July 01 2020 and the last on July 01, 2027. The seven-year transition period allows a longer timeframe to meet new capital requirements. Also, RBNZ has decided to implement the change in internal ratings-based scalar from October 01, 2020 and output floor from January 01, 2021. This ensures that the playing field between the internal and standardized approach banks is leveled sooner rather than later.

    The final decisions in the capital review included a range of changes to the fourth paper (December 2018) proposals. Many of these changes reflect feedback received during the submission process and points raised in stakeholder meetings with a diverse range of groups. The final decisions include more flexibility for banks on the use of specific capital instruments, a more cost-effective mix of funding options for banks, more transparency in capital reporting, and a lesser increase in capital for the smaller banks consistent with their more limited impact on society should they fail. All of the banks identified as domestic systemically important banks or D-SIBs (ANZ, ASB, BNZ, and WNZL) agreed with the proposed D-SIB buffer of 1%, noting that this calibration aligns with the approach of APRA. However, RBNZ determined that a more appropriate D-SIB buffer for the New Zealand context would be 2%. This is on the basis that D-SIBs in New Zealand are relatively more systemic than they would be overseas, largely due to the high level of concentration in the banking sector.

    Furthermore, any legislative changes to the crisis management regime in New Zealand are not likely to come into effect for several years. RBNZ has not yet determined whether establishing a bail-in framework would be desirable in the New Zealand context, even if provided with the legislative authority to do so. If RBNZ were to establish a bail-in framework, it would likely not become effective for several years after the legislative authority is provided. If a bail-in framework were to exist, it should not be assumed that it would be appropriate to use it in all resolution scenarios. If a bail-in framework were to exist, its effectiveness could not be evaluated until after it is executed (bail-in frameworks remain untested internationally).

    As part of the next steps, RBNZ will consult on Exposure Drafts of the capital chapters in the Banking Supervision Handbook, to give effect to the 2019 reforms. It is envisaged that the Exposure Drafts will be ready for consultation by April 01, 2020. An indicative date for the end of the consultation on the Exposure Drafts is June 01, 2020, with the revised chapters coming into effect on July 01, 2020. The transition period will begin on July 01, 2020. An indicative transition timeline is given in Appendix 2. RBNZ will consult on the details of the Escalating Supervisory Response policy and operationalizing the countercyclical capital buffer, or CCyB, in 2020.


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    Keywords: Asia Pacific, New Zealand, Banking, Capital Adequacy Framework, Capital Review, Basel III, Regulatory Capital, Systemic Risk, Resolution Framework, RBNZ

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