RBNZ Releases Responses Received to Consultations on Capital Review

As part of the Capital Review, which began more than two years ago, RBNZ has 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. There was significant and wide-ranging media and public interest in the fourth consultation, with written feedback from 161 respondents. Feedback has also been received from analysts and other interested parties who did not make a formal submission. 

In general, respondents support the RBNZ objective to ensure that the financial system in New Zealand is safe, acknowledging the economic and well-being impact of banking crises. Many respondents, particularly from the general public, support the proposed higher capital requirements for banks. A number of respondents observe that higher capital requirements could lead to higher borrowing costs for New Zealanders. Yet some other respondents, in particular banks and business groups, question whether the proposed increases are too large and too costly. 

Central to the measures proposed in the consultation paper are increases in regulatory capital buffers for locally incorporated banks. The changes include requiring bank shareholders to increase their stake so that they absorb a greater share of losses in case their bank fails, thus improving the quality of capital and ensuring that banks more accurately measure their risk. Increasing the amount and quality of capital can be reasonably expected to mean that banks can survive all but the most exceptional shocks. RBNZ is also consulting on changes to the quality of capital, constraints on modeling capital requirements, and the implementation timeline. RBNZ has also engaged three external experts for an independent review of its proposals. 

Additionally, the RBNZ Deputy Governor Geoff Bascand welcomed reports by two key international financial institutions and a major rating agency last week that support the proposals to increase bank capital ratios. The IMF also released a Statement, post its recent mission, that highlights the need for strengthening bank capital levels and that the proposals appear commensurate with the systemic financial risks facing New Zealand. The latest Economic Survey of New Zealand by OECD also expects that increases in capital will likely have net benefits for New Zealand. Furthermore, Standard and Poor’s says that the proposals should not have material impact on overall credit availability.

Related Links

• News Release
• Summary of Submissions (PDF)
• Individual Submissions
• Consultation Paper 1 (PDF)
• Consultation Paper 2 (PDF)
• Consultation Paper 3 (PDF)
• Consultation Paper 4 (PDF)

Keywords: Asia Pacific, New Zealand, Banking, Basel III, Capital Adequacy Framework, Capital Requirements, Capital Review, Responses to Consultation, RBNZ