Capital adequacy: Basel III
Background
In December 2010 the Basel Committee on Banking Supervision (the Basel Committee) released the new global regulatory standards for bank capital adequacy and liquidity. These standards are commonly known as Basel III standards and were endorsed by G20 leaders at their November 2010 summit.
In the May 2011 edition of the Financial Stability Report (PDF 1.4MB, chapter 6) the Reserve Bank set out the general principles it would use to guide its implementation of Basel III.
Final capital adequacy standards relating to the definition of capital and capital ratios
On 11 December 2012 the Reserve Bank released new versions of the Banking Supervision Handbook documents Capital Adequacy Framework (standardised approach) (BS2A) (PDF 1.3MB) and Capital Adequacy Framework (Internal Models Based Approach) (BS2B) (PDF 1.3MB). These documents have been updated to implement the Basel III requirements for the definition of regulatory capital instruments for New Zealand locally incorporated registered banks.
At the same time the Reserve Bank also released a response to submissions (PDF 32KB) on the September 2012 consultation package.
Consequential amendments have also been made to the Banking Supervision Handbook documents Connected Exposures Policy (BS8) (PDF 55KB) and Application for consent to acquire or increase significant influence over a registered bank: Material to be provided to the Reserve Bank (BS9) (PDF 53KB).
From 1 January 2013 locally incorporated registered banks must comply with the following capital ratios, measured in relation to their risk-weighted assets:
- A Common Equity Tier 1 capital ratio of 4.5%;
- A Tier 1 capital ratio of 6%;
- A total capital of 8%.
From 1 January 2014 a bank that does not maintain a common equity buffer of 2.5% above these minimum ratios will face restrictions on the distributions it can make.
From 1 January 2013 locally incorporated registered banks must receive a notice of non-objection from the Reserve Bank before treating any capital instrument as regulatory capital and must receive approval for certain repayments of instruments in accordance with the requirements of subpart 2H of BS2A or BS2B. The application forms for recognition of capital instruments or repayment of capital instruments can be found in Banking Supervision Handbook document BS16: Application for capital recognition or repayment (PDF 187KB).
Further information on the Basel III capital requirements is provided in Basel III capital adequacy requirements – frequently asked questions.
Consultation on implementation of Basel III capital adequacy requirements in
New Zealand
The following paragraphs set out the consultations undertaken by the Reserve Bank prior to implementing the Basel III capital adequacy standards.
In November 2011, the Reserve Bank issued a consultation paper on the implementation of Basel III (PDF 200KB) in New Zealand. This consultation paper set out the Reserve Bank’s proposals for implementing core Basel III capital measures relating to capital ratios, the definition of capital and the leverage ratio.
The November consultation paper also noted that the Reserve Bank would consult on other elements of Basel III capital in 2012.
In March 2012 the Reserve Bank issued a consultation paper on further elements of Basel III capital adequacy requirements in New Zealand (PDF 308KB). This paper set out the Reserve Bank’s proposals for further elements of the framework: the operation of the conservation buffer; the countercyclical buffer; and minimum requirements to ensure that all classes of capital instruments fully absorb losses at the point of non-viability (“loss absorbency”). The paper also proposed transitional arrangements.
In September 2012 the Reserve Bank issued a consultation package on proposed changes to the Banking Supervision Handbook to put into effect Basel III requirements. This package included cover letters to standardised (PDF 54KB) and internal models (PDF 57KB) banks, and draft changes to the following Banking Supervision Handbook documents: Statement of Principles (BS1) (PDF 313KB), Capital adequacy framework (standardised approach) (BS2A) (PDF 154KB), Capital adequacy framework (internal models based approach) (BS2B) (PDF 145KB). The Reserve Bank took the opportunity provided by the Basel III programme to propose a small number of minor and technical tidy-ups to the Banking Supervision Handbook that are unrelated to Basel III.
In October 2012 the Reserve Bank issued a consultation paper on its proposed implementation of the final capital-related aspects of Basel III (PDF 241KB), including the proposed draft changes to BS2A and BS2B (PDF 149KB). The consultation paper focused specifically on the Basel III enhanced risk coverage requirements concerning counterparty credit risk and related issues .
Enquires should be addressed to:
Ian Woolford
Manager, Financial
Policy
Prudential Supervision Department
Reserve Bank of New Zealand
PO
Box 2498
Wellington 6140
Email: ian.woolford@rbnz.govt.nz
The Reserve Bank will consult on its proposed implementation of the Basel III disclosure requirements in early November.
Reserve Bank response to submissions
In May 2012 decisions were taken on some key elements of Basel III. These decisions were supported by the Reserve Bank’s cost benefit analysis and took into account submissions received and developments in the Basel III proposals of the Australian Prudential Regulation Authority (APRA). The Reserve Bank sent all locally-incorporated New Zealand banks a letter providing an update on Basel III implementation in New Zealand (PDF 150KB), including details of the May 2012 decisions.
In September 2012, the Reserve Bank published a full Response to submissions (PDF 219KB) on its November 2011 and March 2012 consultations, and a Regulatory Impact Assessment of Basel III capital requirements in New Zealand (PDF 639KB).
In December 2012, the Reserve Bank published a full response to submissions (PDF 32KB) on its September 2012 consultation document on Basel III.
In December 2012, the Reserve Bank also published its response to submissions on its October 2012 consultation document concerning the implementation of the final capital-related aspects of Basel III: counterparty credit risk and other related requirements.
The impact of Basel III on New Zealand banks
As part of the November 2011 consultation the Reserve Bank requested that locally-incorporated banks complete and submit a quantitative impact assessment of the proposals. The assessments received by the Reserve Bank indicate that most banks’ capital ratios comply with, or are near to the new standards. However, some banks will need to replace non-common equity capital instruments that do not comply with Basel III.
