Executive Summary
The Reserve Bank’s 2019 Capital Review focused on improving the quality and quantity of capital that banks are required to have. The Capital Review decisions introduced higher capital requirements to make the banking system safer for New Zealanders and to ensure that bank owners have a meaningful stake in their businesses. Specifically, capital requirements, including buffers, are in the process of gradually shifting up to 18% of risk weighted assets (RWAs) for the 4 largest banks, and 16% for other banks. The equivalent number was 10.5% of RWAs, prior to the Capital Review changes.
The Capital Review decisions included a Regulatory Impact Assessment (RIA) with a detailed cost-benefit assessment of the potential impacts of higher capital requirements. The RIA concluded that the benefits of greater stability in the financial system, in particular the reduction in the risk of the significant costs associated with bank failure, outweighed the costs of modestly higher interest rates.
This Bulletin article commences regular monitoring on the impacts of the Capital Review decisions that the Reserve Bank committed to as part of the 2019 decisions. The next assessment is scheduled for 2 years from now.
The full impact of the Capital Review decisions will not be clear until 2028, once all the changes are fully implemented. While it is too soon to reach definitive conclusions, the key observations covered in this Bulletin are:
- The largest banks, designated as Domestic Systemically Important Banks (DSIBs), have met the required increases in buffers in 2022 and 2023.
- Banks have used a combination of retained earnings and issuances of new capital instruments to increase their capital.
- While implementation is still only in its early stages, the costs of capital are tracking broadly in line with estimates in the 2019 Regulatory Impact Assessment.
- We have not found any evidence of financial market disruptions from changes to capital requirements.
- The smaller banks have not yet faced any increases in capital requirements and are well-placed to meet the increases scheduled to affect them from July 2024 onwards.