Capital requirements for banks in New Zealand

This page describes the capital adequacy requirements for locally incorporated registered banks in New Zealand.

Our new capital adequacy framework — the outcome of our Capital Review decisions — has increased the amount of capital registered banks must have and also the definitions of regulatory capital. The changes will make the banking system safer for all New Zealanders.

Requirements from 1 October 2021

The capital adequacy framework incorporates the following main parts:

  • capital ratios
  • determination of qualifying capital
  • determination of exposures
  • internal capital adequacy assessment process
  • disclosure.

A full description of all the requirements is set out in the Banking Prudential Requirements (BPR) documents. A short summary is provided below.

Capital ratios

Locally incorporated registered banks in New Zealand are required to comply with the following minimum capital ratios, which are calculated as the amount of capital that must be held in relation to risk-weighted exposures (including market and operational risk):

  • a common equity Tier 1 capital ratio of 4.5%
  • a Tier 1 capital ratio of 6%
  • a total capital ratio of 8%.

Registered banks must have a prudential capital buffer (PCB) of at least 2.5% of risk-weighted exposures, completely made up of common equity Tier 1 (CET1) capital, over and above the minimum requirements listed above.

We impose a condition of registration on a locally-incorporated registered bank that restricts its CET1 capital distributions by varying amounts when its PCB ratio falls below 2.5%. From 1 October 2021 the following restrictions will apply:

Banking group's prudential capital buffer ratio Percentage limit on distributions of the bank's earnings
0%–0.5% 0%
>0.5–1% 30%
>1–2% 50%
>2–2.5% 50%

After the onset of COVID-19 we placed restrictions on dividend payments. Registered banks must now pay no more than 50% of their earnings as dividends on CET1 capital to their shareholders. This restriction will apply until 1 July 2022 (assuming that there is no significant worsening in economic conditions at that point).

Read our March 2021 news release on dividend restrictions for more information

There are no restrictions on distributions to holders of Additional Tier 1 (AT1) capital instruments.

Qualifying capital

From 1 October 2021, the rules for qualifying capital instruments are set out in 'BPR110: Capital Definitions'. These rules are the outcome of our Capital Review and include a number of changes to simplify the system and ensure banks have high quality capital.

BPR110: Capital definitions (PDF 1.2MB)

There are 2 tiers of qualifying capital:

  • Tier 1 (split into CET1 and AT1 capital)
  • Tier 2 capital (a form of subordinated debt).

The processes banks must follow for issuing AT1 and Tier 2 capital instruments are set out in 'BPR120: Capital Adequacy Process Requirements'.

BPR120: Capital adequacy process requirements (PDF 1.2MB)

Note: Our 2019 Capital Review decisions removed the conversion and write-off features in the previous capital framework for New Zealand.

Exposures

Locally incorporated registered banks in New Zealand calculate their exposures based on the Basel 2 framework. This framework is set out in 'Basel 2: International Convergence of Capital Measurement and Capital Standards: A Revised Framework' on the website of the Bank for International Settlements.

Basel 2: International Convergence of Capital Measurement and Capital Standards: A Revised Framework

Pillar 1 of Basel 2 involves calculating the minimum capital requirements to cover credit risk, market risk and operational risk. Credit risk is determined through the calculation of risk-weighted exposures.

The Basel 2 framework has applied to locally incorporated New Zealand banks since the first quarter of 2008. Under Basel 2, banks may, if accredited, use the internal models-based approach to calculate their capital requirements; otherwise they must use the standardised approach.

For banks registered as branches in New Zealand, Basel 2 developments have disclosure implications only.

The overarching approach is set out in 'BPR100: Capital Adequacy' and BPR130: Credit Risk RWAs Overview'.

Basel 2 standardised approach

Locally incorporated registered banks in New Zealand using the standardised approach under Pillar 1 are subject to conditions of registration that require capital adequacy to be calculated using the frameworks set out in:

Basel 2 internal models-based approach

Locally incorporated registered banks in New Zealand using the internal ratings-based (IRB) approach under Pillar 1 are subject to conditions of registration that require capital adequacy to be calculated using the frameworks set out in:

As part of our Capital Review decisions made in December 2019, banks accredited to use the IRB approach will be subject to an ‘output floor’ from 1 January 2022. This means their estimates of risk-weighted assets (RWA) will be either the outcome of their IRB models, or 85% of the standardised outcome, whichever is highest.

ANZ Bank New Zealand, ASB Bank, Westpac New Zealand (Westpac) and Bank of New Zealand (BNZ) have been accredited to use internal models for credit and operational risk. So that these four banks can retain their accreditation status, they must comply with a number of ongoing accreditation requirements (for example, a bank is required to advise us of any significant changes to its models or estimates).

BPRs supporting documents

In addition to the specific requirement documents listed above, the new BPRs include the following supporting overview documents:

Disclosure

The disclosure regime for registered banks in New Zealand page provides details of our approach to disclosure.

Read more about the disclosure regime for banks

Domestic, systemically important banks

We have decided that ANZ Bank New Zealand, ASB Bank, Bank of New Zealand and Westpac New Zealand will be classified as domestic, systemically important banks (D-SIBs).

Read more about the requirements for domestic, systematically-important banks

Transition path to higher capital requirements

The December 2019 Capital Review decisions include a significant increase in capital ratios. We will phase in the increases in capital over a 7-year period, starting from July 2022.

By the end of the transition period in 2028, New Zealand's D-SIBs will have to meet the following minimum requirements:

  • a common equity Tier 1 capital ratio of 4.5%
  • a Tier 1 capital ratio of 7%
  • a total capital ratio of 9%.

In addition, a D-SIB will be required to have a PCB of at least 9%, completely made up of CET1 capital. This will result in a total capital ratio of at least 18%.

For a D-SIB, by the end of the transition period the PCB will comprise:

  • a 2% D-SIB buffer
  • a 1.5% counter-cyclical capital buffer
  • a 5.5% conservation buffer.

By the end of the transition period in 2028, all other New Zealand registered banks will have to meet the following minimum requirements:

  • a CET1 capital ratio of 4.5%
  • a Tier 1 capital ratio of 7%
  • a total capital ratio of 9%.

In addition, a non-D-SIB will be required to have a PCB of at least 7%, entirely comprising CET1 capital. This will result in a total capital ratio of at least 16%.

For a non-D-SIB bank, by the end of the transition period the PCB will comprise:

  • a 1.5% counter-cyclical capital buffer
  • a 5.5% conservation buffer.

The transition timeline is set out in the following document:

Bank Capital Review implementation timeline (PDF 259KB)

Transitional capital arrangements

Below are specific (superseded) versions of Banking Supervision Handbook documents referred to in BPR110: Capital Definitions.

Document Document reference Date of issue
BS2A November 2015 superseded (PDF 1.8MB) BS2A November 2015
BS2B November 2015 superseded (PDF 3.4MB) BS2B November 2015

More information about aspects of the framework

Changes to capital requirements for farm lending exposures

In June 2011 the Reserve Bank released finalised changes to the Reserve Bank's capital adequacy framework applying to internal models banks that required internal models banks to hold more regulatory capital in relation to rural lending portfolios.

The intent of the policy is to align banks' farm lending capital requirements with risk in the sector. In the years prior to implementation of the policy there had been a reduction in farm lending credit quality and an increase in debt accumulation by farmers. Details of the farm lending capital policy were published in the Reserve Bank Bulletin (September 2009).

In April 2011, the Reserve Bank issued a consultation paper (PDF 120KB) proposing changes to the Reserve Bank's capital adequacy framework. The Reserve Bank prepared a summary of submissions (PDF 51KB) received and its responses to key issues raised. Further explanation of the Reserve Bank's farm lending policy is provided in the FAQ sheet and Reserve Bank Bulletin (June 2011 edition).

Changes to capital requirements for residential mortgage loans (the Housing Review)

Stage one: adjustments to the correlation factor for high-LVR loans

On 26 March 2013 the Reserve Bank issued a consultation paper (PDF 100KB) on the first stage of the housing review. Stage one focussed on a technical adjustment to the housing correlation factor of the Basel equation that internal models banks use to calculate their capital requirements for residential mortgages. On 8 May 2013 the Reserve Bank announced it would increase the correlation factor for high loan-to-value ratio (LVR) mortgage loans, thereby increasing the capital adequacy requirements for the high LVR residential mortgage loans of internal model banks. The Reserve Bank considers this change to be necessary to give sufficient weight to the systemic risk that such loans present. The Reserve Bank published a Response to submissions (PDF 154KB) and Regulatory Impact Assessment (PDF 196KB) for this first stage of the review.

From 30 September 2013, the correlation factor was adjusted as set out below:

Prior Adjusted
Correlation for LVR under 80% 0.15 0.15
Correlation for LVR 80-89% 0.2
Correlation for LVR 90% and over 0.21

Stage two: harmonisation of definitions between BS2A and BS2B

On 20 September 2013 the Reserve Bank issued a consultation paper (PDF 614KB) on the second stage of the review. This consultation covered a number of definitional changes needed to improve the consistency and clarity of both the calculation of the loan-to-value ratio for residential mortgages, and the definition of a residential mortgage loan, between internal models and standardised banks. A summary of submissions and policy position (PDF 99KB) from this consultation was published on 20 December 2013.

On 28 March 2014 the Reserve Bank issued a consultation paper (PDF 150KB) on the wording of these proposed changes to be included in Capital Adequacy Framework (Standardised Approach) (BS2A) and Capital Adequacy Framework (Internal Models Based Approach) (BS2B), and on consequential changes to Framework for Restrictions on High-LVR Residential Mortgage Lending (BS19). A summary and response to submissions, and implementation decisions (PDF 170KB) was published on 13 June 2014.

From 1 July 2014, the Reserve Bank implemented:

  • A new definition of the loan-to-value ratio of residential mortgages for all banks;
  • A requirement for all banks to have a Board-approved property valuation policy;
  • Enhanced clarity as to the asset class boundary between residential mortgage loans and other types of loans, e.g. farm or commercial property lending.

Stage two: changes to the asset class treatment of residential property investment loans

The Reserve Bank consulted on a separate treatment of residential mortgage loans for investment purposes, with higher capital requirements, in the earlier stage two consultations. However, implementation issues with the proposed count-based definition led to a reconsideration of the policy. The rationale for higher capital requirements for loans secured by investment property is that the risk profile of loans to residential property investors differs from those to owner-occupiers. On 5 March 2015 the Reserve Bank issued a consultation paper (PDF 307KB) that covered new definitions of residential property investment loans and the asset class treatment of these loans. The changes would apply to both internal models and standardised banks. A summary of submissions and policy position (PDF 196KB) and regulatory impact assessment (PDF 301KB) were published on 29 May 2015. A change to the proposed treatment of mixed collateral loans was announced alongside the response to submissions (PDF 416KB) on related changes to the framework for high-LVR lending on 21 August 2015.

From 1 November 2015 residential mortgage loans secured by non-owner-occupied property are located in a separate sub-asset class and are subject to:

  • Increased risk weights for standardised banks;
  • Higher correlation factors and minimum LGDs for internal models banks.

Removal of Qualifying Revolving Retail Exposures and the Foundation IRB approach from the Internal models based approach

Following a consultation, the Reserve Bank announced its intention to remove the Qualifying Revolving Retail Exposure class and the Foundation IRB approach from the BS2B (Internal Models Based Approach) Capital Adequacy Framework. A summary (PDF 113KB) of the consultation feedback and Reserve Bank decisions was published in August 2015.

More information

We have developed some plain language 'explainers' to help you understand some of the key concepts of the capital adequacy framework such as 'capital':