Requirements for Domestic Systemically Important Banks (D-SIBs)
The Reserve Bank consulted on a framework for identifying Domestic Systemically Important Banks (D-SIBs) and consulted on additional capital buffer requirements for banks designated as D-SIBs during the first half of 2019. In August 2019, the Reserve Bank published a response to submitters’ feedback on the D-SIB framework, which also details the Reserve Bank’s preferred methodology for identifying D-SIBs.
In December 2019, the Reserve Bank announced its decisions regarding the capital adequacy framework of locally-incorporated banks. In particular, banks identified as D-SIBs will need to have an additional capital buffer ratio of 2% of their total risk-weighted assets.
1. Why are some banks identified as D-SIBs?
As discussed in Capital Review paper 4: How much capital is enough, and the decisions announced in December 2019, New Zealand has a highly concentrated banking system. Almost 90% of the total banking system assets are owned by the four banks (ANZ, BNZ, ASB, and Westpac). The failure of any of the aforementioned banks is likely to result in significant disruption to the New Zealand financial system and economy. As such, the Reserve Bank decided that additional loss-absorbency requirements, in the form of additional CET1 capital, should be required for banks identified as D-SIBs.
2. What is the framework for identifying D-SIBs?
As discussed in the Reserve Bank’s response to submissions in August 2019, the Reserve Bank has confirmed its framework for determining each bank’s overall systemic importance score. All dimensions considered (size, interconnectedness, substitutability, complexity) will be given equal weighting. The D-SIB scores are indicative and the Reserve Bank has decided not to have a pre-set threshold above which a bank is automatically identified as D-SIB. Instead, the Reserve Bank will use supervisory judgement to decide on the list of D-SIBs.
3. What is the D-SIB buffer ratio requirement?
The Reserve Bank confirmed that a D-SIB buffer ratio requirement of 2% of total risk-weighted assets will apply. The D-SIB buffer ratio requirement needs to be met with common equity capital. The requirement is being phased in, with the first 1% due to take effect on 1 July 2022, and the second 1% on 1 July 2023.
4. Which banks are identified as D-SIBs?
- ANZ New Zealand Limited
- Bank of New Zealand
- ASB Bank Limited
- Westpac New Zealand Limited
The Reserve Bank will update the list of D-SIBs if there is a change in the list. When a bank is added to the list, the Reserve Bank will agree the length of any transition period before the bank is subject to the full D-SIB buffer ratio.