The purpose of bank capital
The funding that banks raise from their owners is referred to as ‘capital’. Capital reduces the risk of failure by absorbing losses upfront and limits repercussions in the event of failure by ensuring creditors are paid.
Capital ensures that bank owners have a meaningful stake in the business to incentivise them to manage the bank more carefully. It makes banks more resilient to unexpected shocks, which helps to build confidence in the financial system.
About the 2025 Review of key capital settings
Between 2017 and 2019, we completed an extensive review of New Zealand’s capital framework. This resulted in the decision to significantly improve the quantity and quality of capital that banks are required to hold to improve the resilience of the banking system. These requirements have gradually been phasing in until 2028.
Read more about the 2017-2019 Capital Review
In the 2019 Capital Review, we assessed the cost and benefits of capital settings for New Zealand to inform our decision. Subsequent to this, submitters to recent inquiries have expressed views that our bank capital settings are unreasonably conservative and that this is undermining competition and growth in the New Zealand economy.
The environment has changed since the capital settings were decided in 2019. Some factors have increased risks as discussed in Financial Stability Reports. Other factors could reduce risk, such as debt-to-income lending restrictions and more intensive supervisory practices. We therefore consider now to be an appropriate time to reassess key capital settings.
Read more about the DTA legislation and regulation
What the review will cover
We will assess whether the Reserve Bank’s capital requirements for deposit takers are set at the appropriate level to support a stable financial system – one where resilient financial markets, institutions and infrastructures enable a productive and sustainable economy and ultimately promote the prosperity and wellbeing of all New Zealanders.
The review will build on existing work to review options for more granular risk weights for residential mortgages, corporate lending and lending for housing for community housing providers, housing co-operatives and on whenua Māori. We will also consider risk weights for rural lending. In addition, the review will include:
- An assessment of key developments since the 2019 Capital Review, including findings of the Commerce Commission’s market study into personal banking services, the Finance and Expenditure Committee’s inquiry into banking competition and developments in regulatory and supervisory settings.
- An assessment of how our capital settings compare internationally and a consideration of whether our capital settings are appropriate, given the risks that the New Zealand financial system faces. This will be supported by a report by an independent expert.
- A reassessment of the appropriate risk appetite for capital settings in New Zealand – based on our statutory parameters including the purposes and principles of the Deposit Takers Act 2023 and the Proportionality Framework, and having regard to the Financial Policy Remit (December 2024) and the Minister of Finance’s Letter of Expectations (December 2024).
- Reviewing the degree of proportionality in the framework and considering any changes in capital ratios for different groups of deposit takers.
- Considering the balance between going concern and gone concern capital (including the share of Common Equity Tier 1 capital), the appropriateness of any Total Loss Absorbing Capacity requirements, and if we should continue to have ‘Additional Tier 1 capital’ as part of the New Zealand capital framework. It will also consider the interrelationship between capital and the crisis management framework.
Next steps
We will consult publicly on key proposals later in 2025. Responses to this consultation process, alongside a cost and benefit analysis and the inputs from independent international experts, will inform our decisions.
We intend to make final decisions by the end of 2025. The implementation of any changes that may be agreed will be prioritised following the conclusion of the review. This gives us adequate time to consider the concerns raised by stakeholders and engage international experts, while giving certainty to deposit takers and avoiding unnecessary delays to the Deposit Takers Act implementation timeline.
Implications for the 2017-2019 Capital Review decisions
We are currently around halfway through implementing the decisions of the 2017-2019 Capital Review. The next increase in capital requirements for banks will occur on 1 July 2025. Banks are well advanced in their plans to meet the increase on 1 July 2025, so we intend to proceed with this planned increase. However, the outcome of the review of key capital settings could impact capital requirements in the future. The prompt completion of the reassessment will allow us to signal any changes to capital requirements well ahead of future scheduled increases.