Capital requirements for banks in New Zealand

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 must 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:

After the onset of COVID-19, we placed restrictions on dividend payments. 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 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.

There are two tiers of qualifying capital:

• Tier 1 (split into Common Equity (CET1) and Additional Tier 1 (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.

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 Bank for International Settlements’ website.

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. This approach is also known as the internal ratings-based (IRB) approach, and accredited banks are sometimes called ‘IRB banks’.

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, 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. The new requirements began to be phased in from 1 October 2021. We will phase in the increases in capital over a seven-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 CET1 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 prudential capital buffer (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 in 2028, 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 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%, completely made up of 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.

Bank Capital Review implementation timeline (PDF 259 KB)

Transitional capital arrangements

Below are specific (superseded) versions of Banking Supervision Handbook documents referred to in BPR110: Capital definitions.

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':

Capital Buffer Response Framework explainer (887 KB)

Capital Review Go-to-Guide 2019 (PDF 662 KB)

Read the Capital Review decisions 2019 (PDF 658 KB)