Quality of bank capital in New Zealand
The four largest banks in New Zealand have been accredited to operate as ‘internal models’ (IM) banks under the Basel II capital framework. Under this approach, banks are allowed to use their own models as a basis of determining their minimum capital requirements, subject to their models being accredited by the Reserve Bank. In this article, we explore the quality of capital in New Zealand. We explain the Reserve Bank’s capital philosophy, and discuss the key issues that have been considered during the implementation of the IM approach within the New Zealand context. In doing so, we highlight areas in which the Reserve Bank has diverged from international practice to ensure that the New Zealand banking system operates within a conservatively capitalised framework, commensurate with the risks faced by New Zealand banks.