Banks operating in New Zealand must increase capital by NZ$20 billion ($13 billion) over the next seven years as regulators move to shock-proof the country's economy. The Reserve Bank of New Zealand released its final decisions following its comprehensive review of its capital framework for banks.

New Zealand's largest lenders must raise high-quality capital to 16 percent of risk-weighted assets by 2027, the Reserve Bank of said in its final decision released Thursday in Wellington. The level matches that floated a year ago but lets banks have more time to implement the changes rather than the five years initially mooted.

«Our decisions are not just about dollars and cents. More capital in the banking system better enables banks to weather economic volatility and maintain good, long-term customer outcomes,» said RBNZ Governor Adrian Orr in a statement.

Economic Costs And Social Issues

«More capital also reduces the likelihood of a bank failure. Banking crises cause not only harmful economic costs but also distressful social issues, such as the general decline in mental and physical health brought about by higher rates of unemployment. These effects are felt for generations,» Orr added. 

The key decisions, which take effect from 1 July 2020, include banks’ total capital increasing from a minimum of 10.5 percent now, to 18 percent for the four large banks and 16 percent for the remaining smaller banks. The average level of capital currently held by banks is 14.1 percent. 

New Zealand’s four biggest banks are all units of Australia’s major lenders, which together hold about 90 percent of deposits. ANZ Bank and Westpac operate under their own brands, while Commonwealth Bank owns ASB Bank and National Australia controls Bank of New Zealand.

Final Decisions

The governor added that adjustments to the original proposals were based on their analysis and industry feedback over the past two years. Changes will be phased in over a seven-year period, rather than over five years as originally proposed so as to smoothen the economic impacts of these changes. Compared to the Reserve Bank’s initial proposals, the final decisions also include:

  • More flexibility for banks on the use of specific capital instruments;
  • A more cost-effective mix of funding options for banks;
  • A lesser increase in capital for the smaller banks consistent with their more limited impact on society should they fail;
  • A more level capital regime for all banks – with the four large banks having to measure the risks of their exposures (lending) more conservatively, more in line with the smaller banks; and
  • More transparency in capital reporting.