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Reserve Bank reveals new capital rules

Banks will be forced to raise close to $20 billion in extra capital to comply with the Reserve Bank's new requirements, the central bank revealed today.

Thursday, December 05th 2019

Big four banks will be hit hardest by the new rules. The Aussie-owned giants will need to increase total capital from a minimum of 10.5% to 18%. Smaller banks will need to raise their minimum capital to 16%, the RBNZ said. They are expected to account for "hundreds of millions of dollars" of the extra $20 billion needed for the banking system, according to reports.

The rules take effect from July 1 next year and will be implemented over seven years. They are part of measures designed to make New Zealand's financial system more secure. The average level of capital currently held by banks is 14.1%, according to the central bank.

The final decision is close to initial proposals revealed this time last year. The proposals have been in a consultation period, and have been heavily criticised by the big four, but tentatively welcomed by smaller domestic banks, who hope to level the playing field. Currently, big banks are required to hold less capital aside than their smaller rivals.

Banks received a silver lining from today's announcement, as the Reserve Bank will allow lenders to use redeemable preference shares to count towards some of the additional capital required. The allowance means banks will rely less on raising new equity and retaining profits. 

The RBNZ predicts a 0.2% increase in loan rates by the time the rules are implemented in 2027. 

Market reaction

Economists reacted to the announcement this afternoon, saying the outcome made further interest rate cuts less likely. 

Kiwibank's team said the "favourable" decisions, such as the seven year transition period, would "reduce the likely impact on credit conditions, and therefore reduces the likely need for the RBNZ to cut the OCR again"

BNZ economists, meanwhile, said "the certainty is significantly better than once feared". They added: "At the margin, this should lift confidence reducing our downside fears for growth and the probability of further interest rate reductions."

Bruce Patten, head of growth at NZFSG, doesn't expect the new rules to have much of an effect on home loan rates. 

"I expect the reserve bank may drop OCR in Feb, and little or none of the cut will be passed on," Patten said. "With 7 years to get it in place and average 14% of the 18% already held, I don't see the impact being as great as they are making out." 

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