Reserve Bank sets capital ratios for lenders under new Basel III regime

The Reserve Bank has settled on what it thinks are appropriate capital ratio requirements for the nation’s lenders which are set to kick in from next month.

The bank regulator hasn’t moved on its view that banks should be holding a ratio of 4.5 percent of common equity Tier 1 capital in relation to their risk-weighted assets, a Tier 1 capital ratio of 6 percent and total capital ratio of 8 percent. The banks will also be limited in what they can do if they don’t hold a 2.5 percent equity buffer above those ratios.

Tier 1 capital is always freely available to soak up losses without a bank ceasing to trade, while Tier 2 capital only absorbs losses in a winding up.

Most of the new standards take effect from Jan. 1 next year, with a new counter-cyclical buffer that can be applied in times of excessive credit growth coming in the following year.

“The final capital adequacy requirements released today considerably enhance the ability of the New Zealand banking system to absorb shocks, whatever their source,” deputy governor Grant Spencer said in a statement. “New Zealand banks are already well capitalised and this has made it easier for New Zealand to implement the Basel III package ahead of the schedule set by the BCBS (Basel Committee on Banking Supervision).”

Last month, the central bank said it supports the higher Basel III standards, though it wouldn’t impose all of the new standards which would make New Zealand’s requirements less conservative.

The bank’s regulatory impact assessment found stricter capital ratios reduce the chance of a financial crisis and increase taxable income, though could lead to higher bank lending rates in the short term as shareholders downgrade their expectations for return.

The Reserve Bank is still working on counterparty credit risk and disclosure requirements under the Basel III rules, both of which are set to start early next year.

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