Source: Reserve Bank of New Zealand
29 September 2022 – The Reserve Bank of New Zealand – Te Pūtea Matua is proposing changes to how banks should apply risk weightings to their exposures under bank capital adequacy rules.
We are in the process of phasing in the Capital Review decisions from December 2019. These are designed to make the banking system safer for all New Zealanders by reducing the likelihood of bank failure, lifting financial stability and protecting people from the economic and social impacts associated with the failure of a bank.
The proposals cover our responses to some questions banks asked us to look at during consultations about the implementation of the Capital Review decisions during 2021. We are proposing a number of small amendments and clarifications to address their questions. The consultation also covers the treatment of the Business Growth Fund.
The proposed changes are designed to improve clarity and transparency, but have little impact on the overall parameters of the changes announced in December 2019.
The consultation paper covers six areas where we have considered changes to the approach to risk weighting in response to feedback from stakeholders.
We are seeking feedback on our proposals to lower the risk weighting on First Home Loans underwritten by Kāinga Ora and to reduce the risk weighting of bank equity exposures to the Business Growth Fund.
Other areas covered in the consultation paper include:
Sovereigns, Public Sector Entities and Multilateral Development Banks
Reverse Residential Mortgage Loans
Cross-method guarantees
Qualifying Central Counterparties
What are risk weights?
Risk weights are used to convert the actual size of an exposure into a risk-weighted asset. A more risky exposure will have a higher risk weight. Banks are required to hold a minimum percentage of capital against these risk weighted exposures. Higher risk exposures mean a bank will need more capital — money provided by the owners (shareholders) of a bank. This ensures that the owners have a meaningful stake in the bank — the more the bank’s owners have to lose, the more they will want to make sure the bank is run properly.
