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Source: Reserve Bank of New Zealand

18 March 2024 – The Reserve Bank of New Zealand’s 2019 Capital Review focused on improving the quality and quantity of bank capital to make the banking system safer for New Zealanders and to ensure that bank owners have a meaningful stake in their businesses.

We are now publishing a Bulletin article that assesses the first 2 years of Capital Review implementation, from 2021 to 2023, and examines progress with phasing-in the Reserve Bank’s new higher capital requirements.

Over the previous 2 years, all New Zealand banks have met our increasing capital requirements. The central conclusions of this Bulletin are that higher capital is helping to increase banks’ resilience to shocks, as well as their capacity to absorb losses, and lifting financial stability in New Zealand.

As a result of the Review, capital requirements are gradually increasing to 18% of risk weighted assets (RWAs), including capital buffers, for the largest banks, and 16% for the remaining smaller banks. A detailed assessment of new capital requirements was carried out ahead of decisions being confirmed. This concluded that the benefits of increased resilience in the financial system would exceed the costs.

The key observations covered in this Bulletin are:

The largest banks, designated as Domestic Systemically Important Banks (DSIBs), have met the required increases in buffers in 2022 and 2023.
Banks have used a combination of retained earnings and issuances of new capital instruments to increase their capital.
While implementation is still only in its early stages, the costs of capital are tracking broadly in line with estimates in the 2019 Regulatory Impact Assessment.
We have not found any evidence of financial market disruptions from changes to capital requirements.
The smaller banks have not yet faced any increases in capital requirements and are well-placed to meet the increases scheduled to affect them from July 2024 onwards.

The full impact of Capital Review decisions will not be clear until 2028, once all the changes are fully implemented. The next assessment is scheduled for 2 years from now.