RBNZ expects new bank capital requirements to lower rates

[WELLINGTON] New Zealand’s central bank is reducing capital requirements for lenders and expects that to benefit consumers through lower interest rates and more competition.

“These new settings will reduce the overall cost of deposit takers’ funding, which we expect to see passed on as benefits to New Zealanders through increased lending and reduced rates, which we will monitor closely,” Reserve Bank of New Zealand (RBNZ) governor Anna Breman said on Wednesday (Dec 17) in Wellington. “Small and mid-sized deposit takers should see a proportionately larger reduction than the four large banks, which should allow them to grow and compete more effectively.”

The new rules materially reduce requirements compared with decisions made in 2019, which aimed for capital levels that would allow banks to withstand a one-in-200-year shock. Lenders have claimed that was too conservative and led to higher interest rates.

In August, the RBNZ said that independent studies showed current levels of Tier-1 capital in New Zealand was likely one of the highest among comparator nations. It also said that under the new Deposit Takers Act, it will have stronger tools for supervision and crisis management, as well as additional capacity and capability as a regulator. That meant it could ease capital requirements while still protecting financial stability.

The new settings will be phased in from early 2026, although full implementation will be in late 2028 to coincide with the Deposit Takers Act coming fully into force.

The RBNZ said that it has reduced Tier-1 capital requirements and lowered risk weights, which reflect the amount of equity a bank must hold against a particular type of loan, such as house or farm mortgages.

It will also introduce “Loss Absorbing Capacity” for the largest banks, which is a new tool that can help re-capitalise a distressed lender.

The RBNZ announced the plan to review its capital requirements in March in response to pressure from lenders and lobbying from groups including farmers, who claimed the risk weightings applied to rural loans were too high. That move came three weeks after Finance Minister Nicola Willis said that she was taking advice on how to compel the RBNZ to loosen bank capital rules.

Willis today welcomed the result of the review.

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“The new requirements announced today remain prudent and strike a better, more graduated balance between risk and competition,” she said. “In particular, the adjustments to risk weights are expected to enable smaller deposit takers to compete more effectively against the big four banks. They also open the door to more lending to the agriculture sector.” BLOOMBERG