RBNZ unveils its decisions to revise the regulatory capital rules for banks incorporated in New Zealand

Today, one year after the Reserve Bank of New Zealand (RBNZ) launched its consultation on increasing the regulatory capital requirements for banks incorporated in New Zealand, the RBNZ has unveiled its final decisions.

The key deviations from the RBNZ’s initial proposals are that the banks are being allowed more flexibility on the use of specific capital instruments, and banks will now be given seven years from July 2020 (instead of the five initially proposed) to adopt the new increased regulatory capital requirements. Smaller (non-systemically important) banks will also only need to increase their capital requirements to 16% rather than the 17% originally proposed to reflect their more limited impact on society should they fail.

A summary of the final decisions can be found online, along with The Capital Review Go-to-Guide and the RBNZ’s Regulatory Impact Assessment and Cost-Benefit Analysis.

Key Features

Ratios

  • The Total Capital requirement (including the Prudential Capital Buffer (PCB)) will be:

– 18% of Risk Weighted Assets (RWA) for systemically important banks (ANZ, ASB, BNZ and Westpac) (D-SIBs), and

– 16% of RWA for non-systemically important banks (Non-D-SIBs).

  • The Tier 1 Capital requirement (including the PCB) will be:

– 16% of RWA for D-SIBs, and

– 14% of RWA for Non-D-SIBs,

of which 2.5% can be made up of Additional Tier 1 (AT1) capital;

  • The Prudential Capital Buffer (PCB) will be 9% of RWA for D-SIBs and 7% for Non-D-SIBs, of which:

– 2% will consist of D-SIB buffer (only applies to D-SIBs);

– 5% will be an early-set counter cyclical buffer; and

– 5% will consist of the conservation buffer;

  • A Minimum Total Capital requirement of 9% will be adopted, of which 2% can be made up of Tier 2 capital;
  • A seven year transitional period from July 2020 will be allowed; and
  • A Leverage Ratio will not be introduced.

The table below (taken from the RBNZ’s summary of the final decisions) shows a simplified capital stack for D-SIBs and Non-D-SIBs.

RWA Calculations

  • The RWA outcomes for banks that use the Internal Ratings Based (IRB) approach (i.e. the D-SIBs) will increase to approximately 90% of what would be calculated for banks that use the Standardised Approach by:

 – Applying an 85% output floor for credit risk RWA of IRB banks, and

– Increasing the scalar applied to credit risk RWA of IRB banks from 1.06 to 1.02; and

  • IRB banks will have to report to the RBNZ and the public on what their capital levels are using both the IRB approach and the Standardised approach.

Composition of Capital

  • Redeemable perpetual preference shares will be accepted as AT1 capital (with suitable protections in the contract terms), and
  • Long term subordinated debt will be accepted as Tier 2 capital.

Key Takeaways

  • Given the increased amount of capital that banks will need to hold (which, anecdotally, may be as high as $11 billion in equity and $9 billion in preference shares), the key focus of the banks will be on identifying the most efficient ways to raise or retain capital, and on rationing capital.
  • We expect the banks’ focus will be on stakeholder management. The banks will need to work closely and constructively with the RBNZ on the detail of the final decisions allowing smooth implementation and compliance. The banks will also need to consider the implications for their business and customers and develop their own commercial response.
  • The potential impact of the increased regulatory capital requirements on the economy (either from increased lending costs, reducing credit availability or both), will be a key concern for all stakeholders. Anecdotally, the agricultural, commercial and SME sectors may be disproportionately affected.

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