Photo: RNZ
- RBNZ eases capital requirements on banks
- New settings to reduce bank funding costs overall by about $5 bn
- RBNZ says settings conservative but closer to global standards
- Changes likely to benefit smaller banks, improve competition
- Banks will be expected to pass on savings.
The Reserve Bank has reduced the amount of capital that banks will need to hold in case of financial shocks, which it says will improve competition and lower costs.
The central bank has followed through on a preliminary report and decided to lower the overall amount of capital that will need to be held, while they will have to hold lesser assets to absorb any losses.
RBNZ chair Rodger Finlay said the environment had changed since it brought in the current settings in 2019, including the introduction of the Depositor Compensation Scheme, and more intensive supervision of the sector.
"This led us to ease common equity requirements across the system by around $5 billion compared to current levels, while still remaining confident in our system resilience."
He said the settings for the big four Australian owned banks was now closer to what occurred in Australia, while the risk weightings for various types of lending has been refined, and the range of assets used for reserves has been simplified.
Pass on the savings
RBNZ Governor Anna Breman said small and medium sized banks should benefit, but warned banks to pass on the savings.
RBNZ Governor Anna Breman. Photo: RNZ / Samuel Rillstone
"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."
"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 current capital levels, strongly backed by former Governor Adrian Orr, were blamed as stifling competition by hurting small players, holding back innovation, and holding up interest rates, provoking industry, regulator, and political criticism.
Out with the old
The current capital levels, strongly backed by former Governor Adrian Orr, were blamed as stifling competition by hurting small players, holding back innovation, and holding up interest rates, provoking industry, regulator, and political criticism.
The big four banks will have to have a base capital level of 12 percent, secondary capital, and extra finance assets acting like a shock absorber, bringing the total level to 21 percent by 2031.
Mid-sized institutions will have to have 14 percent capital levels, and the smallest 13 percent.
Although the savings will be in the billions, which RBNZ officials previously said would be material, they had also expected the overall effect to be modest.
Different types of lending - residential mortgages, business loans, farm finance - would continue to be assessed with differing levels of risk, but the amount of capital needed to back them would be reduced.
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