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Reserve Bank works toward new rules on capital

10 April 2006,

Reserve Bank works toward new rules on bank capital

Capital requirements for banks will soon be made more sensitive to the risks the banks are taking, under new rules being implemented by the Reserve Bank.

Speaking (www.rbnz.govt/speeches/2489166.html) at the Retail Financial Services Forum, Deputy Governor Adrian Orr said that the Reserve Bank was working intensively on the implementation of the new international framework for bank capital adequacy, known as Basel II.

"Bank capital represents the owners' stake in the business and a platform for the bank's future growth and innovation," Mr Orr said. "For the stability of the financial system, banks need to hold capital above certain minimum levels at all times, in order to absorb unexpected losses associated with ups and downs in the economy, including severe stress events."

The Reserve Bank's implementation of Basel II is focused on making bank capital requirements more sensitive to risk, and particularly risks specific to the New Zealand environment. "These include the exposure of the economy to international commodity markets, and the high concentration of housing loans in New Zealand bank portfolios," Mr Orr said.

Basel II is not intended to lead to large changes in the level of capital in the banking system overall.

Some banks would be applying to the Reserve Bank to use their internal statistical models as part of the calculation of their minimum capital requirements. The Reserve Bank will allow this only if the internal models and the banks' processes for managing capital are of adequate quality.

"Due to the importance of banks in New Zealand that are parts of international banking groups, we are coordinating New Zealand's implementation closely with relevant foreign supervisors," Mr Orr commented.

Engagement with the Australian Prudential Regulation Authority (APRA) will be particularly important, because of the significant place in New Zealand's banking system of banks owned by Australian parent banks.

"Under the Terms of Engagement we have with APRA, we will ensure that, in meeting our responsibilities to set capital requirements for the New Zealand subsidiaries of Australian banks, we will keep compliance costs to the minimum necessary, consistent with New Zealand capital requirements being tuned to New Zealand conditions."


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