Reserve Bank proposes bank owners bear greater risks

Reserve Bank proposes that bank owners bear greater share of financial system’s risks

The Reserve Bank is consulting on a proposal to raise the level of capital that bank owners must contribute to their business.

“Insisting that bank shareholders have a meaningful stake in their bank provides a greater incentive to ensure it is well managed. Having shareholders able to absorb a greater share of losses if the company fails also provides stronger protection for depositors,” Deputy Governor and General Manager of Financial Stability Geoff Bascand said today.

The Reserve Bank has been reviewing bank capital rules since early 2017.

“Bank crises happen more often than many people care to remember, and the economic and social costs of bank failures can be very high and persistent. These proposals are designed to make bank failures less frequent. With these changes we estimate the banking system will be resilient to shocks that might occur only once every two hundred years,” Mr Bascand said.

The proposal would see banks’ capital levels increase materially. We are proposing to almost double the required amount of high quality capital that banks will have to hold. In practice, actual changes to the amount that they hold will be less than double and will vary. The increase will depend on their current levels of capital, how much extra they choose to hold above the required minimum, and whether they are a large or small bank. Generally, it will be an increase of between 20 and 60 percent. This represents about 70 percent of the banking sector’s expected profits over the transition period. We expect only a minor impact on borrowing rates for customers.

“While borrowing costs may increase a little, and bank shareholders may earn a lower return on their investment, we believe these impacts will be more than offset by having a safer banking system for all New Zealanders,” Mr Bascand said.

We are consulting on a five year transition period for banks to meet the new requirements. We welcome feedback on our proposals. The deadline for feedback is 22 March 2019.

More information
• Non-technical summary
• Consultation paper: How much capital is enough?
• Speech: Higher capital better for banking system and New Zealand
• Video: What is capital adequacy?
• Video: Governor Adrian Orr describes importance of bank capital
• Earlier consultations: Review of capital adequacy framework for registered banks

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