Reserve Bank delays start date for increases in bank capital

The Reserve Bank – Te Pūtea Matua is further delaying the start of increases in bank capital until 2022 to allow banks continued headroom to respond to the effects of the COVID-19 pandemic and to support the economic recovery.

This delay supports other actions the Reserve Bank has taken to cushion the initial economic blow of COVID-19 by promoting cash flow and confidence in the financial system.

“The Reserve Bank’s actions throughout this period have promoted monetary and financial stability and provided broad support to the Government, financial institutions and New Zealanders,” Reserve Bank Deputy Governor and General Manager Financial Stability Geoff Bascand says.

“COVID-19 has emphasised the importance of buffers in the financial system. The more capital a bank holds, the better it can weather economic storms and meet customer needs during tough times.

“Delaying the implementation of parts of the Capital Review decisions by a further 12 months strikes the right balance between providing more headroom for banks to support lending now by drawing on their capital buffers, while also ensuring that capital levels lift in the longer term to support financial stability.”

The Reserve Bank remains committed to increasing capital requirements in the medium-term to underpin financial stability, Mr Bascand says.

The changes mean the increase in the Prudential Capital Buffer will not begin until July 2022. The Reserve Bank will reconfirm this timing near the end of 2021, and will consider making further amendments to the timing if the conditions warrant it. Other aspects of the capital reforms will proceed from 1 July 2021, including the new rules around capital instruments. More detail on this will be released on November 17.

Reserve Bank will consult on loan-to-value ratio (LVR) restrictions

Meanwhile, in December, the Reserve Bank will consult about re-instating loan-to-value ratio (LVR) restrictions on high-risk lending with effect from 1 March 2021.

LVR restrictions are used to reduce the risks to financial stability from higher-risk lending. The restrictions were removed in May to best ensure credit could flow, and that they did not have an undue impact on the mortgage deferral scheme implemented in response to the COVID-19 pandemic.

“Circumstances in the lending market have since improved and we are now observing rapid growth in higher-risk investor lending. We will consult about re-instating the restrictions we had in place pre-COVID, which limited the amount of high-risk lending that banks could make,” Mr Bascand says.

Bank Dividend restrictions will remain in place

The Reserve Bank is also announcing that the restrictions on dividends and redeeming non-Common Equity Tier 1 (CET1) capital instruments put in place in April 2020 will be retained until 31 March 2021, or later if required. This will continue to support the stability of the financial system.

Reserve Bank updated expectations on insurer dividends

The Reserve Bank has also written to insurers to advise it has updated expectations on dividends. The Reserve Bank expects that insurers will only make dividend payments if it is prudent for that insurer to do so, having regard to their own stress testing and the elevated risks in the current environment.

More information:

• Bank Capital Review Implementation timetable (PDF 420KB)
• Letter to banks regarding dividend restrictions (PDF 461KB)
• Letter to insurers regarding dividend restrictions (PDF 313 KB)
• Reserve Bank removes LVR restrictions – April 2020
• Loan-to-value ratio restrictions
• Capital Review go-to guide (PDF 600KB)

Background Notes

• Reserve Bank Deputy Governor Geoff Bascand will discuss these announcements in a media conference, livestreamed on the Bank’s website at 3pm today.
• The Reserve Bank will be publishing more detailed commentary on its assessment of the soundness and efficiency of New Zealand’s financial system in the November Financial Stability Report (FSR) at 9am on Wednesday 25 November. More details of the LVR restriction consultation, including the timing, will be provided when the FSR is released.
• Removing the LVR restrictions earlier this year was a reasonably quick process, as it allowed banks to lend straight away. The process of imposing LVR restrictions takes more time, following consultation, as banks require time to adjust their lending practices and manage borrowing applications already underway to ensure they comply with the new rules.
• Timing of Capital Review implementation:
  • In March 2020 the Reserve Bank delayed the start date of increased capital requirements for banks by 12 months - to 1 July 2021. We noted that this action was taken to help support lending in the economy at time of heightened uncertainty. Banks have significant buffers above current regulatory minimums, and we encouraged them to use them.
  • At the time of that decision we also noted that should conditions warrant it next year, the Reserve Bank will consider whether further delays are necessary. Today’s announcement updates the March 2020 decision.
  • The following parts of the December 2019 decisions have been delayed to begin from July 2022 onwards:
  • Increases in capital buffers: the increase will be gradually phased in from July 2022 until July 2028.
  • The scheduled increase in the Internal Ratings-Based approach (IRB) ‘scalar’ for risk weights to 1.2, from 1.06 at present, will start from 1 October 2022.
  • All other December 2019 decisions will proceed as planned:
  • Changes to the requirements for Additional Tier 1 and Tier 2 capital instruments (from 1 July 2021).
  • The de-recognition of existing Additional Tier 1 and Tier 2 capital instruments (from 1 July 2021).
  • ‘Dual reporting’: Internal Ratings Based (IRB) banks required to report IRB and Standardised capital calculations (from 1 January 2022).
  • Setting the output floor on IRB exposures to 85% (from 1 January 2022).
  • Other December 2019 Capital Review changes, that do not require banks to increase capital, will continue to proceed from 1 July 2021 onwards. These changes provide banks with certainty about the future capital rules.
  • To implement the changes, the Reserve Bank will publish consultation material and seek feedback for changes to the Banking Supervision Handbook – which is the set of rules and policies registered banks must adhere to – on 17 November. Consultation will run until 31 March 2021.

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