Mutual Capital Instrument Rules Near Completion
The development of a framework for capital instruments for mutual banks is nearing completion, following further consultation with affected entities.
We are now providing affected entities with an opportunity to review the amended banking prudential requirement (BPR) documents before finalising the framework for the proposed mutual capital instrument.
Banks registered in New Zealand must comply with a range of prudential requirements developed and supervised by the Reserve Bank of New Zealand – Te Pūtea Matua to promote financial stability. These prudential requirements reduce the risk of a bank failing and protect New Zealanders from the economic and social costs if a bank failure were to occur.
In December 2019, we published the final decisions from the Capital Review, which focused on improving the quality and quantity of capital banks are required to have. A key decision from the Review was to require banks to have larger buffers of Common Equity Tier 1 (CET1) capital, which is the highest quality of capital and the most effective at supporting financial stability. This helps reduce the risk of having to deal with the negative economic and social costs associated with bank failure in New Zealand.
One unresolved issue from the Capital Review was a request for a capital instrument for mutual banks which could qualify as CET1 capital. Mutual banks, which are collectively owned by their members (or customers), are currently limited in their options to raise CET1 capital due to their mutual structure. This impacts the mutual banking sector’s ability to grow and compete with other, non-mutual banks that do not face similar constraints.
In response to this issue, we consulted on two possible options for a mutual capital instrument in 2022. Following consideration of the feedback received, we proceeded to develop an exposure draft (our document that sets out the proposed requirements for capital instruments) for our preferred option. This new instrument will provide mutually owned banks with more flexibility for raising capital and will support our financial stability objectives by aligning shareholders’ financial interests with the performance of the bank.
Submitters on the exposure draft consultation said they were pleased with our progression of this work and generally supportive of our proposed design of the instrument. They requested some changes to both the requirements for the instrument and the structure of the banking prudential requirements (BPRs), which are addressed our response document.
We request affected entities provide any further feedback on the amended BPR documents by 31 July 2023.