NZ dollar, bank share prices rally after Reserve Bank releases capital changes

Adrian Orr hasn't held back in his battle with the banks. Photo / File

Australian bank shares firmed and the New Zealand dollar rallied by a quarter of a US cent after the Reserve Bank released details of its new capital requirements, which were seen as being less severe than the market had anticipated.

The central bank is requiring so called "Tier 1" capital at the big four banks to be 16 per cent of their assets on a risk weighted basis, up from 8.5 per cent.

The Reserve Bank has extended the phase in period to seven years from five.

Ratings agency S&P Global said the changes should not materially reduce the availability of credit in New Zealand across the board.

By the early afternoon, the New Zealand dollar had gained to US65.50c from US65.24c just before the announcement. Near the close of business, the currency had eased to US65.40c.

Shares in ANZ Bank - whose New Zealand franchise is the biggest on this side of the Tasman - were in a trading halt pending an announcement from the company.

When trading resumed, ANZ shares rallied to A$24.73, up 54c.

Commonwealth Bank of Australia - which owns the ASB Bank - saw its share price rally by A74c to A$78.55.

BNZ's owner, National Australia Bank, rallied by A50c to A$25.40.

All the big Australian banks - which dominate the banking scene - had vociferously opposed the Reserve Bank altering its capital requirements.

Kiwibank chief economist Jarrod Kerr said the New Zealand dollar had rallied because the new requirements were not a stringent as was first feared.

"The market has taken them as being less onerous on the banking system than the original proposal," he said.

"It's quite significant for the sector. We have actually got some certainty now and a longer time frame (seven years from five) and some concessions here and there," he said.

The impact of the bank capital proposals will be much less than the market had previously anticipated, Kerr said.

"So any thoughts of a contraction in credit and a slowdown in the economy have been pulled right back.

"This is a net positive for the economy and therefore the currency."

Mark Brown, chief investment officer at Devon Funds, said there had been a degree of pragmatism shown by the Reserve Bank in extending the compliance period, which would allow the banks greater opportunity to accumulate capital from retained earnings.

"Furthermore the ability of the banks to issue redeemable preference shares as additional Tier 1 capital should be seen as a positive," he said.

The New Zealand dollar has been firming over the last month, based on an improved outlook for commodities prices.