KEY POINTS:
New Zealand's biggest banks have been given a Reserve Bank green light to calculate their own capital adequacy ratios - the amount of capital they must hold as a buffer against unexpected economic crises.
The RBNZ yesterday said Westpac New Zealand, ANZ National Bank and ASB had been cleared to use the Basel II "internal model" for credit and operational risk from the start of next year.
The Bank of New Zealand has been cleared to use internal models for operational risk only but is expected to apply for accreditation of its credit risk models during the year.
The Basel II accord is aimed at creating an international standard on capital adequacy.
"A key feature of the Basel II regime is that it increases the sensitivity of capital requirements to key bank risks, particularly credit risk," Reserve Bank Deputy Governor Grant Spencer said.
Basel II will, in theory, allow lower capital levels for retail banks with mortgage portfolios, as such assets historically had shown low credit risk.
The internal model also allows banks "to calculate regulatory capital with their own respective internal models," said Spencer.
However, the details of how Basel II will apply in New Zealand have yet to be settled and banks given accreditation to use internal models are subject to transitional requirements.
"In particular, there will be a transitional requirement to maintain capital at a level no less than 90 per cent of previous 'Basel I' capital requirement," said Spencer.
Those banks which did not apply for accreditation - including TSB Bank and Kiwibank - will be on a standardised model.
RESERVE FUNDS
* Under the Basel international framework, the Reserve Bank requires locally incorporated banks to hold a minimum level of capital in reserve to absorb losses associated with fluctuations in the economy.
* At present they must hold at least 8 per cent of their risk-weighted exposure in reserve.
* Next year the Reserve Bank moves to the Basel II framework which may reduce the amount they are obliged to hold.
