Reserve Bank extends consultation on controversial new capital rules

Deputy governor and general manager of financial stability, Geoff Bascand. Photo / File

The Reserve Bank of New Zealand has added a little over a month for submissions on its proposals to require the country's largest banks to carry substantially more capital on their balance sheets to reduce the risk of bank failures in a financial crisis.

Submissions were initially due by March 29 but submitters now have until May 3 to prepare their responses to proposals that one international bank has warned could add as much as 1.25 percentage points to mortgage lending rates and slow the economy unnecessarily as a result.

Swiss-based UBS said the RBNZ's proposals would be the most stringent among developed economies while Fitch Ratings described them as "radical".

The extension of time was a response to feedback from submitters that they needed more time to take their own advice and undertake modelling to understand the likely impact of the proposals, a central bank spokeswoman said.

Released with the announcement of the extension were internal papers produced at the RBNZ since 2016, when it began assessing the capital adequacy of New Zealand's most powerful banking institutions, all four of which are Australian-owned.

A note published with today's date explains why the RBNZ does not believe the global rules developed by the Bank of International Settlements in Basel, Switzerland, are an appropriate basis on their own for setting New Zealand banks' capital ratios.

For a start, the Basel rules were developed against the "perceived capital needs of a group of large, internationally active banks".

The calibration of the Basel framework "implicitly assumes a degree of portfolio and geographic diversification that is unlikely to be present in banks with narrower business model focusses, such as those operating in New Zealand," the explanatory note says.

"All else being equal, this means that the capital requirements determined by applying the Basel ... framework to less diversified institutions will deliver a lower level of solvency than the notional 99.9 per cent chosen by the Basel Committee."

Secondly, the RBNZ did not regard the 2008 global financial crisis as a particularly serious event for the New Zealand banking system, despite its impact in other countries.

"The Reserve Bank's view is that the 2008-2009 recession in New Zealand is not, on its own, a sufficiently severe event" for calculating capital adequacy in the event of a banking crisis.

It reached instead to the 1988-91 period, when the Bank of New Zealand was twice bailed out by the government, for guidance. At times during that period, some banks were reporting more than 20 per cent of their total lending portfolios were impaired assets.

"Data on credit losses during the early 1990s would provide a more reliable basis for estimation of the inputs needed for the Basel model than the GFC period," the note says.

The RBNZ expects to make decisions in the third quarter of this year and allow banks five years to make the transition to higher capital ratios.

"While we've published our proposed views in the consultation document, these are not final, and we want to ensure all interested parties have time to adequately consider the proposals and provide feedback," deputy governor and general manager of financial stability, Geoff Bascand, said in a statement.

The proposals are intended to "make bank failures less likely and ensure that bank shareholders have a meaningful stake in their bank, so that they absorb a greater share of losses if their bank fails".