Reserve Bank sees sense

The Reserve Bank announced:

“Following the completion of the review commissioned by the Board in March, we are pleased to announce modernised capital rules that will support an efficient and resilient financial system,” said Rodger Finlay, Chair of the RBNZ Board.

“We recalibrated our risk appetite to have regard to our new Financial Policy Remit, and to reflect important developments since 2019, including the introduction of the Depositor Compensation Scheme, and more intensive supervision, enforcement, and resolution approaches. This led us to ease common equity requirements across the system by around $5 billion compared to current levels, while still remaining confident in our system resilience.”

The package announced today includes reduced requirements for common equity, more granular risk weights, simplification of capital instruments, and greater alignment of instruments for the ‘big four’ banks with Australian settings. The final package further refines risk weights consulted on in August.

The previous requirements were somewhere between overly conservative and punitive. They were greater than other jurisdictions. The tension is:

Capital requirements are a foundational part of our prudential framework. Our rules specify the minimum percentage of a deposit taker’s funding that must come from its owners. Capital requirements that are too low risk deposit takers being unable to absorb unexpected losses when they arise and therefore failing – which may impose a direct fiscal cost on New Zealand taxpayers, as well as reducing the long-run prosperity and well-being of New Zealanders. Conversely, capital requirements that are too high can reduce credit availability and increase costs unnecessarily.

So this will allow more lending, at a lower cost.