The Reserve Bank has lifted Westpac New Zealand's minimum regulatory capital requirements after it failed to comply with obligations relating to its status as an internal models bank.

The central bank accredits internal models banks to use approved risk models to calculate how much regulatory capital they need to hold.

Westpac used a number of models that had not been approved by the Reserve Bank, and materially failed to meet requirements around model governance, processes and documentation, the Reserve Bank said in a statement.

Westpac currently operates 17 unapproved capital models, has used 21 further unapproved capital models since it was accredited in 2008, and failed to put in place the systems and controls an internal models bank is required to have under its conditions of registration, the Reserve Bank said.

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Consequently, the bank's minimum capital ratio requirements will be lifted. Westpac now needs a minimum capital ratio of 6.5 percent for common equity Tier 1 capital, compared to 4.5 per cent for all other locally incorporated banks, 8 per cent for Tier 1 capital, compared to 6 per cent, and 10 per cent for total capital, compared to 8 per cent, along with a 2.5 per cent capital conservation buffer.

As at September 30, Westpac NZ's regulatory capital ratios were 11.1 per cent for common equity Tier 1 capital, 14 per cent for Tier 1 capital, and 16.1 per cent for total regulatory capital, it said in a separate statement.

The central bank said it took into account that Westpac has not deliberately sought to reduce its regulatory capital, and said that while there have been serious shortcomings and non-compliance, it appears that Westpac has remained well above its required regulatory capital levels.

"This is very disappointing," deputy governor and head of financial stability Geoff Bascand said.

"Operating as an internal models bank is a privilege that requires high standards and comes with considerable responsibilities. Westpac has not met our expectations in this regard."

Westpac New Zealand said it has publicly disclosed its non-compliance with aspects of the RBNZ's IRB framework in its disclosure statements since September 2016.

"WNZL acknowledges the high standards required of an IRB accredited bank and has already taken several steps to address the issues raised in the review," it said.

"WNZL looks forward to working with the RBNZ over the next phase of remediation work."