The Reserve Bank will give banks more time and flexibility to raise capital levels to cope with financial shocks, but the battle over who will face the costs reignited.
On Thursday the Reserve Bank signalled the end of a three-year review of bank capital, estimating the final decisions would require the sector collectively to raise around $20 billion.
Designed to allow the New Zealand financial system to withstand a one-in-200-year financial crisis, the overall level of capital required is largely the same as the bank proposed a year ago, up from a minimum of 10.5 per cent currently to 18 per cent.
But the way banks will get to the higher levels contained a number of changes to the proposals of December 2018, which prompted warnings that the banks may constrain credit and slow growth.
"We've studied, we've listened and analysed the issues in a very open manner for over three years," Reserve Bank governor Adrian Orr said.
Banks will have longer to raise the capital, with the implementation period increasing from five to seven years.
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Smaller banks - which mean all but the big four Australian banks - will need to hold total capital of 16 per cent, less than proposed in December, a reflection of the "smaller mess" which would be caused in the event that they collapsed, Orr said.
The biggest concession came as the Reserve Bank broadened what it would consider as tier-one capital, to include redeemable preference shares, a type of equity which investors tend to view more like a debt instrument. These shares offer a cheaper way for the banks to raise money.
Orr said close to half of the additional $20b could come from the new vehicles, which could provide a fillip for the local capital markets as the New Zealand subsidiaries could raise at least some of the funds domestically.
While the Reserve Bank said it expected some of the funds would be raised offshore, Orr said the investment community suggested the New Zealand market could absorb the entire amount.
The New Zealand dollar rose on the news, as did bank shares, with the changes meaning the capital requirements would be less expensive for the banks to cope with.
But arguments immediately resumed over the impact of the changes. The Reserve Bank's own analysis was that the higher levels would boost the economy, adding only around 20 basis points to borrowing costs.
ANZ meanwhile said that while the proposals could add 30-60 points to borrowing costs, with the impact "uneven" and the risk of a particular impact on sectors such as agriculture and business.
ANZ chief economist Sharon Zollner said that with interest rates so low, if the impacts were greater than the central bank expected it would increase the odds the Reserve Bank would have to turn to unconventional monetary policy.
"This would especially be the case if the economy was hit by any kind of negative shock over the transition period."
While the Reserve Bank has repeatedly insisted the changes will have no relative impact on any particular sectors, analysts have warned sectors which are seen as more risky will find it even harder to borrow.
Federated Farmers commerce spokesman Andrew Hoggard said the impact of the changes was likely to be "much higher" on banks than borrowers as a whole, calling on the banks to absorb as much of the costs as possible.
"There is less lending competition in the agricultural sector and we know banks are already looking to reduce their exposure to farm debt."