The Reserve Bank realised the banks were not expecting higher capital requirements of the scale the central bank has decided to impose and it warned the government to expect "intensive lobbying" from the big four banks.
In a memo - dated December 6th - to Prime Minister Jacinda Ardern, Finance Minister Grant Robertson and Commerce and Consumer Affairs Minister Kris Faafoi, the Reserve Bank said the banks did know it was likely to require them to hold higher levels of capital.
"However, we do not believe the banks are expecting increases of the scale we are proposing," says the memo, which was released along with other similar memos after a request under the Official Information Act.
"Our advice is to anticipate intensive lobbying from the large banks once they become aware of what we are proposing in the consultation paper due to be released in mid-December."
On December 14, the Reserve Bank announced proposals to double the minimum amount of tier 1 capital that the four major banks have to hold from 8.5 per cent to 16 per cent of risk-weighted assets and to lift total minimum capital from 10.5 per cent to 18 per cent.
The central bank is also proposing to reduce the advantage the four major banks have enjoyed since 2008 over smaller banks because they are allowed to use their own internal models for calculating their capital requirements rather than the standardised model the other banks have to use.
The Reserve Bank plans to limit that advantage to no less than 90 per cent of the capital required using standardised models.
Figures the central bank released in February showed New Zealand's largest bank, ANZ Bank, currently has to hold just over half the amount of capital that Kiwibank is forced to hold to back every $100 of mortgage lending.
That gives the Australian-owned bank a huge cost advantage over its smaller government-owned rival.
"The large banks – effectively the four Australian-owned banks – operate under a capital calculation framework that currently gives them an unjustifiably large capital advantage over the other banks in the system that are subject to our capital requirements," the memo says.
International regulators are also grappling with the uneven playing field such rules have created, it says.
"The Reserve Bank is proposing to follow the international approach but is proposing to go further in closing the gap than other countries – including Australia – and indeed further than the international standards suggest."
The Australian Prudential Regulation Authority is also requiring Australian banks – and Australia's big four banks own New Zealand's big four banks – to lift their total capital to 19.5 per cent from 11.5 per cent currently, but it is leaving its tier 1 capital requirement at 6 per cent, where it already sits.
Another major difference is that New Zealand's Reserve Bank will limit tier 1 capital to equity only, no longer accepting quasi-equity or hybrid securities that normally function as debt instruments but which can be converted into equity if required.
APRA will still allow quasi-equity to count towards tier 1 capital and it expects most of the additional capital will be satisfied by such instruments which cost about a fifth of the cost of equity.
An earlier memo to Robertson dated June 26, 2018, the Reserve Bank explained in detail how the internal models give the major banks an unfair competitive advantage and also noted "the sector as a whole has argued that it is well-capitalised by international standards."
Another memo to Robertson dated Feb. 12, says "media commentary has been both sceptical and supportive" and that "we are getting more submissions from the general public than we would normally expect for a consultation such as this, and most have been supportive."