Reserve Bank bows to banks’ and Government’s wishes, proposing to make bank capital rules ‘materially’ less restrictive

Reserve Bank interim Governor Christian Hawkesby helped create the existing bank capital rules, which are still being phased in. Photo / Marty Melville

The Reserve Bank is adhering to the Government’s request for it to reduce the amount of capital it requires banks to hold.

Banks need to hold set amounts of capital to prevent them from collapsing.

However, the Commerce Commission and coalition Government argue the standards, which were decided on in 2019 and are being phased in over several years until 2028, are too conservative. They fear this is increasing the cost and reducing the availability of credit, which is impeding economic growth.

Following Adrian Orr’s abrupt resignation as Reserve Bank Governor in March, the board announced it would review the capital rules, which Orr fiercely defended in the face of criticism from the banking industry.

The capital rules are worth billions and affect banks’ profitability.

Today, the Reserve Bank put two options on the table for how it could “materially” loosen the rules.

It warned its proposed changes would only have “minor impacts on economic activity and the attractiveness of the New Zealand market to new entrants”.

However, they would make it easier for small banks to compete with large banks.

As well as proposing to change the total amount of capital it requires banks to hold, the Reserve Bank proposed taking a more granular approach towards its requirements for the capital smaller banks need to hold in relation to certain types of loans (larger banks are allowed to make these decisions themselves).

The idea is that having additional categories for different types of loans means risk can be priced more accurately.

This could make it cheaper and easier for low-risk farmers or business owners, for example, to get loans.

Governor Christian Hawkesby said capital settings were one of the most important tools the bank had to protect and promote the stability of the financial system.

“However, it’s essential we strike the right balance – protecting depositors and the wider economy, while supporting competition and economic efficiency,” he said.

Separately, the Reserve Bank announced it had decided to reduce the amount of capital it would require deposit-takers to hold to become licensed from $30 million to $5m.

The Reserve Bank said a few factors had changed since all the capital rules were created.

Under the Deposit Takers Act 2021, it has more comprehensive tools at its disposal to supervise deposit takers and respond in the event of a crisis.

Indeed, as of July this year, a new Depositor Compensation Scheme will insure up to $100,000 of deposits per person, per bank.

If people know the first $100,000 of their savings in a bank is safe, they are less likely to withdraw their money during a crisis, causing a bank to collapse.

The Reserve Bank also acknowledged that Finance Minister Nicola Willis issued it with a new Financial Policy Remit in 2024, which requires it to put more emphasis on efficiency and competition in the way it regulates financial institutions.

And, it acknowledged the feedback the Commerce Commission and Parliament’s Finance and Expenditure Committee received in response to inquiries they did into banking competition. A number of submitters – including the banks – argued the rules were too restrictive.

Willis welcomed the proposed changes.

The public has until October 3 to provide feedback to the Reserve Bank. It will make a decision on the capital rules before the end of the year.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.