The changes will enable banks to replace some of the high-cost, high-quality capital they have to hold with larger amounts of lower-cost, lower-quality capital.
The Reserve Bank expected the switch to see the average bank’s funding costs reduce by 6 basis points (bps) compared to the status quo, and 12bps compared to when the current rules are meant to be ratcheted up and fully implemented by 2028.
The Reserve Bank said it would monitor the extent to which banks passed these savings onto customers versus shareholders.
Overall, it expected the interest rates banks charge to fall by between 7 and 19bps compared to what they could have been by 2028 under current settings.
However, because banks will have less high-quality capital to absorb losses in the event of a crisis under the new rules, depositors will be more exposed.
The Reserve Bank estimated the present value of the cost of a crisis would increase from 0.11% of gross domestic product (GDP) to 0.16%.
However, it believed the benefits of the change outweighed the potential costs, noting the new rules would still be conservative by international standards.
Reserve Bank Governor Dr Anna Breman told the Herald that even though she only began her job on December 1, she had input into the way the rules have been set.
“Our approach is simple, strong, proportionate, and efficient,” she said.
“Small and mid-sized deposit takers should see a proportionately larger reduction than the four large banks, which should allow them to grow and compete more effectively.”
The Reserve Bank has also changed the amount of capital it requires mid-sized and smaller banks to hold in relation to the different types of lending they do.
The idea is that having a more granular schedule will allow banks to more accurately price risk, which should see some borrowers pay less interest.
While the Reserve Bank previously defended its 2019 rules in the face of very strong criticism from the banking industry, as well as corners of the business and agricultural sectors, it said now was a good time to make a change.
It noted that in the middle of the year it stood up a massive depositor compensation scheme.
It is requiring banks to pay levies into a Government-backed fund that will be used to reimburse depositors up to $100,000 if their deposit-taker collapses.
People knowing the first $100,000 of their savings in a particular institution is safe should prevent the risk of them pulling their money out and causing a bank to collapse during a time of crisis.
The Reserve Bank is also regulating non-bank deposit takers more heavily under new legislation.
One of its acting Assistant Governors Angus McGregor said the outcome of the bank capital review was informed by more than 40 submissions, supplemented by independent external reports and advice.
“As a result of submissions, we made material changes to our proposals, including reducing some risk weights further to better reflect risk,” he said.
“These internationally-calibrated settings bring us closer to alignment with Australia, while still recognising the New Zealand context and higher risk profile.
“To ensure the benefits of these new settings are realised promptly, we will commence an accelerated implementation in the early new year, with full implementation under the new Deposit Takers Act in 2028.”
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.
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