Kiwibank says it won't continue with the settlement of a proposed A$175 million bond issue after the Reserve Bank said its bonds don't comply with Capital Adequacy Framework requirements.

The state-owned bank has been told that RBNZ has formed a preliminary view, which is yet to be finalised, about its tier 2 convertible subordinated bond which was issued on June 6, 2014, and its additional tier 1 perpetual bond issued on May 27, 2015.

"The issue relates to a technical interpretation matter and in Kiwibank's view does not in any way affect the quality of the capital represented by the Kiwibank bonds," the Wellington-based company said. "Kiwibank is working urgently to resolve the issues with the RBNZ."

Kiwbank said it has the support of shareholders NZ Post, the New Zealand Superannuation Fund and the Accident Compensation Corporation following the RBNZ announcement.


"The RBNZ preliminary decision does not in any way impact the growth opportunities of the bank and all shareholders continue to support those opportunities," head of funding Geoff Martin said in a statement. "In the event that the RBNZ determines that the issuances to Kiwi Capital Funding Limited (KCFL) are not fully compliant, the shareholders will ensure that the bank will be in no worse capital position than if the RBNZ had not changed the treatment of the capital."

The central bank last week announced plans to review the definition of bank capital, the measurement of risks that the banks face and the minimum capital requirements and buffers to set up a regime that provides confidence in the banking sector.