Reserve Bank deputy governor Geoff Bascand has held firm on its proposed new capital requirements for the banks, saying they would promote a level playing field among the big lenders.
Bascand said at a news briefing that the bank's proposals were about "putting the roof on while the sun is shining" — or bolstering the banks' capital adequacy before a crisis appears.
"Part of what's in these proposals involves quite a bit of levelling the playing field," he said.
"It is removing what we think is an artificial advantage that the big four banks have over the rest of the banking sector."
"Some of the changes that we are doing is closing the gap," Bascand said, adding that ANZ Bank holds half as much capital as Kiwibank.
He said there could be transitional impacts as the banks moved to greater capital adequacy, but that there would be advantages in the longer term.
"In the long run, this makes New Zealand safer and it's hard to see how it could increase the cost of funds to New Zealand, but different parts of the capital market will respond in different ways."
Bascand said the current rules distort competition.
Some banking analysts have warned that interest rates could rise because of higher capital requirements.
In a supporting slide, the central bank said: "Interest rates (borrowing and lending) could change — but we don't expect by much."
Lending margins above borrowing costs may expand by 20 to 40 basis points, it said.
"Banks make profits from lending. The competitive market will continue and if one bank pulls back in a particular segment of lending, we expect another will step up," the Reserve Bank said.
Twenty banks operate in New Zealand — 16 in the retail market.
The big four banks would have five years to increase their capital ratio from the current 12 per cent to 16 per cent.
The bank expects a combined increase in capital of around $20 billion among the big four as a result of higher capital requirements.
Other banks have to increase their capital ratio from the current average of 14 per cent to 15 per cent — increasing their combined capital by $0.9 billion.
Banks will make their own decisions as to how they manage their balance sheets.
Bascand said this could be done by retaining more profits over several years — rather than pay out dividends to their owners — or the banks could raise more capital from their shareholders.
The Reserve Bank estimates that the big four could get there by retaining 70 per cent of their net earnings over five years.
The small bank sector might take longer to reach the target, perhaps around seven years.
The RBNZ is proposing that banks be required to raise high-quality Tier-1 capital to 16 per cent of overall their risk-weighted assets, which is almost double the current level that is required.
The central bank is seeking submissions by early May and expects to release its final decision on the proposal in the third quarter.
Today's briefing came ahead of a speech by Bascand on Tuesday entitled "Safer Banks for a Safer New Zealand".
Bascand said the capital increase would leave New Zealand banks in a stronger position to withstand shocks, and protect the banking system.