The Reserve Bank's proposed tightening of capital requirements for local banks could permanently dampen the economy by more than one per cent of GDP, ASB economist Nick Tuffley has warned.

The proposal would also equate to an additional half a per cent on mortgage rates - although that would likely be offset by a lower official cash rate, he writes in a new report.

The RBNZ has proposed to increase capital requirements for locally-incorporated NZ banks, by 2023. The required Tier 1 capital ratio for the "big four" (ASB, BNZ, Westpac and ANZ) will be increased from 8.5 per cent to 16 per cent of risk-weighted assets.

Tuffley estimates that would equate to an additional $19 billion to $22 billion for local banks by 2023 and that it would constrain credit supply, slowing the economy.

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Reserve Bank deputy Governor Geoff Bascand argued in a February speech that the new requirements were necessary to make the banking system safer and ensure that bank shareholders had "more skin in the game".

He argued that holding more capital would make Banks being better able to absorb large, unexpected losses, lower the social risk from banking crises, reduced fiscal risk to the Government and make bank shareholders and management less inclined to take excessive risks.

In the report Tuffley acknowledges that the RBNZ is "not swimming against the global tide", with other regulator lifting requirements.

However he argues that the RBNZ has "set a high benchmark of limiting bank failures to a 1-in-200 year event."

He warns of significant economic implications for New Zealand although the scale will depend on the extent to which investors are prepared to accept lower returns relative to "the perceived increased soundness of the banking institution."

A UBS report in February said the majority of costs arising from higher capital requirements were likely to be borne by mortgagors.

That report estimated that local banks would "re-price mortgage books between 86 and 122 basis points," UBS said.

Tuffley cites the upward pressure new capital requirements will put on mortgage rates as a reason why the ASB economics team has dropped its forecasts for the OCR.

ASB now sees 50 basis points of cuts this year with the OCR staying on hold at 1.25 per cent until 2022.

It has also lowered its estimate of the "neutral OCR" from 2.75 percent to 2.25 per cent by 2023.

Despite this, Tuffley argues the capital requirements will flow through to tighter credit conditions and these will have a more significant impact on the economy than the Reserve Bank has estimated.

Citing two international studies Tuffley says " the higher capital requirements could permanently lower New Zealand GDP by 1.1 per cent relative to the baseline."

There may also be transitional costs, he says.

The changes would likely see rural lending, low deposit residential lending and lending to higher risk companies come under the most pressure.

The Reserve Bank has today extended the public submission date on its proposals to May 17.

That will take the consultation process to approximately five months.