The Reserve Bank says it has stepped up its supervisory monitoring of Bank of New Zealand after identifying weaknesses in the bank's capital calculation processes.

RBNZ says it's also applying "precautionary adjustments" to BNZ's capital requirements, increasing the risk weight floor on its operational risk capital model from $350 million to $600m.

BNZ is owned by National Australia Bank and is one of the big four Australian-owned banks accounting for about 88 per cent of New Zealand's banking system. Those banks have been allowed to use their own internal models since 2008.

The other smaller banks are forced to used standardised models that in practice mean they have to hold more capital than the heavyweights.

Advertisement

BNZ is the third of the four to be publicly censured by RBNZ and forced to hold more capital.

Westpac was the first to be censured in November 2017 for capital calculation transgressions dating back to 2008, and has had to hold about $1 billion of additional capital, an obligation it will be released from at the end of this year.

ANZ Bank was censured in May this year, forced to use the standardised model to calculate operational risk, one of about 45 internal models it had been using, and required to hold more capital against housing and farm lending from June 30.

The fourth bank, Commonwealth Bank of Australia-owned ASB Bank, escaped censure but confessed in November 2017 that it had to call in a consultant to review its compliance after it discovered it had been miscalculating its capital ratios for the best part of a year.

"BNZ identified a number of errors while undertaking a programme of remediation which began in early 2018 and is expected to continue into 2020," RBNZ says in a statement.

"These included three capital calculation errors which resulted in mis-reported risk-weighted assets over a number of years."

BNZ brought in accounting firm PricewaterhouseCoopers at that point to help with the programme.

RBNZ says BNZ, like the other three major banks, hasn't breached its minimum capital requirements at any point.

Advertisement

"However, given the likelihood that further compliance issues will be discovered during the review and remediation, the Reserve Bank regards a precautionary capital adjustment as prudent," says deputy governor Geoff Bascand.

RBNZ says that in 2017 it conducted a review of bank director attestation processes and noted that many banks were attesting to compliance on the basis of negative assurance – in other words, they didn't have any evidence to suggest they weren't in compliance.

"Breaches are now being identified as banks review their governance, control and assurance processes and move from a negative assurance to a positive evidence-based assurance framework," Bascand says.

"Over the past year, a number of banks have disclosed breaches of their conditions of registration. Many of these have related to errors in the calculation of their regulatory capital or liquidity, which in some cases, have gone undetected for a number of years," he says.

"We are reassured by BNZ's response to the issues along with the independent oversight from PwC," Bascand says in the release.

"BNZ has committed to providing the Reserve Bank with regular and timely updates of the details of issues as they are discovered and the remedial activity as this work progresses," he says.

"The additional capital overlay will be removed when remediation is complete. It is the Reserve Bank's expectation that the current review will identify all outstanding compliance issues and potential breaches."

These breaches by all four of the major banks have been discovered at the same time that RBNZ has been reviewing minimum capital requirements.

RBNZ's proposals include greatly reducing the capital advantage the big four banks get from using internal models and making them also report what their capital levels would be if they had to use standardised models.

RBNZ has also proposed increasing the big four's minimum common equity from 8.5 per cent of risk-weighted assets to 16 per cent with the smaller banks having to increase their equity to 15 per cent.

The prudential regulator is set to release its final decisions on December 6.