New Zealand’s recent economic performance tells a troubling story, writes Nick Stewart.
Nick Stewart is a financial adviser and CEO at Stewart Group.
New Zealand’s economy is caught in a relentless cycle, bouncing between positive and negative GDP growth every three to six months like a yo-yo.
The economy contracted 0.90% in the second quarter of 2025, with GDP falling 0.5% over the year ended December 2024.
In these turbulent times, we’re handicapping ourselves with regulatory constraints that act as a handbrake on the very institutions that provide the lubrication our economy desperately needs.
The culprit? The doubling of bank capital ratios, a dramatic policy shift implemented through the collaboration between Adrian Orr and former Finance Minister Grant Robertson.
This policy response, designed to address what they characterised as a once-in-a-century crisis, has instead gummed up our economy and now represents a historical anchor dragging down our economic potential.
The December 2019 Capital Review decisions are fundamentally reshaping New Zealand’s banking landscape, with full implementation required by 2028.
The “Big Four” banks, ANZ NZ, BNZ, ASB and Westpac NZ, must hold a total capital ratio of at least 18%, while other banks including Kiwibank face 16% requirements.
To put this in perspective: capital is essentially the bank’s own money that acts as a safety buffer. The higher the requirement, the less money banks have available to lend to businesses and consumers.
Economic performance crisis
New Zealand’s recent economic performance tells a troubling story. The economy has contracted, on a per capita basis, for nine of the past 12 quarters, making for a deep and lengthy recession that has been painful for all New Zealanders.
Our banking system is the circulatory system of our economy. When we constrain banks’ ability to lend through excessive capital requirements, we’re restricting the flow of economic oxygen throughout the entire system.
The Oliver Wyman report commissioned by the RBNZ found that New Zealand’s Tier 1 capital requirements are relatively high by international standards, creating a competitive disadvantage that ripples through every sector.
In a globalised world, economies compete on the efficiency of their financial infrastructure. New Zealand already faces high energy prices that make it difficult to compete with other countries that enjoy cheaper power.
Now we’re compounding this disadvantage by artificially constraining our banking sector with capital requirements that our competitors haven’t imposed on themselves.
Political opportunity
The Reserve Bank has endured a difficult period, culminating in Adrian Orr’s resignation in March 2025.
Finance Minister Nicola Willis’ handling of Orr’s departure has not helped the situation, creating additional uncertainty around monetary policy leadership at a time when the economy desperately needs stability. Dr Anna Breman, formerly First Deputy Governor of Sweden’s Riksbank, has now been appointed as the new RBNZ Governor, beginning her five-year term on December 1, 2025.
For the current government, correcting this policy overreach represents more than just good economics, it’s a potential political lifeline. Willis and Christopher Luxon have inherited an economy constrained by their predecessors’ regulatory overcorrection.
Since 2019, concerns have been raised that the Reserve Bank’s capital settings may be undermining competition and efficiency, increasing lending costs and creating economic headwinds.
The simple solution
The RBNZ has opened consultation on capital settings, with two options that materially reduce requirements compared to 2019 decisions.
But why stop at modest reductions? The government has the power to go further, to revert completely to the pre-crisis capital requirements that served New Zealand well for decades.
This bold move would unlock billions in lending capacity, flooding the market with the credit that businesses need to grow and families need to prosper. It’s the growth stimulus New Zealand has lacked, and it’s hurting every Kiwi.
The solution is both simple and transformative: revert to the old capital ratio rules and flood the market with lending that can stimulate the growth New Zealand desperately needs. This isn’t theoretical economics; it’s a practical policy lever that could work quickly to revive our struggling economy.
By returning to historical capital requirements, we would immediately free up billions of dollars in lending capacity that banks are currently forced to hold as regulatory buffers. This unleashed capital would flow directly into business expansion, home purchases, infrastructure projects, and the countless economic activities that create jobs and prosperity for every Kiwi.
Breman and the RBNZ have the opportunity to demonstrate economic leadership by acknowledging that the crisis-era increases were appropriate for their time but inappropriate for our current needs. Returning to the old rules would send a clear signal that New Zealand is serious about breaking free from its economic doldrums.
The handbrake has been on long enough. Our banks are ready to power economic growth. Our businesses are ready to expand. Our entrepreneurs are ready to innovate.
The only question is whether our regulators, and now Breman, are ready to let them unleash New Zealand’s economic potential.