Consultation process will end on June 9, 2017
Supplied Content (Edited)
Wellington, May 1, 2017
The Reserve Bank of New Zealand published today an Issues Paper seeking public view on the regulation of Capital Adequacy for Banks.
The Bank is conducting a broad ranging capital review, as foreshadowed in a speech by RBNZ Deputy Governor and Head of Stability Grant Spencer at the New Zealand Bankers’ Association in Auckland on March 7, 2017.
Indian Newslink had carried a part of that speech in its March 15, 2017 edition.
The following is a part of the Issue Paper released by RBNZ today:
The review aims to identify the most appropriate capital adequacy framework, taking into account experience with the current framework and international developments.
The review will consider the definition of regulatory capital, the measurement of risk-weighted exposures, and the minimum capital ratios that apply to locally incorporated banks. The Issues Paper marks the first public consultation as part of the review. The Bank is seeking feedback about the topics covered by the issues paper. Responses for the consultation close on June 9, 2017.
Basle III Requirements
Since the traumatic experience of the Global Financial Crisis (GFC) in 2007-2009, banks and regulators have been revising their assessment of appropriate levels of capital. Bank capital is an important cushion for the financial system. It is the form of funding that stands first in line to absorb any losses that banks may incur. Having sufficient capital promotes financial stability by reducing the likelihood of bank insolvency and moderating the effect of credit cycles.
The main international regulatory response to the GFC went under the broad banner of ‘Basel III’. This has involved a higher minimum quantity of capital and also a better quality of capital, for example, in terms of loss absorbency. While the new Basel III requirements are still being phased in, many national regulators, including the Australian Prudential Regulation Authority (APRA) in Australia and ourselves in New Zealand, have moved ahead of the Basel timetable. Several countries have also chosen to adopt more conservative capital rules than Basel III.
Australian Inquiry
The Final Report of the Financial System Inquiry (FSI) in Australia, recommended bolstering Australian banks’ capital ratios so that they are “unquestionably strong”, with the top quartile of internationally active banks given as a guide. APRA is implementing the FSI recommendations and this has resulted in a number of capital raisings by the Australian banks over the past year. APRA have indicated that their final position on “unquestionably strong” is not far away.
In New Zealand, our broad approach has been to adopt the Basel standards, where appropriate, and implement them with a conservative bias. For example, the Reserve Bank has imposed restrictions on components of banks’ internal risk models. New Zealand has chosen not to adopt some aspects of Basel III, such as the internal modelling approach for market risk, where we have felt that a policy is overly complex or inappropriate for New Zealand conditions.
Conservative Approach
This conservative approach to bank capital has been warranted by New Zealand’s relatively high risk profile and the Reserve Bank’s non-interventionist approach to banking supervision. Both factors are likely to be present going forward.
In the changing international regulatory environment, it is becoming less clear whether New Zealand’s historical position on bank capital is being maintained relative to Australia and other peers. We believe it is time to review New Zealand’s position and review more broadly our capital framework in light of international and domestic developments and our experience with the current regime.
Objective of the review
The aim of the Capital Review is to identify the most appropriate regulatory framework for setting capital requirements for New Zealand banks. Consistent with the Reserve Bank’s legislative purposes, minimum capital requirements should promote the maintenance of a sound and efficient financial system. In broad terms, higher levels of capital will improve the soundness of the financial system as the likelihood of bank failures is reduced and the potential impact of credit cycles is moderated.
However, the capital regime may reduce the efficiency of financial intermediation if ratios are pushed too high or standards are made overly complex. Capital is a more expensive form of funding for the banks and so higher capital ratios can potentially increase the overall cost of funding the system as well as improving its soundness.
Our aim is to agree a capital regime that ensures a very high level of confidence in the solvency of the banking system, while avoiding unnecessary economic inefficiency.
In pursuing this objective, the Capital Review will look at the three key components of the regulatory capital regime (a) The definition of eligible capital instruments (b) The measurement of risk, in particular the risk weights attached to credit exposures (c) The minimum capital ratios and buffers
These three factors are interdependent and the links between them must be carefully considered. The calibration of the capital ratios needs to be set in the context of the risk weights applying to exposures as well as the capacity of eligible capital instruments to absorb losses. Also, the role of capital buffers versus hard minimum requirements needs to be considered.
The Capital Review will examine how well the Reserve Bank’s current framework operates and consider potential improvements. The Reserve Bank will consult the banks and the public on its findings and on any proposed changes to the capital framework.
Outcomes of the Review will be heavily influenced by the international regulatory context, the risk characteristics of the New Zealand system and the Reserve Bank’s regulatory approach.
For full text of the above, please visit www.rbnz.govt.nz
*
Photo Caption:
Grant Spencer
