RBNZ does a u-turn on bank capital requirements
The Reserve Bank has bowed to pressure from the Commerce Commission, the banks and submitters to parliament’s banking inquiry and will conduct a review of its bank capital requirements.
Tuesday, April 1st 2025, 6:26AM 
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by Jenny Ruth
The Reserve Bank has bowed to pressure from the Commerce Commission, the banks and submitters to parliament’s banking inquiry and will conduct a review of its bank capital requirements.
Lower capital requirements would likely mean lower interest rates and greater access to funding for borrowers.
“The Reserve Bank board has agreed to an evidence-based framework for a review of our capital regime utilising international experts and assessing it against the regimes in other countries,” chair Neil Quigley told parliament’s finance and expenditure committee (FEC).
Quigley said the banking system is profitable and that it isn’t capital constrained, “so lending could be increased if there was demand.”
He denied that RBNZ’s about face had anything to do with former governor Adrian Orr abruptly resigning without explanation in early March.
“It’s unrelated to Adrian Orr’s resignation. It’s something we’ve been talking about for a period of time,” Quigley said, adding that international thinking, particularly in Australia, about bank capital requirements has showed “some softening” since RBNZ’s capital review.
New Zealand’s capital requirements may be “unduly conservative” so there is now an opportunity to review them.
Acting governor Christian Hawkesby said RBNZ has heard the criticism of its bank capital rules and that RBNZ is already looking at the standardised risk weightings that the smaller banks must follow.
The big four Australian-owned banks are allowed to use their own internally derived risk weightings in determining how much capital they need, which gives them a substantial cost advantage over the smaller banks.
Finance minister Nicola Willis, who had already asked officials for information about the likely impact of reducing bank capital requirements, welcomed RBNZ’s review
“Submissions made to the FEC’s banking enquiry have raise concerns that New Zealand’s bank capital regime is too conservative and that this is undermining bank competition, driving up the cost of lending and reducing growth in the ealandNew Z economy,” Willis said.
“I share these concerns …. It is important that the RBNZ’s prudential regime preserves the stability of our financial system while taking care not to impose excessive costs in the process.”
In late 2019, RBNZ decided the big four banks would have to hold a minimum of 16% of risk-weighted assets in tier 1 capital, with 13.5% having to be equity, while the smaller banks would have to hold 14% as tier 1 capital and 11.5% of that being equity.
All banks were previously required to hold equity of at least 8.5% of risk-weighted assets.
The implementation of the new rules was delayed during the covid pandemic but is now about halfway through the process being phased in through to June 30, 2028.
Last week, Westpac said the new rules would cost about 50 basis points, higher than RBNZ’s own estimate of between 20 and 40bp, or between $1.2 billion and $2.3 billion, but other submitters have said the cost is higher still.
Quigley told the FEC that while some submitters have backed their claims with analysis, others had simply made assertions.
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“We think that at least some of the claims are incorrect,” he said. However, he said the Reserve Bank board had agreed to undertake an evidence-based review of capital settings, which critics say are pushing up loan interest rates.
It would utilise international experts and test it against the capital regimes of other countries, he said. “The international view is really important because we must maintain the confidence of our financial system in international markets,” he said.
Translation - we now need to bring in “international experts” and take months to consider this change otherwise NZ taxpayers will realise that we at the Reserve Bank got this horribly wrong. Adrian Orr and his team of academics paid handsomely by the NZ taxpayer applied increased capital ratios on the banks here for a one in two-hundred-year event whilst other countries decided a one in one-hundred-year event was sufficient.
If you are looking for proof of why the Government needs to overhaul the Wellington public service, then look no further than the above example.