Reserve Bank proposes forcing commercial bank owners to lift their capital levels to bear greater share of financial system risks

The Reserve Bank went out to consultation on Friday on a proposal for bank owners to lift their shareholding stakes – their capital ratio – and thereby bear a greater share of the financial system’s risks.

The consultation has 2 closing dates on successive Fridays in March, the 22nd & 29th, depending on which consultation document you look at.

Deputy governor & financial stability general manager Geoff Bascand put the bank’s case: “Insisting that bank shareholders have a meaningful stake in their bank provides a greater incentive to ensure it is well managed. Having shareholders able to absorb a greater share of losses if the company fails also provides stronger protection for depositors.

“Bank crises happen more often than many people care to remember, and the economic & social costs of bank failures can be very high & persistent. These proposals are designed to make bank failures less frequent. With these changes we estimate the banking system will be resilient to shocks that might occur only once every 200 years.

“We are proposing to almost double the required amount of high quality capital that banks will have to hold. In practice, actual changes to the amount that they hold will be less than double and will vary. The increase will depend on their current levels of capital, how much extra they choose to hold above the required minimum, and whether they are a large or small bank.

“Generally, it will be an increase of between 20-60%. This represents about 70% of the banking sector’s expected profits over the transition period. We expect only a minor impact on borrowing rates for customers.

“While borrowing costs may increase a little, and bank shareholders may earn a lower return on their investment, we believe these impacts will be more than offset by having a safer banking system for all New Zealanders.”

Mr Bascand said the Reserve Bank was consulting on a 5-year transition period for banks to meet the new requirements.

 Links: Reviewing bank capital rules
Non-technical summary 
Consultation paper: How much capital is enough?
Speech: Higher capital better for banking system & New Zealand
Video: What is capital adequacy?
Video: Governor Adrian Orr describes importance of bank capital
Earlier consultations: Review of capital adequacy framework for registered banks

Attribution: Bank release.

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