Changes to NZ bank capital law will affect Australia’s big four

Australia’s four major banks face ‘material and complex’ effects from higher capital requirements in New Zealand.

The nation’s four major banks face “material and complex” effects from higher capital requirements imposed on their New Zealand subsidiaries by the Reserve Bank of NZ, with the industry’s tier one capital levels to increase by a minimum of $NZ13.7 billion ($13.2bn).

Despite this, credit rating agency Standard & Poor’s said the RBNZ proposal was unlikely to change the ratings of the NZ banks’ Australian parents, although the parents were likely to need a strengthening of their consolidated group capital.

In an assessment of the proposal, S&P estimated the higher tier one capital requirement would amount to a 43 per cent increase in the system’s existing capital base and 47 per cent for the four major NZ banks.

“The potential implications for their Australian-based parents are material and complex given cross-border regulatory issues,” S&P said.

The RBNZ proposed an increase in minimum regulatory tier one capital equivalent to 16 per cent of risk-weighted assets for systemically important banks and 15 per cent for all other banks from the minimum regulatory requirement of 15 per cent.

The initiative, published last December, was the central bank’s fourth paper as part of a comprehensive review of bank capital rules that began in 2017.

The increase was in the form of a 5 per cent boost in the capital conservation buffer, a countercyclical capital buffer of 1.5 per cent for all banks, and an additional buffer of 1 per cent for systemically important banks in NZ. While the capital increase was significant for the country’s major banks, S&P said its issuer creditor ratings were unlikely to change if the RBNZ proposal was implemented.