An easing of lenders’ capital requirements has been proposed by New Zealand’s central bank. This action was taken after some criticism was voiced that the existing regulations had reduced the availability of funds in the economy and had led to additional costs for borrowers. In a recent consultation document, two alternative scenarios for deposit-taking institutions were put forward, both of which would lead to a lower minimum overall capital level. The current capital requirements, which are set to rise, were originally announced in 2019, with full implementation not anticipated until 2028. However, a review of these requirements was announced earlier in the year.
The current regulations have been faulted by various groups, including politicians, farmers, and the lenders themselves, as having contributed to higher interest rates. It has been stated that it is essential to strike a proper balance between protecting depositors and the broader economy while also supporting competition and economic efficiency. The banking system in New Zealand is dominated by four large Australian-owned banks, and any changes in regulation would primarily affect them.
Under one of the options being considered, the capital buffer for the top four Australian-owned banks would be reduced to 8% above the minimum capital requirements, with a 5% buffer for mid-sized banks. In contrast, the 2019 regulations had required the largest banks to hold a 9% buffer and the mid-sized banks to hold 7%. A second option would see the capital buffers for the biggest banks at 6%, but it would also introduce new requirements for debt instruments that are capable of absorbing losses and can be converted into capital if an entity finds itself in distress.
The announcement of the proposed changes was welcomed as a step in the right direction by the head of the Banking Association, who noted that a response to the proposals was being developed in collaboration with its 17 members. A final decision on the lower capital requirements is hoped to be reached by the end of the year. It was also noted in the consultation document that any shift in regulation is not expected to cause a significant economic change.
The review of lenders’ capital requirements has been welcomed by the Finance Minister of New Zealand, who has commented that it is seen as a way of lowering lending rates for New Zealanders. In a related proposal, the minimum capital that deposit takers need to hold to become licensed would be reduced from NZ5 million, which is seen as a way of reducing barriers to entry. This multi-pronged approach to regulatory change is being undertaken with the goal of fostering a more competitive and efficient banking environment, without compromising the safety and stability of the financial system.
This series of events, from the initial implementation of the 2019 regulations to the subsequent criticisms and the current review, demonstrates how economic policy is often a dynamic process. The initial requirements were put in place with a view to increasing the resilience of the banking sector. However, as the downstream effects of these regulations became apparent, particularly with regards to the cost and availability of credit, a reassessment was deemed necessary. The proposals now being considered represent an effort to recalibrate the balance between prudential regulation and economic activity. The focus has shifted from simply increasing capital to finding a more nuanced approach that encourages lending and competition while still maintaining a robust and stable financial system. This move is seen as a response to both domestic concerns and the ongoing need to adapt regulatory frameworks to changing economic conditions.
