New capital adequacy standards set for New Zealand banks

Locally incorporated registered banks in New Zealand will have to maintain new capital adequacy standards from Jan. 1 next year, the Reserve Bank of New Zealand ( RBNZ) announced Tuesday. The new standards set higher minimum requirements around how much regulatory capital must be held by registered banks, along with which financial instruments can be treated as regulatory capital. The new capital ratios, measured in relation to each bank's risk-weighted assets, were a Common Equity Tier 1 capital ratio of 4.5 percent; a Tier 1 capital ratio of 6 percent; and a total capital of 8 percent. A bank that did not maintain a common equity buffer of 2.5 percent above these minimum ratios would face restrictions on the distributions it could make, said a statement from the RBNZ. Another key feature of the reforms was the introduction on Jan. 1, 2014, of a new counter-cyclical capital buffer that could be applied in times of excessive credit growth. The standards were part of the implementation of the international Basel III standards. "The final capital adequacy requirements released today considerably enhance the ability of the New Zealand banking system to absorb shocks, whatever their source," RBNZ deputy governor Grant Spencer said in the statement. "New Zealand banks are already well capitalized and this has made it easier for New Zealand to implement the Basel III package ahead of the schedule set by the BCBS (Basel Committee on Banking Supervision)," he said. The Basel III capital framework was introduced by the BCBS in December 2010 to raise the quality and level of capital in the global banking system. The Basel III standards define Tier 1 capital as permanently and freely available to absorb losses without the bank being obliged to cease trading, while Tier 2 capital generally only absorbs losses in a winding up. Within Tier 1 capital, Common Equity Tier 1 has greater loss absorbing capability than the other Tier 1 instruments. The RBNZ was still to finalize two parts of the Basel III regime regarding counterparty credit risk and disclosure requirements. New disclosure requirements would take effect from March 31 next year and the counter-party credit risk requirements would take effect in early 2013.