The Reserve Bank of New Zealand (RBNZ) will reassess its capital requirements for banks and deposit takers before the year is out, Chairman Neil Quigley confirmed on Monday. His remarks came during an appearance before the Parliamentary Banking Inquiry, where he outlined the rationale behind the review and addressed concerns about the country’s financial regulatory framework.
Evidence-Based Review to Compare International Standards
Quigley emphasized that the review will be rooted in empirical analysis and benchmarked against other countries. He acknowledged claims that New Zealand’s bank capital regime is overly conservative and potentially restrictive to economic growth. However, he pushed back against these assertions, stating that such claims need to be tested against data rather than opinion.
“Capital is the buffer that allows a bank to absorb losses while still being able to pay its depositors and other creditors in full,” Quigley explained. “We have heard the claims that our bank capital regime is unreasonably conservative, and that it is undermining competition and growth in the New Zealand economy. We think that at least some of those claims are incorrect, but ultimately all of the claims can be tested empirically.”
The framework for the review, as agreed upon by the RBNZ Board, will involve international experts assessing the country’s capital rules and comparing them with those in other jurisdictions.
Banks Are Profitable, Not Capital-Constrained
According to Quigley, the current banking system is profitable and has sufficient capital to support lending. He dismissed concerns that regulatory capital requirements are limiting access to credit, instead attributing lending decisions to commercial bank policies rather than system-wide capital constraints.
“At present, our banking system is profitable and not capital constrained, so lending could be increased if there was demand. Of course, there may be some individual borrowers who would like a larger loan and/or at a lower rate, but that is an individual commercial bank assessment rather than being driven by system-wide capital constraints.”
His comments counter the argument made by some financial institutions that higher capital requirements stifle competition and reduce access to credit for consumers and businesses.
International Confidence and Financial Stability at Stake
Maintaining international confidence in New Zealand’s financial system is a key factor in the review, Quigley noted. He referenced the recent visit from the International Monetary Fund (IMF), which underscored the importance of a strong prudential regulatory framework to safeguard financial stability.
“This international view is important as a robust capital regime is critical to maintaining international confidence in our financial system. This was highlighted just two weeks ago with the visit of the International Monetary Fund who said the primary objective of prudential regulation should be to safeguard financial stability, calibrated to New Zealand’s unique risks.”
His remarks indicate that while RBNZ is open to reassessing its policies, any changes will be made with caution and with a clear focus on maintaining the integrity of the financial system.
Political and Industry Reactions
Finance Minister Nicola Willis welcomed the review, saying that any move to reassess capital requirements in a structured manner is a positive step. She reiterated the importance of balancing financial stability with economic growth.
Banks and business groups have long argued that high capital requirements limit competition, particularly for smaller lenders. Some have suggested that loosening capital rules could provide a much-needed boost to economic activity, particularly at a time when lending conditions have tightened.
On the other hand, financial stability advocates caution against lowering capital requirements too aggressively, warning that it could make the banking sector more vulnerable to shocks. The global financial crisis of 2008 remains a stark reminder of the consequences of undercapitalized banks facing sudden economic downturns.
What Comes Next?
The RBNZ review is expected to be completed by the end of the year. While it remains unclear whether significant changes will be made, Quigley’s comments suggest that the process will be thorough and grounded in international best practices.
New Zealand’s banks and financial institutions will be watching closely as the review unfolds, with potential implications for lending practices, competition, and the broader economy.
