Commercial banks in New Zealand might face new capital requirements after a review outlined by the Reserve Bank of New Zealand (RBNZ) on Tuesday.
The review, due to be completed early next year, would take into account the unique risks of New Zealand’s economy and financial system, including exposure to export markets, dependence on international capital markets, its high degree of banking industry concentration, and the low diversification in banks’ lending portfolios, RBNZ deputy governor Grant Spencer said.
The RBNZ’s current capital ratio for banks is calculated by dividing its capital by its risk-weighted exposures.
The review would explore the definition of capital, how banks measure the risks they face (risk weights) and the minimum capital ratios and buffers, Spencer said in a published speech to the New Zealand Bankers Association in Auckland.
It would be guided by broad principles centered on simplicity and conservatism, with the requirement for capital to readily absorb losses ahead of creditors and depositors.
In the wake of the Global Financial Crisis (GFC), banks and regulators around the world have been reviewing capital buffers for banks to maintain guarding against the risk of losses, said Spencer.
It was a very complex area full of trade-offs, and the RBNZ planned to comprehensively assess whether New Zealand’s capital framework remained fit for purpose.
“New Zealand’s exports are concentrated in a small number of commodity-based sectors which can be subject to considerable price volatility. Bank exposures to commodity export industries are a key risk in the domestic system,” said Spencer.
“Residential mortgage exposures are also a major source of risk given the system’s heavy exposure to housing and the capacity for house prices to become very stretched – as at present.”
New Zealand was a net debtor country, having run current account deficits continuously over the past 40 years.
“About half of the country’s gross external debt is issued by the New Zealand banking system which then on-lends to businesses and households. This reliance on external funding is an important vulnerability of the New Zealand system, as starkly demonstrated during the GFC,” he said.
The RBNZ would outline the broad areas of the capital framework that would be examined in the capital review in an issues paper released in April.
New Zealand has 24 registered banks as of August 2016, most of them subsidiaries or branches of foreign-owned banks. Enditem