Today the Reserve Bank of New Zealand, Te Pūtea Matua appeared before the Finance and Expenditure Committee (FEC) for their banking inquiry and discussed the wide range of initiatives underway to support and improve competition in the banking sector.
Chair Neil Quigley, Acting Governor Christian Hawkesby, Director Prudential Policy Jess Rowe, and Financial Stability Adviser Charles Lilly appeared before the committee.
The RBNZ's statutory purpose is to promote prosperity and wellbeing for all New Zealanders. This is achieved through its three core objectives: price stability, financial stability and central banking, which includes managing monetary policy, overseeing payment systems and ensuring access to cash. Competition is important across all these objectives.
"We have never had more focus on competition across our functions, including addressing the recommendations of the Commerce Commission's market study" Mr Hawkesby said.
Key initiatives likely to support competition include developing proportionate prudential standards, launching the depositor compensation scheme, expanding access to the payments system, investigating a digital currency and working with CoFR partners on system-wide issues such as a payments vision for New Zealand.
"Advancing competition and innovation in the financial sector is a team effort across government agencies, regulators and the industry itself," Mr Hawkesby said.
The RBNZ's submission to the FEC outlines that the greatest gains to be made are through advancing open banking, customer data rights, digital identity, and the retail payments infrastructure to deliver an eco-system where competition can flourish.
"Through our consultation on the new Deposit Takers Act and submissions to the FEC, 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 some of those claims are incorrect, but most of the claims can be tested empirically.
"The Reserve Bank Board has agreed to an evidence-based review of key aspects of our deposit takers capital settings, utilising international experts and assessing it against the regimes in other countries." Professor Quigley said.
The full opening statements from Mr Hawkesby and Professor Quigley can be read below.
What is capital?
Capital is the buffer that allows a bank to absorb losses while still being able to pay its depositors and other creditors in full
What will the review cover?
The Reserve Bank intends to conduct a reassessment of key capital settings. We intend to engage independent international experts to support this process.
The review will build on work currently underway to review more granular risk weights for residential mortgages and corporate (including rural) lending, community housing and whenua Māori lending, as well as development of a new crisis management framework. The review will expand the work programme to include consideration of additional evidence and the calibration of other foundational aspects of the regime including:
- Reviewing submissions or statements made at the FEC banking enquiry regarding our prudential capital framework
- An assessment of how our capital settings compare internationally
- A reassessment of the appropriate risk appetite for capital settings in New Zealand
- Reviewing the degree of proportionality in the framework and considering changes
- Considering the balance between going concern and gone concern capital and the role of 'Additional Tier 1' capital.
What does this mean for the planned increase in capital requirements on 1 July?
- Following a review over 2017-2019, the Reserve Bank announced higher capital requirements, a long transition period to 2028. For Domestic Systemically Important Banks (D-SIBs), total requirements are scheduled to go from 10.5% to 18%. Current requirements are 13.5%.
- Requirements for smaller banks are scheduled to go from 10.5% to 16%, and current requirements are 11.5%.
- There is a scheduled increase in capital requirements on 1 July 2025 of a 1% of risk weighted assets increase in the Prudential Capital Buffer (PCB) for all banks.
- Banks are well advanced in their plans to meet the new requirements. On average, banks' total capital levels are currently above 16%.
- Accordingly, we intend to proceed with the 1 July increase, taking total requirements for D-SIBs to 14.5% and other banks to 12.5%.
- The review will be conducted promptly to allow for any changes to be well signalled ahead of next year's scheduled increase and to minimise the impact on the implementation of the Deposit Takers Act.
More information
Opening remarks to Finance and Expenditure Committee
