The Reserve Bank of New Zealand today announced final decisions on its capital review. A copy of the final decisions is available here.
As expected, the total amount of capital required to be held by banks is increasing — to 18% of risk-weighted assets for systemically important banks and 16% for other banks. 2% of total capital can be in the form of tier 2 capital. The transition period has been extended from 5 to 7 years, starting on 1 July 2020.
The proposed removal of contingent capital instruments (i.e. instruments that achieve loss absorption via conversion or write-off) has been confirmed. The concept of additional tier 1 capital has been retained, but only in the form of redeemable non-cumulative perpetual preference shares. AT1 capital can comprise no more than 2.5% of Tier 1 capital. Tier 2 capital means long-term subordinated debt. The final decisions on AT1 and T2 capital will provide banks with some ability to raise capital externally via the issuance of marketable securities.
The proposal to more closely align risk-weighted asset outcomes for IRB and standardised banks has been confirmed (including via an 85% output floor and increasing the scalar from 1.06 to 1.2).
A leverage ratio will not be introduced.
The Reserve Bank will consult on amendments to the Banking Supervision Handbook to implement these decisions from 1 April 2020.
If you have any questions on the new capital requirements and how it might affect your organisation, please reach out to one of our experts listed below.