Willis Backs RBNZ Review of Bank Capital Rules, Cites Gains for Competition

Finance Minister Nicola Willis has welcomed the Reserve Bank of New Zealand’s (RBNZ) decision to open consultation on a comprehensive review of capital settings for banks and other deposit takers, describing it as an important step toward improving competition and lowering borrowing costs for New Zealanders.

Background to the Review

The Reserve Bank’s current capital framework was significantly strengthened in 2019, requiring banks to hold higher levels of capital as a safeguard against financial shocks. While these measures were aimed at bolstering financial stability, concerns soon emerged from industry stakeholders, smaller lenders, and policy experts that the rules were too restrictive. Critics argued that the higher capital thresholds:

• Raised the cost of lending for households and businesses.

• Created barriers for new entrants into the banking sector.

• Imposed undue restrictions on lending to sensitive sectors such as agriculture, community housing, and small businesses.

• Favored large, well-capitalised banks at the expense of smaller competitors.

Willis said that the Government has long been concerned that such imbalances could be stifling innovation, raising lending costs, and ultimately undermining broader economic growth.

Government’s Policy Direction

In 2023, Willis issued a new Financial Policy Remit to the Reserve Bank, making clear that while financial stability remained the top priority, prudential regulation must not unnecessarily impede competition.

In her letter of expectations, Willis specifically asked the central bank to look into areas that could open up the market, including:

• Reviewing standardised risk weights applied to lending.

• Reassessing minimum capital thresholds for new entrants.

• Ensuring wider access to the Exchange Settlement Account System (ESAS), which is critical for clearing and settlement of payments.

Key Proposals Under Consultation

The Reserve Bank’s consultation, informed by an independent review, will consider a range of adjustments to the capital settings. Among the most notable proposals are:

• Risk-based capital adjustments: Better aligning granular capital requirements with the actual risk profile of loans. This could translate into improved lending terms for residential mortgages, small and medium-sized enterprises (SMEs), farmers, and providers of community and cooperative housing.

• Leveling the playing field: Smaller banks and deposit takers would benefit more from reduced requirements than larger institutions, allowing them to compete more effectively with the “big four” Australian-owned banks that dominate New Zealand’s financial system.

• Overall capital ratios: Options for recalibrating capital ratios in ways that could ease lending rates for households and businesses across the economy.

• Lower barriers for entry: A significant cut to the minimum capital requirement for deposit takers—from $30 million to $5 million—to encourage new entrants into the market.

Willis Welcomes the Shift

The Finance Minister commended the Reserve Bank for being responsive to concerns and for inviting transparent public feedback.

“I welcome the Bank’s decision to consult on these proposed changes. In particular, the move to align capital requirements with actual risk could open the door to better lending conditions in critical areas such as housing, agriculture, and small business,” Willis said.

She also highlighted that the decision to reduce minimum capital requirements for deposit takers would make it easier for new institutions to enter the market, intensifying competition and giving New Zealanders more choice beyond the major Australian banks.

Broader Implications

If adopted, the changes could reshape New Zealand’s financial landscape by:

• Lowering borrowing costs for households and businesses.

• Supporting investment in priority sectors like agriculture and affordable housing.

• Enhancing financial inclusion by enabling smaller, community-focused deposit takers to thrive.

• Increasing competitive pressure on larger banks to deliver better products and services.

The Reserve Bank has called for submissions from stakeholders, with feedback expected to help shape the final framework in the coming months.