The Reserve Bank of New Zealand has definitely caused some trouble with its latest bank capital consultation document. It suggests a considerable increase in the minimum regulatory capital required by banks incorporated in New Zealand.It has led to a lot of discussions among economists, financiers and many others (lawyers are not an exception). The bank has received 164 submissions. This degree of involvement in what could be found by many as a very dry subject could only be a positive sign for the country.
The consultation paper proposes the following:
- To increase the conservation buffer from 2.5% to 7.5% (this is in fact the margin of safety banks must hold over minimum capital);
- To introduce an extra 1% buffer for the large banks operating in New Zealand;
- To increase the counter-cyclical capital requirement from 0% to 1.5% (this is the capital that the Reserve Bank uses to ease the ups and downs of business cycles. Banks’ capacity to lend is restricted in a ‘boom’ cycle by increasing capital. This condition is then eliminated in a ‘bust’ cycle).
We also consider any 'market overreaction' risk if payments on alternative capital are suspended is exaggerated and compensated by the benefit of additional control of a bank by the holders of this capital. High quality recovery and resolution policy can also efficiently reduce this risk.Moreover, the potential size of additional capital required by banks was not known, when this big decision to disqualify these forms of capital was made. In effect, while banks were concerned about the loss of access to these instruments, as they were all well capitalized and did not expect any additional capital requirements to be significant, it was less of an issue at that time. In a nutshell, the risks mentioned as reasons for disqualifying some capital types do not really sound persuasive. The benefits of providing banks access to a wider range of capital outbalance the risks, therefore the decision is worth revising.