Reserve Bank sticks to its guns on timing of new bank rules

BUSINESSDESK: Australian-owned banks operating here are being required to meet new global capital adequacy rules two years ahead of their trans-Tasman parents.

The Reserve Bank of New Zealand rejected submissions from banks that they should have until January 2016 to get ready for new capital adequacy rules that are being imposed in the wake of the global financial crisis.

The so-called Basel III framework, named for the Bank of International Settlements in Basel, Switzerland, is being imposed early in New Zealand from January 2013.

The Reserve Bank also held firm on its intention to move to a "counter-cyclical buffer" approach to capital adequacy from 2014.

This is despite several banks fearing they could not prepare in time for a new regime requiring them to ramp capital up and down in response to central bank judgements about the emergence of credit booms or busts.

The counter-cyclical buffer is being proposed as a new, slow-acting instrument of monetary policy, which will require a 12-month warning to allow banks to reorder their balance sheets to meet the buffer requirements.

The central bank rejected pleas for earlier warning and for the buffer to be set no higher than 2.5% of risk-weighted assets.

"A longer notice period runs the risk that the countercyclical buffer is built up too late," the bank said in a summary of its response to submissions on the Basel III rules, which were communicated to banks in May.

"In the context of a credit boom it is likely that capital can be raised reasonably easily and even if it could not the bank would simply face restrictions on distributions."

"Dialogue with banks and public signalling of our unease about credit developments" would come ahead of a formal trigger announcement.

On the 2.5% upper limit for the buffer, the RBNZ said "no formal limit on the maximum size of the buffer is appropriate for New Zealand" because of the lack of experience calibrating of the new instrument, and "retaining an open-ended maximum may be useful in conditioning bank incentives against excessive credit growth".

It "acknowledges that further work is needed on the counter-cyclical buffer framework in relation to financial indicators as well as governance and accountability arrangements for the operation of the buffer".

"However, we consider this work can be undertaken in sufficient time to allow the implementation of the counter-cyclical buffer in 2014."

Further announcements are due in coming weeks on the Reserve Bank's approach to the controversial issue of "open bank resolution" – a proposal to require depositors and bond-holders to take a financial "haircut" in the event of a bank failure.