Review of the Reserve Bank of New Zealand’s Capital Adequacy Proposals

James Mellsop, Lewis Evans, and Kevin Counsell

In January 2019 the Reserve Bank of New Zealand (RBNZ) released a paper seeking feedback on proposals to increase the minimum level of capital required to be held by New Zealand banks. NERA Managing Director James Mellsop and Senior Consultant Kevin Counsell, along with Affiliated Academic Professor (Emeritus) Lewis Evans, prepared a report assessing the RBNZ’s proposals. 

While stronger capital requirements can reduce the chance of bank failure, the report finds that the RBNZ had not presented any evidence to show there is a problem with the current level of capital held by banks. Moreover, the costs to the economy of the RBNZ’s proposals are clear, and include higher interest rates on lending, reduced lending, harm to competition, and a reallocation of deposits to, and lending by, the less regulated finance sector.

The report, which benefited from funding from Westpac New Zealand, concludes that various flaws in the RBNZ’s proposals would lead to a more stringent set of capital requirements than has been demonstrated to be necessary, imposing clear costs on the economy in return for an unclear and unsubstantiated benefit.