Reserve Bank to call in international experts to review its bank capital settings

Monday, 31 March 2025

Reserve Bank Te Pūtea Matua chair Neil Quigley says international experts will be called in to review bank capital requirements.

Speaking at a hearing of Parliament’s banking inquiry, Quigley responded to mounting criticism from bank bosses that the bank capital requirements it sets are too conservative.

“We have heard the claims that our bank capital regime is unreasonably conservative, and that it is undermining competition and growth in the New Zealand economy,” he told MPs.

“We think that at least some of the claims are incorrect,” he said.

However, he said the Reserve Bank board had agreed to undertake an evidence-based review of capital settings, which critics say are pushing up loan interest rates.

It would utilise international experts, and test it against the capital regimes of other countries, he said.

“The international view is really important because we must maintain the confidence of our financial system in international markets,” he said.

The chief executives of ANZ, BNZ, Westpac, Kiwibank and ASB had lobbied for a review of Reserve Bank capital requirements at earlier hearings.

Quigley said more details of the review, including its timing, would be made public at a later date.

However, Quigley said: “We want to do it before the end of this year.”

There would be consultation with banks before any changes were made, he said.

Quigley said the Reserve Bank’s view was that banks were profitable, and were not capital constrained.

“Lending could be increased, if there was demand for it,” he said.

Quigley said some presenters to the banking inquiry had claimed the capital requirements were pushing up loan prices by more than the amount the Reserve Bank had expected.

“That’s a reason for having the review,” Quigley said.

At the hearing Christian Hawkesby appeared as acting governor, having taken over from former Reserve Bank Governor Adrian Orr who resigned on March 5.

Today’s announcement was welcomed by Finance Minister Nicola Willis.

“I share these concerns and welcome the Reserve Bank Board’s decision to conduct an evidence-based review of its capital regime, using international experts, and comparing New Zealand’s requirements with those in comparable countries,” she said.

“It’s important that the Reserve Bank’s prudential regime preserves the stability of our financial system, while taking care not to not impose excessive costs in the process.”

Labour’s finance spokesperson, Barbara Edmonds, wanted to know whether the review was related to Orr’s resignation.

“It’s unrelated to Adrian Orr’s resignation,” Quigley said.

He said the review was prompted by “softening” of bank capital requirements in some overseas markets, as well as the criticism in New Zealand.

Labour’s Deborah Russell said it was “odd” the review was announced soon after Orr’s resignation.

Quigley said it might seem odd, but he suspected that a review would have been decided on regardless of who was the governor.

“It’s one of those issues that has developed a head of steam, and we have to respond,” he said.

National MP Suze Redmayne pressed Quigley and Hawkesby on whether banks had used the Reserve Bank increases to capital requirements, which started to be introduced in 2019, as cover to increase their farm loan interest rates by more than was justified.

She asked whether banks had been pocketing an extra $555 million to $714m every year as a result.

Bank lending to rural businesses had declined from $63 billion to around $61b in the past several years, Redmayne said.

Charles Lilly, the Reserve Bank’s adviser for financial stability assessment and strategy, said the Reserve Bank had not expected its changes to contribute to some banks’ decisions to reduce their rural lending growth.

The shrinking desire of banks to lend to farmers has frustrated MPs representing rural areas, including Redmayne.

“We can’t get rich as a country by selling houses to each other,” she said.

Hawkesby said: “Debt is not the only source of funding for our economy.”

Hawkesby told MPs the Reserve Bank was planning on holding a second review.

It would work with the Financial Markets Authority Te Mana Tātai Hokohoko on identifying impediments to the development of New Zealand’s capital markets, he said.

A key characteristic of New Zealand’s economy was on over-reliance on bank funding, Hawkesby said.

The Reserve Bank also announced it would be allowing non-banks to access its Exchange Settlement Account System, which should bring down their running costs enabling them to better compete with banks.