Reserve Bank signals softer stance on capital rules

Monday, 25 August 2025

The Reserve Bank is seeking views on whether it should relax some of the bank capital requirements that it has been phasing-in since 2019 under a policy championed by former governor Adrian Orr.

The rules were designed to make it less likely any banks might fall over, for example in the wake of a natural disaster or international financial crisis, and to reflect concerns the Australian-owned banks might prioritise their domestic survival over New Zealand interests in a crisis.

However, Finance Minister Nicola Willis in December instructed the central bank to carry out a review, amid concerns the existing rules might be too conservative and have the effect of unnecessarily elevating interest rates.

Willis said in March that there could be a case for both rebalancing the risk weightings the Reserve Bank attaches to business lending and mortgage lending, to encourage the former, as well as a generalised relaxation of the rules, rather than just one or the other.

The Reserve Bank now appears to be ready to take that approach.

One of the options it will consider is freezing the current bank capital requirements as they are now, before the remaining proposed tightening that has yet to be phased in takes effect.

Another would see more complex changes with the same broad effect of making the rules cheaper for the banks to comply with.

Both options are “likely to reduce overall funding costs for banks compared to the decisions made in 2019”, the Reserve Bank said.

They could also open the door to encouraging more competition in the banking market by tilting the rules to favour smaller banks.

It is proposing to change “risk weights” for different types of lending in a move that it said would reduce the amount of capital that deposit takers are required to hold by about 5%, and could encourage more lending for businesses.

Willis was quick to welcome the Reserve Bank consultations.

“Since 2019 concerns have been raised that the Reserve Bank’s capital settings may be undermining competition and efficiency in our banking industry, increasing the cost of lending to New Zealanders,” she said.

Documents previously released to The Post under the Official Information Act show Orr pushed back against relaxing the bank capital rules in a meeting with Willis and Treasury officials on February 24, days before his abrupt departure from the bank.

Orr noted there was a significant amount of analysis underpinning the bank’s current settings and that the bank considered them to be “in the middle of the pack internationally”, Treasury minutes of the meeting stated.

“The governor was confident in the cost-benefit analysis that showed that there were positive net economic benefits from the policy settings,” it continued.

However, a report commissioned by the Reserve Bank from consulting firm Oliver Wyman that it released today, indicated that — while nuanced — New Zealand’s rules were more conservative in some key respects than those overseas.

Governor Christian Hawkesby said the capital settings were one of the most important tools the bank had to protect and promote the stability of the financial system.

“However, it’s essential we strike the right balance – protecting depositors and the wider economy, while supporting competition and economic efficiency,” he said.

Acting assistant governor Angus McGregor made clear the bank had been listening to the Government, among others, in the review, to date.

It sought to take a holistic, evidence-based approach “taking into account the range of stakeholders, including of course views from government stakeholders”, he said.