The Reserve Bank of New Zealand is proposing to almost double the required high-quality capital that banks must hold in order to prevent bank failures.
The central bank said Dec. 14 that the proposal will see banks' capital levels increase significantly. However, the regulator noted that actual changes in practice to the amount of capital banks hold will be less than double and will depend on their current levels of capital, how much extra they decide to hold over the required minimum and whether they are small or large banks.
The RBNZ said the increase will be in the range of 20% to 60%, which represents about 70% of the banking sector's expected profits over a five-year transition period. The central bank only expects a minor impact on borrowing rates for customers.
"Insisting that bank shareholders have a meaningful stake in their bank provides a greater incentive to ensure it is well managed. Having shareholders able to absorb a greater share of losses if the company fails also provides stronger protection for depositors," said Geoff Bascand, RBNZ deputy governor and general manager of financial stability.
The central bank is welcoming feedback on the proposed changes until March 29, 2019.