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Moody's: New Zealand's higher capital requirements for banks are credit positive

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Moody's: New Zealand's higher capital requirements for banks are credit positive

The Reserve Bank of New Zealand's decision to raise capital requirements for banks is broadly credit positive as it will make the banking system more resilient to shocks, Moody's said.

The rating agency said Dec. 9 that the higher capital requirements will also weigh on the banks' return on equity.

Under the New Zealand central bank's modified measures, the country's four largest banks by total assets Bank of New Zealand, ASB Bank Ltd., Westpac New Zealand Ltd. and ANZ Bank New Zealand Ltd. — will need to have total capital equal to 18% of risk-weighted assets, while the remaining smaller banks will need to have total capital equal to 16% of risk-weighted assets.

The four large banks will be required to have Tier 1 capital equal to 16% of risk-weighted assets, while the remaining banks will need to have Tier 1 capital equal to 14% of risk-weighted assets.

Moody's said it expects the the new measures to prompt higher lending rates in efforts to boost profitability and constrain growth in more capital-intensive lending.

The rating agency added that the decision by New Zealand's central bank to extend the transition period to meet the rule to seven years from five years will ensure banks are well placed to meet the new targets, especially given the Australian Prudential Regulation Authority's recent changes to its standards to further restrict how much equity support Australia’s largest banks can provide to their New Zealand subsidiaries.