New Zealand central bank to review capital settings to boost banking competition

By Lucy Craymer and Renju Jose

WELLINGTON (Reuters) -New Zealand's central bank said on Monday it would review bank capital requirements this year following criticism of the regime for being too stringent and reducing competition in the sector.

"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," Reserve Bank of New Zealand acting Governor Christian Hawkesby told a parliamentary committee.

"We think that some of those claims are incorrect, but most of the claims can be tested empirically."

Hawkesby said the New Zealand banking system is not capital constrained as it had the ability to raise capital if it saw opportunities.

In 2019, the central bank announced it would increase capital requirements. These have been brought in slowly and will not be fully implemented before 2028.

The requirements have been criticized by some politicians and submitters to a parliamentary inquiry into the banking sector. They argue the requirements have reduced capital in the economy and borrowers have to bear extra costs.

The big banks are currently required to maintain a minimum capital of 13.5% and the smaller ones 11.5%.

Finance Minister Nicola Willis welcomed the RBNZ's decision, and said the review would help objectively assess New Zealand's settings and consider whether the RBNZ's intention to keep increasing capital requirements still made sense.

"Submitters have argued that other countries have less onerous bank capital requirements and that New Zealand is becoming an outlier internationally," Willis said.

Globally there has been a softening on capital requirements. The Federal Reserve last year watered down plans to raise big banks' capital requirements.

"I want to see settings that preserve financial stability while encouraging investment, job creation and income growth," Willis said in a statement.

New Zealand's economy emerged from recession in the fourth quarter of 2024 but remains weak and unemployment is expected to increase in the first half of this year.

RBNZ Chair Neil Quigley said the bank needed to go through a process that demonstrated both intellectual and practical integrity to change its position on any regulatory matter.

"The bank cannot act arbitrarily," Quigley said.

He said the RBNZ, which is currently searching for a replacement for the governor after the surprise exit of Adrian Orr this month, will "relatively soon" start its search process.

But it could take up to nine months to name the new governor, Quigley added.

(Reporting by Lucy Craymer in Wellington and Renju Jose in Sydney; Editing by Bill Berkrot, Aurora Ellis and Chris Reese)