By Gareth Vaughan

The Reserve Bank has pushed out its timetable for the full New Zealand implementation of new global capital adequacy requirements for banks by two years. The move comes after the banks apparently raised concerns about not being able to meet the new so-called Basel III standards from the central bank's proposed January 1, 2013 start date.

In its second consultation paper on its plans for the implementation of Basel III the Reserve Bank notes some submissions to its first consultation paper, released last November, raised concerns about the timeframe and asked for a more phased approach. Global oversight body the Basel Committee on Banking Supervision has proposed the new standards be phased in from 2013 to 2019. However, in New Zealand the Reserve Bank had proposed a January 1, 2013 launch unless there were "compelling reasons" for a phased approach.

 "While we now consider some transitional arrangements may be appropriate, we remain of the view that Basel III should be implemented in New Zealand ahead of the Basel Committee's timetable," The Reserve Bank says.

It hasn't yet made any of the submissions on the first consultation paper, or a summary of them, public.

TSB Bank managing director Kevin Murphy, who oversees one of the country's most strongly capitalised banks, told interest.co.nz after the release of the Reserve Bank's first Basel III consultation paper that its timeframes for the adoption of Basel III were "aggressive."

Basel III is a set of reform measures, developed by the Basel Committee on Banking Supervision and endorsed by Group of 20 leaders, designed to strengthen the regulation, supervision and risk management of the banking sector in the wake of the global financial crisis. It aims to improve the banking sector's ability to absorb shocks arising from financial and economic stress, improve risk management and governance, and strengthen banks' transparency and disclosures.

The Reserve Bank now says a so-called capital conservation buffer won't be introduced until January 1, 2014, with a countercyclical capital buffer framework also in place from that date.

Reserve Bank proposes grand parenting of non-compliant securities

Despite the Basel III framework not including grand-parenting provisions for capital instruments issued by banks after September 2010, the Reserve Bank says capital instruments issued before the release of its final Basel III standards may qualify for grand parenting if they don't comply with the final standards. It has no date set yet for the release of the final Basel III standards.

Any grand-parenting of securities issued by the banks before September 12, 2010 that no longer qualify as equity will take place over three years, but no later than a particular issue's first call date. Non-qualifying securities will be capped at 67% on January 1, 2013 the Reserve Bank says, 33% a year later and from January 1, 2015 there'll be no recognition of non-qualifying securities.

Other Basel III capital requirements already consulted on such as new minimum ratios and regulatory deductions, will take effect from January 1, 2013, the Reserve Bank says.

Currently banks must have a tier one capital ratio of at least 4%, or 6% for ANZ New Zealand, BNZ, Kiwibank and Westpac NZ due to the about NZ$8 billion of debt, combined, those banks still have on issue under the Crown Wholesale Funding Guarantee Scheme. Tier One capital represents the shareholders' funds in the bank. The banks must also have a minimum 8% total capital ratio.

The Reserve Bank's Basel III proposals would see the standard tier one capital ratio rise to 6%. They also propose a 2.5% "conservation buffer"  to ensure banks maintain a buffer of capital over the minimum ratio requirements that can be used to absorb losses in times of financial and economic stress. This will take the tier one capital ratio to 8.5% and total capital ratio to 10.5%. See more on the capital ratios and capital definitions here.

The central bank says a bank will be able to operate inside the conservation buffer without breaching its bank registration conditions. However, when operating within the buffer a bank must fully restrict earnings distributions such as dividends, share buybacks and discretionary payments on other tier one capital instruments such as perpetual non-cumulative fully-paid up preference shares, to the extent necessary to restore the buffer to 2.5% of common equity. This is stricter than the standard Basel III proposal of only partial restrictions on distributions.

Banks to get up to 12 months warning of incoming 'credit bubble' buffer; Finance companies may be included

Meanwhile, the Reserve Bank has confirmed it will introduce a countercyclical buffer of between 0% and 2.5% proposed under Basel III. The central bank would be able to implement this "infrequently" if it felt "excess private sector credit growth was leading to a build-up of system-wide risk." The buffer could then be released when the credit cycle softens. This buffer would comprise tier one common equity.

The Reserve Bank says it won't set a formal limit on the size of the buffer meaning it would be determined by circumstances. That said, banks will be given up to a year's notice before the countercyclical buffer requirements would be introduced, letting them adjust to the buffer level. At its potential 2.5% high point, the countercyclical buffer would take the tier one capital ratio minimum requirement to 11% versus the current 4% and total capital ratio to 13% versus the current 8% requirement.

The Reserve Bank says the countercyclical buffer could potentially be extended from banks to to other lenders such as non-bank deposit takers - finance companies, building societies and credit unions.

Each financial institution will have to submit a plan to the Reserve Bank on how it'll raise the necessary capital to comply with the countercyclical capital buffer, if given the up to 12 months notice of its introduction. The same restrictions on distributions such as dividends as under the conservation buffer will apply.

No write-offs

Under the central bank's proposals all non-common equity securities would have to be converted to equity, rather than written off, either following a Reserve Bank direction, or if a bank is placed in statutory management.

"We do not favour a write-off approach, as write-off with no compensation could rank debt holders below equity holders," the Reserve Bank says. "Moreover we do not propose to introduce any requirements about the rate of conversion."

Submissions on the second Basel III consultation paper are due by April 13. The Reserve Bank is also reviewing its liquidity policy - which includes the core funding ratio - given Basel III liquidity requirements, and plans to draft changes to its Banking Supervision Handbook to incorporate Basel III requirements.

This article was first published in our email for paid subscribers this morning. See here for more details and to subscribe.