A majority of Finance and Expenditure Committee members want the Reserve Bank to scrap all further increases in bank capital requirements and establish an independent committee to make prudential policy more market friendly

Parliament’s Finance and Expenditure Committee has urged the Reserve Bank to stop further bank capital increases, saying they are raising borrowing costs and suppressing competition.

In its final report on a 14-month inquiry into banking competition, the committee said New Zealand’s banking sector lacks strong rivalry, and that RBNZ’s capital rules have hurt rural borrowers and smaller lenders.

“Submitters told us that changes from the Reserve Bank’s 2019 review of capital requirements have been overly conservative and suggested reviewing this requirement,” the report said.

“We heard that the level of capital held against certain loan products (known as risk-weighted assets) may be hindering lending to business and agriculture, leading to a rise in lending into less productive areas, such as residential lending.”

To address the concerns, the committee recommended halting further capital increases, creating a Prudential Policy Committee, and giving more weight to regulatory efficiency, among other measures.

An RBNZ capital review in 2019 resulted in retail banks being required to lift their total capital from about 10.5% in 2021 to 18% for large banks and 16% for others by 2028.

The next increase is due in July 2026. Pausing now would freeze minimum buffers at roughly 14.5% for major banks and 12.5% for others, although large banks are already carrying capital above those levels.

Many submitters argued the stricter capital rules were entrenching the big banks’ market share while restricting business lending and lifting borrowing costs. 

A majority of the committee agreed and urged the Reserve Bank to “cease the planned incremental increases to capital requirements” immediately.

Efficiency first

This recommendation was included in a chapter on rural and business banking. The chapter on prudential regulation itself had more modest proposals.

It only urged the central bank’s forthcoming review to consider whether risk-weighted asset calculations are hindering business and rural lending, and to revisit the overall risk tolerance set in the 2019 capital review.

RBNZ announced a new review of key capital settings during the inquiry’s hearings earlier this year. It is expected to be launched on Monday and to report back before the end of the year. 

Labour Party members of the Finance and Expenditure Committee criticised the inquiry’s focus on capital rules, arguing they are only a small factor in competition dynamics.

“We are particularly concerned that discussion of capital requirements has become the dominant focus of the inquiry. This narrow emphasis reflects the submissions of the Big 4 banks, whose interests are served by tweaks to the capital rules, rather than a comprehensive assessment of competition or consumer outcomes,” they wrote in the report.

Reviewing prudential settings should focus on easing rules for smaller lenders, as relaxing capital requirements for the largest banks is unlikely to benefit consumers.

Treasury analysis said tougher capital rules have reduced big banks’ return on equity over recent decades, with more profits retained as capital and shareholders accepting lower returns as the risk of default fell.

Prudential Policy Committee 

The Finance and Expenditure Committee also recommended that the Reserve Bank establish a “Prudential Policy Committee,” modelled on the seven-member Monetary Policy Committee that sets interest rates.

This body would be made up of prudential policy experts and tasked with monitoring the efficiency and effectiveness of banking regulations. At present the RBNZ’s governance board oversees prudential policy, but it has been criticised for lacking expertise.

“Our independent specialist adviser told us that the perception that the Reserve Bank has been overly conservative in assessing risk is sufficiently widespread and credible to warrant further examination,” the report said.

“Given the concerns raised by the Commerce Commission and submitters, we agree that the Reserve Bank’s prudential role could benefit from enhanced scrutiny.”

A group of internal and external prudential policy experts would “independently monitor the Reserve Bank’s prudential regulation process and its progress in achieving market efficiency.”

The report also recommends the Government reinstate “market efficiency” as a key objective of the Reserve Bank under the Reserve Bank of New Zealand Act 2021. Currently, efficiency is only a guiding principle of prudential regulation, while stability and depositor protection are the Bank’s formal objectives.

Farms are businesses  

Elsewhere, the report acknowledged rural lending carries more risk than residential lending—despite both being secured against land—and would naturally attract higher interest rates.

This concern was a key reason for the inquiry, after Federated Farmers lobbied the Primary Production Committee to examine perceptions of unfair pricing.

The FEC’s report, written with input from the PPC, said rural business lending is riskier than other lending because it depends on volatile international commodity prices.

“We understand that loan losses on rural lending are higher than for residential mortgages and are therefore subject to higher risk-weighted capital requirements,” it said.

Labour members again argued that easing capital rules would mostly benefit the largest banks rather than help farmers.

“Our view is that rural lending challenges arise less from prudential settings than from the high barriers some farmers face when they go to switch banks, alongside the complexity of managing risk, and increasingly normalised need for brokers and expensive specialist financing advice,” they wrote.

Treasury analysis also showed non-performing loans in agriculture were higher than in other sectors, and that Rabobank had managed to expand its market share.

Act Party committee member Todd Stephenson welcomed a recommendation that banks be required to “provide greater clarity” about how interest rates are affected by climate-related disclosures or other sustainability factors.

The committee said its report ultimately reached similar conclusions to the Commerce Commission’s market study, completed in August last year.

“Our recommendations are also unlikely to be a silver bullet for competition, and it now falls to the various government agencies to determine how to implement and respond to our recommendations,” it said.

Finance Minister Nicola Willis welcomed the release of the report, saying the Government would review its recommendations and provide a response by November 2025.

“Additionally, we look forward to the outcome of the Reserve Bank’s review of key capital settings for deposit takers. We want to see settings that preserve financial stability while encouraging investment, job creation and income growth,” she said.