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RBNZ, eyeing 'suitable local fit,' to release consultation paper on Basel III international bank capital requirements

RBNZ, eyeing 'suitable local fit,' to release consultation paper on Basel III international bank capital requirements

By Gareth Vaughan

Hot on the heels of the Australian Prudential Regulation Authority (APRA) releasing a consultation paper on its proposed implementation of the Basel III bank capital reforms in Australia, the Reserve Bank has confirmed it'll follow suit in New Zealand, where the central bank wants to ensure a "suitable fit" for New Zealand conditions and wants to coordinate its policy with APRA's.

A Reserve Bank spokeswoman told interest.co.nz yesterday that the central bank plans to release a consultation paper on its proposed approach to the Basel III capital requirements in the next couple of months. APRA, which oversees the Australian parents of New Zealand's ANZ, ASB, BNZ and Westpac, released its consultation paper yesterday.

Basel III is a set of reform measures, developed by the Basel Committee on Banking Supervision, 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 plans are designed to boost the quality of banks’ capital, increase the level of capital they hold, promote the build up of capital buffers to mitigate procyclicality, improve capital framework risk coverage, introduce a leverage ratio as a supplementary measure to risk-based capital requirements and introduce global minimum liquidity standards. See more detail here and here in this summary table.

Something new & something old for APRA

APRA said it plans to broadly adopt the minimum Basel III requirements for the definition and measurement of capital for authorised deposit-taking institutions (ADIs). This means it will amend current policies in several areas, taking a stricter approach in some but a less conservative approach in others.

However, in some areas there were strong in-principle reasons to continue existing policies, APRA added, such as the treatment of deferred tax assets, investments in non-consolidated financial institutions and investments in commercial institutions. APRA does, however, want to introduce the new Basel III capital buffer regimes and the leverage ratio.

“By requiring ADIs to hold higher minimum levels of better quality capital, supplemented by minimum capital buffers, the reforms will enhance APRA’s current prudential capital framework for ADIs, with positive benefits for depositors, other stakeholders and the stability of the banking system as a whole,” APRA chairman John Laker said.

APRA wants to accelerate aspects of the Basel Committee’s timetable, although this still means Australian banks won't have to meet the Basel III minimum capital ratios and regulatory adjustments in full until 2013, and the capital conservation buffer from 2016.

New Zealand banks 'generally well placed'

Back in New Zealand the Reserve Bank spokeswoman said the central bank had little to say on Basel III at this point, other than to refer to comments in its Financial Stability Report released in May. In this the Reserve Bank said New Zealand banks were generally well placed with respect to the Basel III capital regime as their capital holdings generally substantially exceed Basel II minimum requirements.

It said its implementation of Basel III will be guided by the following principles:

* Although New Zealand banks' capital is generally well above current formal minimum requirements, the Reserve Bank doesn't want to see any material weakening of capital positions ahead of the adoption of new standards.

* It generally supports the strengthening of international capital standards and expects to adopt most of the Basel III standards.

* It will adapt the Basel III standards, as necessary, to ensure a suitable fit for New Zealand conditions.

* It will aim to coordinate Basel III policy and implementation with APRA.

* It will undertake an economic impact assessment of the Basel III proposals and will consult with New Zealand banks before finalising its Basel III policy.

* It expects to implement Basel III ahead of the Basel Committee's timetable, which runs until 2019.

* It won't change its liquidity policy, which includes the core funding ratio, the short-term but will monitor how this aligns with the global standard and APRA.

The Reserve Bank says it's not sold on the Basel III leverage ratio, because this might provide a misleading picture of risk because it isn't risk based, but will explore practical issues with it before making a final decision on whether to implement it in New Zealand. See more on this here.

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