RBNZ extends some emergency measures

The Reserve Bank of New Zealand is further delaying the introduction of new capital rules for banks in an effort to promote economic recovery.

The RBNZ also announced a provisional end date to banks’ dividend restrictions and launched a consultation on reimposing loan-to-value ratio limits on mortgage lending.

It imposed dividend restrictions on banks’ Tier 1 capital instruments in April, and lifted LRV restrictions in May. All three measures were taken to buffer the economic impact of the Covid-19 pandemic.

In December 2019, the RBNZ told New Zealand’s four largest banks that in July 2020, they would have to start raising their capital holding to 18%, while smaller banks would need to meet a minimum of 16%.

But in March, in response to the Covid-19 pandemic, the RBNZ pushed back the date when banks had to start increasing capital ratios to July 2021. Under the new timetable, increases to capital buffers will be gradually phased in from July 2022 to July 2028.

New Zealand’s four largest banks will have to raise their Tier 1 capital ratio to 16%, with an 18% total capital ratio. The country’s smaller banks will have to implement a 14% Tier 1 ratio and a minimum 16% total capital ratio. 

The final figures represent a sharp increase from the 10.5% minimum total capital currently in place. The changes have been met with strong resistance from New Zealand’s banks, which claimed they were excessively conservative by international standards.

In a statement published on November 11, RBNZ deputy governor Geoff Bascand said delaying the implementation by a further 12 months “strikes the right balance between providing more headroom for banks to support lending now by drawing on their capital buffers, while also ensuring that capital levels lift in the longer term to support financial stability”.

The RBNZ added it would review whether future delays to the capital buffer increase would be needed at the end of 2021. The scheduled increase in the internal ratings-based approach (IRB) ”scalar” for risk weights to 1.2, from 1.06 at present, has also been delayed to October 2, 2022.

The RBNZ said other changes introduced as part of its review of banks’ capital levels will take place as planned.  

LVR consultation

The RBNZ said it will also launch a consultation on reintroducing loan-to-value ratios for high-risk mortgage lending from March 2021.  The RBNZ first implemented the restrictions in October 2013, but removed them from May 1, 2020, to help banks lend during the pandemic. The changes were due to be in place for 12 months.

Under the restrictions, banks could only make up to 20% of their residential mortgage lending to owner-occupiers paying deposits of less than 20%. No more than 5% of such lending could be to investors with deposits of less than 30%.

The RBNZ decided to remove the restrictions to ensure they did not affect borrowers or lenders taking part in its mortgage deferral scheme, another emergency response to the pandemic.

Removing the restrictions earlier this year was “a reasonably quick process”, the RBNZ said. But it added that re-imposing them would take “more time… as banks require time to adjust their lending practices and manage borrowing applications already underway”.

Dividend restrictions

In the same statement, the RBNZ also announced restrictions on dividends and redemptions made on Common Equity Tier 1 capital instruments would remain in place until March 31, 2021, or later if required, it said. These restrictions were first put in place in April 2020.

The RBNZ also extended its guidance on dividends to the insurance industry, saying it expects insurers to make dividend payments only if it is prudent to do so. Firms should take into account stress tests and the “elevated” risk environment, before making a decision, it said.