RBNZ consults on capital adequacy and Basel III
In December 2010 the Basel Committee on Banking Supervision (the Basel Committee) released the new global regulatory standards for bank capital adequacy and liquidity. These standards are commonly known as Basel III standards and were endorsed by G20 leaders at their November 2010 summit.
In the May 2011 edition of the Financial Stability Report the Reserve Bank set out the general principles it would use to guide its implementation of Basel III and how it proposed that the Basel III capital adequacy requirements in New Zealand.
Updated position
In November 2011, the Reserve Bank issued a consultation paper on the implementation of Basel III in New Zealand. This consultation paper sets out the Reserve Bank’s proposals for implementing core Basel III capital measures relating to capital ratios, the definition of capital and the leverage ratio.
Generally, capital ratios are used to define minimum capital requirements for each of: common equity, tier 1 capital (CET1 plus AT1), and total capital (tier 1 plus tier 2), as a percentage of risk-weighted assets. Table 1 below contains the ratios set out in the Basel III standards.
The key comparisons between the RBNZ’s current requirements and Basel III capital standards outlined above are:
• The total minimum capital requirement remains unchanged at 8 per cent.
• The Tier 1 minimum capital requirement has increased from 4 per cent to 6 per cent.
• The quality of Tier 1 capital has increased – a larger portion of common equity is required (CET1), and the criteria for inclusion in Tier 1 capital have been tightened.
• The quality of Tier 2 capital has increased – the criteria for inclusion in Tier 2 capital have been tightened.
• Basel III requires that most capital deductions be applied to CET1 rather than 50 per cent from Tier 1 and 50 per cent from Tier 2 as is often the case under Basel II.
The Reserve Bank said it intends to consult on other elements of Basel III capital in 2012. This will include a policy on restrictions that apply to banks operating within the Basel III conservation buffer, the countercyclical buffer, and counterparty credit risk requirements. The Reserve Bank said it has yet to reach a position on Basel III minimum requirements to ensure that all classes of capital instruments fully absorb losses at the point of non-viability, before taxpayers are exposed to loss. It expects to form a decision in early 2012. The Reserve Bank will also consult on any Basel III related changes to its disclosure requirements in 2012.
The Bank also said it expects New Zealand’s locally incorporated banks to be relatively well positioned to meet the proposals set out in the consultation paper. “However, further information from banks will provide us with greater clarity on this matter,” the banks said. The Reserve Bank therefore requests that locally incorporated banks complete and submit a quantitative impact assessment of the proposals.
Next steps
The Reserve Bank has asked for comments on the consultation proposals and requested completed quantitative impact assessments by 27 January 2012.
Following the consultation the Reserve Bank will draft new capital adequacy requirements taking into account submissions received. It plans to release these draft requirements for consultation in the first quarter of 2012. Further changes to capital adequacy requirements may also be necessary once the other elements of Basel III are consulted on in 2012.
The Reserve Bank’s starting position is that the proposals in the consultation paper will take effect from 1 January 2013. They will not be phased in over a period of time from 1 January 2013 as the Basel Committee contemplates, unless there are compelling reasons to do this, the Bank said.
- Categories
- New Zealand
- Tags:
- Reserve Bank, Basel III
- Author:
- AB+F, bkellerman@financialpublications.com.au
- Article Posted:
- December 15, 2011
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