In December 2009 new global regulatory standards for bank capital adequacy and liquidity were released by the Basel Committee on Banking Supervision and endorsed by the G20 leaders at their November 2010 summit. These standards are commonly known as Basel III standards and build on the themes of their predecessors – Basel I and Basel II.
While not a G20 country the Reserve Bank is still proposing to adopt some core elements of Basel III relating to capital ratios and definitions of capital. The Reserve Bank has this month released a consultation paper setting out how the standards might be implemented. The consultation paper is available here.
The Reserve Bank has also said it separately intends to consult on other elements of Basel III in 2012. The Reserve Bank has also stated that it does not propose to adopt the Basel III liquidity provisions but will retain the Liquidity Rules it adopted in 2009.
The consultation paper sets out the main differences between New Zealand's current requirements and those contained in Basel III as follows:
- The Tier 1 minimum capital requirement has increased from 4% to 6%
- The quality of Tier 1 capital has increased – a larger portion of common equity is required, 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 Tier 1 common equity capital rather than 50% from Tier 1 and 50% from Tier 2 as is often the case under Basel II.
The total minimum capital requirement remains unchanged at 8%.
At this stage the Reserve Bank is anticipating that the revised proposals to the capital adequacy requirements in New Zealand will be implemented by the banks by January 2013. This is a much shorter timeframe than has been proposed in the Basel III standards, which contemplate that the requirements will be phased in starting in January 2013, to be completed by 2018.
Although it is expected that banks in New Zealand will be well positioned to meet the capital adequacy requirements, the Reserve Bank has requested that those banks complete and submit a quantitative impact assessment of the proposals by 27 January 2012. It also requires comments on the consultation paper by that date with a view to releasing a revised draft of the capital adequacy requirements, taking into account submissions received, by the first quarter of 2012.
A particular area of concern will be the treatment of existing capital instruments and the extent to which banks may have to call or replace capital instruments that no longer meet the tougher Tier 1 and Tier 2 capital tests (particularly given the truncated timetable for New Zealand banks to comply with the Basel III standards).
We will keep you advised of developments.