The Reserve Bank of New Zealand (RBNZ) is proposing to implement the capital conservation and countercyclical buffers of the Basel III framework in full from January 1, 2014 – two years ahead of the timetable set down by the Basel Committee.
According to Ross Pennington, Auckland-based partner at law firm Chapman Tripp, the RBNZ’s prudence is not necessarily justified by market conditions in New Zealand.
“The RBNZ’s proposals for the capital conservation buffer are tougher than those put forward by the Australian Prudential Regulation Authority, which instead intends to use the Basel Committee’s sliding scale. No explanation is offered for why New Zealand should be out of step with the international framework, including any potential competitive or other implications,” he says.
In addition, the RBNZ proposes to adopt the Basel III standard requirements of the countercyclical buffer. The buffer is to be made up of common equity Tier I capital and will vary between 0% and 2.5% of risk-weighted assets. The buffer will increase when the economy shows signs of overheating and decrease in an economic downturn.
“The implementation of these buffers will mean that by 2014 banks will need a total capital of 10.5% and, depending on where New Zealand is in its economic cycle, may have to raise an additional 2.5% of common equity Tier I for the countercyclical buffer – or at least be at risk that they will need to raise this within 12 months,” says Pennington.
“We question the RBNZ’s haste in implementing all the Basel reforms ahead of the Basel Committee’s recommended time frame as it will mean that regulators and the New Zealand banking system will miss out on both the benefit of the debate and of market adjustments – including the development of instruments meeting the new design requirements – that are likely to occur in the international transitional period,” he says.
Consultation on the paper closes on April 13, 2012.