WELLINGTON, Dec 17 (Reuters) - New Zealand's central bank on Wednesday announced it would lower some of the capital requirements for the country's banking sector following a review of the rules introduced in 2019, but requirements would remain above international levels.
The country's top four Australian-owned banks will have to hold common equity tier 1 capital, the highest quality capital, of 12% down from 16% but tier 2 capital requirements will increase to 3% from 2% and they will be required to hold internal loss absorbing capacity of 6%, the Reserve Bank of New Zealand said in a document accompanying the announcement.
Smaller banks total capital requirement will reduce to 14% from 16%, the document added, but noted the changes remain "relatively conservative when compared internationally."
"These new settings will reduce the overall cost of deposit takers' funding, which we expect to see passed on as benefits to New Zealanders through increased lending and reduced rates," Reserve Bank of New Zealand Governor Anna Breman said.
The current, rising capital requirements were announced in 2019 with full implementation not expected before 2028. But in March, the central bank said it would be reviewing them after criticism from some politicians and lenders that they were leading to higher interest rates and weighing on the economy.
The central bank estimates the changes will reduce average funding costs by 12 basis points and would have an expected annual net benefit of 0.12% of GDP for New Zealand compared with the full implementation of the old rules.
New Zealand's banking system is dominated by four large Australian-owned banks: Westpac Banking Corp, ASB Bank, which is part of Commonwealth Bank of Australia, Bank of New Zealand, which belongs to National Australia Bank, and Australia and New Zealand Banking Group.
New Zealand Banking Association Chief Executive Roger Beaumont said the decision will impact member banks differently given their varying sizes. He said member banks are looking at the details to see how it impacts them and their current capital settings.
The Cooperative Bank, a smaller local bank, said it welcomed the decision, which recognized the challenges for smaller banks and would help strengthen competition in the sector.
The central bank will release more details on the changes in February and will consult on detailed rules such as the LAC requirements . Full implementation is not expected until 2028.
(Reporting by Lucy Craymer in Wellington and Renju Jose in Sydney; Editing by David Gregorio)
By Lucy Craymer
