Today the Reserve Bank of New Zealand announced their final decision to increase the capital requirement for banks.
Currently, banks are holding around 14% of Tier 1 capital, and from July 2020, the top 4 Australian-owned banks (ASB, BNZ, ANZ and Westpac) will be required to hold 18%, while the others are required to hold 16%. Tier 1 capital currently consists of shareholders' equity and retained earnings. From July 2020, redeemable preference shares can be included in this.
Of course, this increase can't purely come from preference shares, which means that banks will be forced to increase their shareholders' equity and retained profit. Consequently, banks will be less likely to reduce their already thin profit margins, and interest rates are likely to increase.
On a positive note, banks will have seven years to meet these new requirements as opposed to the standard five years, so any rise in interest rates as a result is expected to be gradual.
According to the RBNZ ‘s press release, Governor Adrian Orr said the decisions to increase capital requirements are about making the banking system safer for all New Zealanders, and will ensure bank owners have a meaningful stake in their businesses.
From here, the RBNZ will use the first half of 2020 to produce an exposure draft of the regulation in more detail. The new capital management will take effect from July 2020.