In a recent discussion with a parliamentary select committee in Wellington, Antonia Watson, the CEO of New Zealand’s largest bank, expressed a desire for government and regulators to reassess the international risk weightings for banks. This conversation comes as the committee investigates the competitive landscape of banking in New Zealand, placing a spotlight on the current prudential regulations.

Banking Competition Under Review

Watson’s statements are particularly timely following Finance Minister Nicola Willis’s announcement that she is seeking expert advice regarding the capital reserves that banks are required to maintain. This review has been amplified by the unexpected resignation of Adrian Orr, the former governor of the Reserve Bank, who was a key advocate for the capital rules implemented last week.

Assessing Capital Ratios and Risk

During her testimony, Watson noted, “Our overall capital ratio measures our capital against risk-weighted assets.” She emphasized that while New Zealand banks maintain a conservative capital base, they also adopt a cautious approach to their risk-weighted assets. This dual conservatism raises a pivotal question for decision-makers: Should banks prioritize prudential risk management over fostering competition?

• Key Points:
  • New capital rules were established in 2019 to enhance bank resilience against rare financial shocks.
  • The new requirements, rolled out in mid-2022, are set to be fully implemented over a seven-year period, leading to increased borrowing costs for consumers and businesses.

The Future of Financial Stability

Watson further elaborated, “We’ve opted for a framework that anticipates a one-in-200-year event. Is this the level of financial stability we aspire to achieve?” Her remarks challenge regulators to consider the balance between stringent capital requirements and the need for a competitive banking environment.

As the inquiry progresses, industry leaders and regulators must work together to ensure that New Zealand’s banking system not only remains robust but also thrives in a competitive market. Addressing these concerns will be crucial for the country’s economic future and the well-being of its citizens.

For further insights on banking regulations, you can explore resources from the Reserve Bank of New Zealand or the New Zealand Bankers’ Association.