Safer banks for greater wellbeing

Increasing the amount of capital banks hold will improve the safety of New Zealand’s financial system and economic wellbeing, Reserve Bank Deputy Governor Geoff Bascand said today.

The Reserve Bank is currently consulting on a proposal to raise the minimum amount of capital that banks must hold. In a speech today Mr Bascand explained the proposal and the implications for banks and society. The speech was hosted by the Institute for Governance and Policy Studies at Victoria University, in Wellington.

“Ensuring the soundness and efficiency of New Zealand’s banking system is a core responsibility of the Reserve Bank. The proposal aims to make bank failures less likely, ensure that bank shareholders have a meaningful interest in their bank’s business, and are able to absorb a greater share of any loss if they occur” Mr Bascand said.

New Zealand has already experienced two banking crises in its modern economic history, and a wide variety of finance company failures and near misses. There has also been more than 140 banking crises around the world since the 1970s. The social and economic costs of these failures is severe, in terms of unemployment, health and the quality of life.

“We are proposing to make New Zealand’s banks safer by requiring them to use more of their own money to manage through good times and bad. More shareholder equity reduces the costs and risks for depositors and taxpayers, should something go wrong. This change goes a long way to improving the wellbeing of current and future generations of New Zealanders.”

“Capital is the single most important feature of the financial sector’s regulatory tools. Other tools such as disclosure and transparency requirements, governance and risk management practices, and regulator supervision all work better when bank owners have more skin in the game.”

Consultation closes on 3 May 2019.The Reserve Bank will consider all feedback before issuing final decisions in the third quarter of 2019.