The Reserve Bank of New Zealand is sticking with a plan to lift capital requirements by NZ$20 billion ($19 billion), a move that will mostly affect the big four Australian banks, but it has made several concessions to soften the blow.
In a keenly-anticipated decision, the RBNZ on Thursday said "systemically important" banks in the country would need to lift their total capital to 18 per cent of risk-weighted assets, a significant increase from 10.5 per cent now.
Subsidiaries of ANZ Bank, Westpac, National Australia Bank and the Commonwealth Bank also dominate the NZ banking market, with ANZ the most exposed.
In a concession to the industry, however, banks will have seven years to meet the new rules, rather than five years as previously proposed. They will also be able to fund some of the increase in capital by issuing other financial instruments, aside from equity, such as redeemable preference shares.
"These adjustments maintain the financial system resilience provided by the 2018 proposal, while reducing the estimated average interest rate impact of higher capital. As a consequence, the estimated annual net benefit of reform is higher than it would otherwise be," the RBNZ said.
The Australian banks have been pushing back against the proposals,
In late morning trade, Westpac shares were up 1.2 per cent to $24.33, Commonwealth Bank shares were up 1.4 per cent to $78.86 and National Australia Bank shares were up 1.6 per cent to $25.29.
Shares in ANZ Bank, which is most exposed to New Zealand, were placed in a trading halt this morning ahead of the announcement.
The RBNZ's governor, Adrian Orr, said the changes were aimed at protecting the economy from financial crisis, pointing to "financial and well-being" impacts on the people of New Zealand.
“Our decisions are not just about dollars and cents. More capital in the banking system better enables banks to weather economic volatility and maintain good long-term customer outcomes,” Mr Orr said. Of the changes, NZ$11 billion will be common equity, and the remaining NZ$9 billion will be redeemable preference shares, he said.
Bell Potter analyst TS Lim said banks' shares had rallied because of the extra concessions, as the "bad news" had already been "priced in."
"With a longer transition period, it means they can still pay themselves some dividends," Mr Lim said.
More to come...