The central bank of New Zealand has increased capital requirements for banks, in line with earlier expectations.

The Reserve Bank of New Zealand (RBNZ) took the decision following a comprehensive review of its capital framework for banks. The move comes a year after the central bank announced the proposed changes requiring the banks to hold more capital.

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The tougher capital rules seek to improve the resilience of the lenders to external shocks and other financial crises.

RBNZ bank capital requirements: Details

Under the new rules, the four large banks will have to raise their total capital from the existing minimum level of 10.5% to 18%. The remaining smaller banks are required to raise it to 16%.

In a statement, RBNZ noted that the average level of capital currently held by banks stands at 14.1%.

The decisions are set to become effective from July 2020. However, the banks will have seven years to implement the requirements. Originally, a five year timeframe was proposed, but it was extended to ensure smooth transition.

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Governor Adrian Orr said: “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.

“More capital also reduces the likelihood of a bank failure. Banking crises cause not only harmful economic costs but also distressful social issues, such as the general decline in mental and physical health brought about by higher rates of unemployment. These effects are felt for generations.”

Last month, Orr hinted to increase bank capital buffers while announcing to ramp up supervision over financial institutions.

Recently, RBNZ has increased efforts to increase bank oversight following a number of failures by major Australian banks. The local arms of the four Australian banks dominate the New Zealand market.

These arms are required to raise combined amount of NZ$13bn ($8.5bn) to meet the new requirements, reported Reuters.