The Reserve Bank of New Zealand has issued its in-principle decisions pertaining to the capital requirements for the registered banks, as part of a systematic review of capital adequacy in the banking system of country.

The in-principle decisions emphasise the threshold limit under which the banks need to hold the capital, and make it simple for investors to measure capital adequacy, and to reduce any unintended competitive advantages.

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Reserve Bank of New Zealand Governor Adrian Orr said: “Adequate capital is the first and most powerful defence for banks to survive unwanted shocks. New Zealand banks face both global and New Zealand-specific risks, so our capital requirements need to reflect this.

“We are ensuring that our capital requirement rules align with international standards while being fit for the New Zealand-specific context.

“We also want to ensure we are being fair to both large and small banks, and avoid creating unintended competitive advantages. Importantly, all banks must have ‘enough skin in the game’ to truly focus on enterprise risk management, responsible lending, and the ability to weather all events.”

As per the latest in-principle decisions, the four largest banks Australia and New Zealand Banking Group, ASB Bank, Bank of New Zealand and Westpac will have to report their risk weighted assets and associated credit ratios.

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The measure is intended to know whether the big banks’ risk estimates are appropriate.

The prudential regulator stated that the next phase of the capital review will be a quantitative impact study of the in-principle decisions announced so far by the Reserve Bank.

The concluding phase will concentrate on prescribing of minimum capital ratios. The Reserve Bank plans to wrap up the key elements of the capital review this year.