The Reserve Bank of New Zealand (RBNZ) has launched a review of its prudential capital settings, a move that follows months of political pressure, growing criticism from the banking sector, and the abrupt resignation of Governor Adrian Orr. The review could reshape the regulatory environment for banks and other deposit takers.
A Conservative Framework Under Review
Announced during a Finance and Expenditure Committee hearing yesterday (31 March), RBNZ Board Chair Neil Quigley described the review as “evidence-based” and confirmed it would be informed by independent international experts. It will include comparisons with overseas regimes, reassessments of risk appetite, and a review of the proportionality of capital requirements—particularly the split between higher-quality “going concern” capital and “gone concern” buffers such as Tier 2 instruments.
Quigley stated the goal is to empirically test widespread claims that the RBNZ’s capital regime is “unreasonably conservative.” These concerns, raised by major banks, industry submitters, and political leaders, argue that high capital requirements may be inflating borrowing costs, discouraging investment, and limiting competition—particularly disadvantaging smaller, domestic banks.
“At present our banking system is profitable and not capital constrained, so lending could be increased if there was demand,” Quigley told MPs. “Of course, there may be some individual borrowers who would like a larger loan and/or at a lower rate, but that is an individual commercial bank assessment rather than being driven by system-wide capital constraints.”
Political Pressure and Perception
Finance Minister Nicola Willis welcomed the review, issuing a statement minutes after Quigley’s announcement. She emphasised that the review was an opportunity to align financial stability goals with broader economic priorities. “Higher capital requirements increase the cost of borrowing. This can reduce economic activity and drive up the cost of living,” Willis said. “I want to see settings that preserve financial stability while encouraging investment, job creation and income growth.”
The coordination between Quigley and Willis ahead of the announcement raised questions about the central bank’s independence, especially given the political backdrop of the Parliamentary banking inquiry and the recent leadership change. Orr, who had been on leave prior to his resignation, did not participate in the board’s decision despite still technically being a board member. Quigley declined to clarify the nature of Orr’s departure, but confirmed the Governor had been involved in discussions “up until he finished at the bank.”
Timeline and Implications
The review will run in parallel with the current phase-in of capital requirements set in motion by the 2017–2019 capital review. Under the existing plan, capital requirements for the four major banks—designated as Domestic Systemically Important Banks (D-SIBs)—are scheduled to rise from 13.5% to 14.5% on 1 July, ultimately reaching 18% by 2028. Requirements for smaller banks are also rising on a similar trajectory.
Despite the review, the RBNZ signalled that this year’s scheduled increase will proceed as planned, citing the advanced state of banks’ capital readiness—currently averaging above 16%. However, Quigley acknowledged that the review might influence whether the longer-term schedule continues unchanged.
Global Context and Domestic Stakes
The RBNZ’s reassessment comes amid a broader international rethinking of post-2008 regulatory settings. While countries like Australia maintain similar capital targets, they allow more flexibility in how banks meet them—particularly through Tier 2 capital. The review will consider whether New Zealand’s more conservative stance remains justified in today’s global and domestic economic context.
Ultimately, the review could have far-reaching implications for lending costs, housing affordability, SME credit access, and New Zealand’s position in international financial markets. It also tests the RBNZ’s ability to navigate a politically charged environment without compromising its operational independence.
As Quigley put it: “We’re open to receiving evidence… but to change the position we’ve articulated on any regulatory matter, we need to go through a process that demonstrates both intellectual and practical integrity.”