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As per the recent press release issued by the Reserve Bank of New Zealand (RBNZ), it is expressing strong inclination towards bringing major changing in the capital maintenance of commercial banks. RBNZ has plans to make sure that the banks become fundamentally strong in long-term. In the interests of shareholders, the apex bank would be working towards increasing the capital amount which the banks are required to maintain.
The primary reason for the new initiatives revolves around reducing the impact of unforeseen banking crisis and avoiding the associated social and economic risks.
The top executives are of the view that the shareholders of bank generally account for a decent enough amount of the holdings and hence, the management of the bank becomes essential. In the times of slowdown in the banking sector, the costs which the banks must incur could be considerably high.
A key executive also stated that, because of the changes, all in all, the banking sector would be better prepared to able to bear and tackle any unforeseen crisis.
The initiatives focused on making the banking sector stronger and more robust, would consider substantially raising the capital base of the banks. However, this would be dependent upon certain parameters. The size of the bank, the extra amount which the bank might opt to maintain over the requirement of the minimum limit as well as the banksâ present capital levels are the key parameters which would be taken into consideration.
As per the recent announcement by the nationâs reserve bank, it would be fair to assume that the rise would be in the range of 20-60%.
 A key executive also stated that there is a possibility that the costs of the borrowing would rise for the banks which would, in turn, hit the investment return of the shareholders. However, he also added that these adverse effects would be taken care of by the strong banking space.
In line with the proposed capital requirement changes, the Reserve Bank released a consultation paper titled âCapital Review Paper 4 and is expecting the feedback submission on the proposal by banks, by 2019 February end. The article observations suggest a potential increase in the risk weighting applied to bankâs assets and the percentage of assets held against those assets, over a period of five years.
For Australia and New Zealand Banking Group Limited (ASX:ANZ) ,this would mean a capital increase in the range of NZ$6 billion-NZ$8, based on the paper suggestions as well as bankâs balance sheet as on September 30, 2018.
As per a recent press release, major banks such as Commonwealth Bank of Australia (ASX:CBA) and National Australia Bank (ASX: NAB) are in the process of reviewing the paper so that they can have a broad idea about their capital requirements. They also have plans to be a part of the process of consultation with RBNZ.
The press release of Westpac Banking Corporation (ASX:WBC) stated the bankâs strong position with a Tier 1 capital ratio of 14.5% as on 30th September 2018.
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