2025 Review of Key Capital Settings: Terms of Reference

1 2025 Review of key capital settings: Terms of Reference 2025 Review of key capital settings: Terms of Reference Purpose The purpose of the review of key capital settings is to assess whether the Reserve Bank’s prudential capital requirements for deposit takers are set at the appropriate level to support a stable financial system – one where resilient financial markets, institutions and infrastructures enable a productive and sustainable economy and ultimately promote the prosperity and wellbeing of all New Zealanders. Approach The review will be informed by relevant findings of the Commerce Commission’s market study into personal banking services and the Finance and Expenditure Committee’s inquiry into banking competition. We will consult publicly on key proposals. Responses to this consultation process, alongside a cost and benefit analysis and the use of independent international experts, will inform decisions made by the Reserve Bank Board. As we consider feedback and options under this review, we will operate consistently with our legislative requirements (e.g. the purposes and principles of the Deposit Takers Act 2023 and the Proportionality Framework), and have regard to the Financial Policy Remit (December 2024) and the Minister of Finance’s Letter of Expectations (December 2024). Scope This is an evidence-based review that will build on existing work to review options for more granular risk weights for residential mortgages, corporate lending and lending for housing for community housing providers, housing co-operatives and on whenua Māori. We will also consider risk weights for rural lending. To achieve the purpose within the stated timeframe, the review will be limited to:  An assessment of key developments since the 2019 Capital Review, including findings of the Commerce Commission’s market study into personal banking services, the Finance and Expenditure Committee’s inquiry into banking competition and developments in regulatory and supervisory settings.  An assessment of how our capital settings compare internationally and a consideration of whether our capital settings are appropriate, given the risks that the New Zealand financial system faces. This will be supported by a report by an independent expert.  A reassessment of the appropriate risk appetite for capital settings in New Zealand – based on our statutory parameters including the purposes and principles of the Deposit Takers Act 2023 and the Proportionality Framework, and having regard to the Financial Policy Remit (December 2024) and the Minister of Finance’s Letter of Expectations (December 2024).

2 2025 Review of key capital settings: Terms of Reference  Reviewing the degree of proportionality in the framework and considering any changes in capital ratios for different groups of deposit takers.  Considering the balance between going concern and gone concern capital (including the share of Common Equity Tier 1 capital), the appropriateness of any Total Loss Absorbing Capacity requirements, and if we should continue to have ‘Additional Tier 1 capital’ as part of the New Zealand capital framework. It will also consider the interrelationship between capital and the crisis management framework.  Utilising international experts to undertake research that will inform the options, review the Reserve Bank’s options and recommendations, and support the Reserve Bank’s decision makers in reaching decisions. Role of international experts and the Treasury At least two independent international experts will be involved in the review. In particular, international experts will be asked to:  Produce an independent report on where New Zealand’s current requirements sit relative to comparable jurisdictions’ capital requirements and report on where they think New Zealand’s capital requirements should sit relative to other countries, based on our risk profile.  Review the Reserve Bank’s analysis, options and recommendations and support the Financial Stability Oversight Committee in reaching decisions. This will help ensure that the Financial Stability Oversight Committee can best support the Reserve Bank Board’s decision making on this review. The Treasury will also play a role in challenging the Reserve Bank’s analysis. Timing To prioritise certainty for deposit takers, the scope of the review is targeted to ensure that key concerns that stakeholders have raised are considered and can be addressed, while avoiding any unnecessary delays to the timeline to implement the Deposit Takers Act 2023. The Reserve Bank intends to run a short consultation on key proposals and recommend final decisions to the Reserve Bank Board by the end of the year. Following the conclusion of the review, we intend to prioritise the implementation of any changes that may be agreed so that they come into force ahead of the Deposit Takers Act coming into force.