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2022-05-17

Capital review - Capital buffering

The document outlines the design of capital buffers, specifying a 16% Tier 1 capital ratio composed of a 7.5% conservation buffer and a 2.5% countercyclical buffer. It details supervisory actions and dividend restriction options ranging from graduated to hard limits based on capital adequacy levels. A five-year transition period is established for implementation, with specific annual targets for conservation and countercyclical buffers from 2019 to 2024.

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Reserve Bank of New Zealand

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Capital buffering The design of capital buffers

2 Key decisions • Size of conservation buffer & CCyB

  • Assessing the appropriate usability of capital buffers • Dividend restrictions & supervisory actions
  • How gradualist should we be? • Transition period
  • Longer transition for small banks?

3 Composition of the capital buffer • 16% Tier 1 capital ratio • Normal buffer = 10% Options • More conservative

  • More certainty buffer will be there when needed • More useable
  • More likely to support lending in crisis

4 Degree of conservatism • CCyB = 2.5% on average

  • Cut to 0% in crisis
  • Risk of cutting too early or face sequence of shocks • Conservation = 7.5%
  • Minimum + conservation buffer = 13.5% T1 capital
  • 1/100 crisis probability

5 Degree of lending support • In theory, could support up to 15% more lending

  • Based on leverage ratio ($10.50 of lending for every $1 of capital) and assumes linear relationship between capital and lending • In practice, may be closer to 2%
  • Around $1 capital for $1 of lending
  • Based on empirical study of the impact of changes in BoE Pillar 2 reqs
  • Likely to be an underestimate

6 Dividend restrictions & supervisory actions Supervisory actions Dividend restrictions (% of earnings that can be paid out) Option A (graduated) Option B (current) Option C (hard) None 7.5%+ 80% 60% 0% Require capital plan 5 - 7.5% 40% 40% 0% Supervisory actions* 2.5 - 5% 0% 20% 0% Make directions / prepare for OBR or stat manager 0 - 2.5% 0% 0% 0%

  • For example, issue instructions to a bank’s board, change CoRs to strengthen other risk buffers.

7 Transition period • 5 year transition period Year Conservation CCyB 2019 2.5 0 2020 4 0 2021 5.5 0 2022 7 0 2023 7.5 1 2024 7.5 2.5

8 Transition period – impact on profit

  • Includes capital impact of risk weight changes for IRB banks

9 If 10yr transition for small banks

  • Includes capital impact of risk weight changes for IRB banks
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