Regulatory Alerts2022-05-17
Capital review - Design options for an output floor for IRB banks
The Reserve Bank of New Zealand's Financial Policy recommends to the FSO Committee the design options for an output floor for Internal Ratings Based (IRB) banks as part of its revised capital framework. This output floor, intended to reduce unjustified capital gaps and excessive variation across IRB banks, will be set at the total exposure level between IRB and standardised credit risk Risk-Weighted Assets (RWA), alongside retaining or potentially increasing the existing IRB scalar. While acknowledging Basel III and APRA frameworks include a 72.5% output floor, the RBNZ views this as a political outcome not binding for New Zealand, and its own Quantitative Impact Study shows current IRB RWAs range from 67% to 86% of standardised outcomes.
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