Regulatory Alerts2022-05-17
Implications of stress tests for calibration of capital requirements
The Reserve Bank of New Zealand argues that current capital requirements should be increased to account for tail risks not fully captured by standard stress tests. The paper calibrates alternative scenarios involving higher credit losses, operational risk events, and profitability erosion to determine necessary buffer levels. It concludes that normal times CET1 ratios of roughly 12-13.5 percent are required to ensure banks can absorb severe downturns while maintaining investor confidence.
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