Reserve Bank of New Zealand Letter on Banking Prudential Requirements Publication

17 June 2021 Dear Chief Executive Publication of Banking Prudential Requirements and changes to Conditions of Registration The Reserve Bank of New Zealand – Te Pūtea Matua has today published the finalised Banking Prudential Requirements (BPRs). The BPRs implement the Capital Review decisions from December 2019 and also form part of the roll-out of the replacement for the Banking Supervision Handbook. The BPRs will take effect from 1 October 2021. The Capital Review implementation marks a significant change in prudential requirements, including the increases in capital buffers that will take place from July 2022 to July 2028. Other changes will be phased in from 1 October 2021 onwards. The final BPRs reflect the December 2019 decisions, and have been amended in a number of places to incorporate feedback we received on the Exposure Draft consultation that ran from November 2020 until 31 March 2021. Thank you for the input that we received, which we found to be a valuable part of the process. This letter outlines:  The list of documents published today.  The Reserve Bank’s processes for you to follow if your bank wants to issue Tier 2 instruments that comply with the new rules in BPR110: Capital Definitions in advance of the BPRs taking effect on 1 October 2021.  Draft changes to Conditions of Registration, which are attached to this letter.  Next steps, including the future work programme. Documents published today Today we published the following documents on our website:  Final BPR documents as well as ‘red-lined’ versions to show changes compared with the Exposure Drafts.  All submissions received on the Exposure Draft consultation.  Response to Submissions document.  Two page summary of the Capital Buffer Response Framework (CBRF).  Guidance Note for BS16: Application requirements for capital recognition or repayment and notification requirements in respect of capital, explaining the processes that you should follow you want to issue Tier 2 instruments before 1 October 2021.

 Draft Amending Order for bank disclosure Orders in Council. Process for issuing new Tier 2 instruments before 1 October 2021 As announced in the May 2021 Financial Stability Report, the Reserve Bank intends to recognise Tier 2 instruments that banks issue in accordance with the new rules, between now and September 30. This provides banks flexibility to raise capital in this form now and helps to embed the new framework in the system. The BS16 Guidance Note attached to this letter, and published on our website, describes how the process will work, including how we will operate BS16 until the new BPRs fully take effect on 1 October 2021. To summarise, we have taken the following steps:  Amending Conditions of Registration so that Tier 2 instruments issued under the new rules can be treated as regulatory capital. Draft changes are attached to this letter.  Changing the approach under BS16 for Tier 2 instruments until 30 September 2021 (at which point BS16 will cease to exist). The main implication of this is that we will consider issuing non-objection notices for Tier 2 instruments issued under the new rules, so long as all processes in the guidance are followed. A copy of the Guidance Note descibing this process is attached to this letter.  Amending Orders-in-Council – we will be seeking the agreement of the Minister of Finance to ask Cabinet to change the Orders in Council that cover bank disclosure processes to incorporate Tier 2 instruments issued in accordance with BPR110. A draft Amending Order is attached as Annex 2. We would welcome any feedback on this by 30 June 2021. Draft changes to Conditions of Registration In addition to providng an overview of the documents published today, this letter is also to advise you of changes the Reserve Bank intends to make to your bank’s Conditions of Registration to reflect the new processes for issuing Tier 2 instruments under the new rules in advance of 1 October. This is the only change to your bank’s Conditions of Registration that is proposed at this time. I will write to you again in September with draft Conditions of Registration to cover all the changes that take effect when the BPRs begin on 1 October 2021. Section 74(2) of the Reserve Bank Act provides that the Reserve Bank may, by notice in writing to a registered bank:  impose conditions of registration (whether or not the registration of the bank is subject to conditions of registration); or  vary, remove, add to or substitute any conditions of registration. Under section 74(3) the Reserve Bank must not exercise a power referred to in subsection (2) unless:  the Reserve Bank gives the registered bank not less than 7 days’ notice in writing of the Reserve Bank’s intention to do so; and

 the notice contains, or is accompanied by, a statement of the Reserve Bank’s reasons; and  the registered bank has a reasonable opportunity to make submissions to the Reserve Bank; and  the Reserve Bank has regard to those submissions. I enclose a copy of your current conditions of registration, marked up to show the proposed changes. I would welcome any comments you may have about the draft changes to your bank’s Conditions of Registration by close of business on 24 June 2021. If you have any questions or require any additional information please contact the Supervisor for your bank in the first instance. Next Steps The Reserve Bank will undertake the following steps, in consultation with banks, to ensure the capital adequacy portions of the BPRs are fully implemented by 1 October:  Now until 24 June: Banks respond to draft Conditions of Registration (attached to this letter) and Reserve Bank confirms final changes after seven-day consultation period.  September 2021: Reserve Bank will consult with banks on further changes to Conditions of Registration prior to the start date of the new BPRs on 1 October 2021.  1 October 2021: New BPRs active from 1 October 2021 onwards. We will also be working on the following consultations for publication in the first half of 2022:  Consultation on Standardised Measurement Approach for Operational Risk.  Consultation on the operational framework for the countercyclical capital buffer. In addition, there are a number of other topics that have been identified by stakeholders during the Exposure Draft consultation. These topics are described in the Response to Submissions document, and include those listed below, for which we expect to engage with stakeholders during the rest of 2021 and 2022:  Issuance of CET1 capital by banks structured as mutual societies.  Risk weights for reverse mortgage loans.  Categorisation of sovereigns, public sector entities and multilateral development banks.  Recognition of guarantees as a credit risk mitigant in the IRB risk-weighted assets calculation.  Voting rights and distribution requirements for Common Equity Tier 1 (CET1) capital instruments.

 Mandatory loss given default rates for security over Māori Freehold Land.  Revising the BPR140: Market Risk framework. Yours Sincerely Geoff Bascand Deputy Governor/General Manager Financial Stability

Annex: Draft Amending Order for bank disclosure Orders in Council