Reserve Bank of New Zealand Consultation Paper on Registered Bank Disclosure Requirements: Basel III Updates

Ref #4986399 Consultation Paper: Registered bank disclosure requirements: Basel III updates The Reserve Bank invites submissions on this Consultation Paper by 14 December 2012. Submissions and enquiries about the consultation should be addressed to: Jeremy Richardson Senior Adviser, Operational Policy Prudential Supervision Department Reserve Bank of New Zealand PO Box 2498 Wellington 6140 Email: jeremy.richardson@rbnz.govt.nz Please note that a summary of submissions may be published. If you think any part of your submission should properly be withheld on the grounds of commercial sensitivity or for any other reason, you should indicate this clearly. November 2012

2 Ref #4986399 Executive summary

1. This consultation paper proposes changes in the disclosure requirements applying to all New Zealand-registered banks, to take account of global changes in the capital adequacy framework for banks, known as “Basel III”. It should be read by all New Zealand￾registered banks and will also be of potential interest to the banks’ auditors and to anyone who has occasion to read bank disclosure statements.
2. The proposed changes affecting New Zealand branches of overseas-incorporated banks are very minor. The main parts of this paper that branches should read are Section 4(d), which discusses the changes needed in the disclosure of overseas bank and parent bank capital adequacy, and Annex 5, which sets out the detail of the proposed changes to that disclosure.
3. The changes that we are making to the RBNZ’s current capital adequacy framework to implement the Basel III reforms mean that some of our bank disclosure requirements will be out of date, in the sense of referring to superseded terms, starting from the reporting date of 31 March 2013.
4. One possible approach will be to update our disclosure requirements, continuing with our current style of disclosure, to reflect the new Basel III categories of capital and criteria for capital. That would be relatively straightforward and mechanical, and this paper includes that approach as one option. The paper sets out proposals for the detailed drafting changes needed to the Orders in Council which contain our disclosure requirements.
5. However, to complement the Basel III changes to its minimum regulatory requirements for capital (“Pillar 1”), the Basel Committee has also issued detailed new disclosure requirements to expand on its existing disclosure requirements around banks’ capital adequacy (“Pillar 3”), and encourage greater global consistency and comparability. These new Basel III disclosure rules include precise templates for the components of capital and for the terms and conditions of individual capital instruments. The new Basel rules also include a requirement for banks to publish full terms and conditions of each capital instrument on their website.
6. Importing the full detail of the Basel III disclosure rules into our disclosure requirements would impose some additional costs compared to the option of updating the disclosure of a bank’s capital base along existing lines. However, this paper discusses and seeks views on a number of possible advantages of following the Basel III rules. We think that the full Basel III option may in fact be more efficient for those banks whose overseas parent banks will be subject to the same rules.

3 Ref #4986399 7. The paper therefore presents detailed proposals for the changes that need to be made to our disclosure Orders in Council by 31 March 2013, with alternative options where appropriate. The areas of disclosure potentially to be updated are the following: • the detail of how the defined components of capital add up to the total, with the choice between implementing the Basel template for this, or updating our existing table of the components of capital; • information on the terms and conditions of individual capital instruments, with the choice between updating the summary descriptive approach in our current disclosure, or following the Basel III rules. We propose three variant solutions for meeting the Basel rules. • updates of other related disclosure which is not directly mandated by the Basel rules. In two areas the paper proposes one set of necessary revisions: these are the summary table of the minimum capital ratios against their requirements, and information on overseas parent banking group capital adequacy. In a third area, the new risk-weighting category for exposures to qualifying central counterparties, the paper discusses the need for change, but proposes no change as the best interim solution. 8. The aim of the paper is thus to make it as clear as possible exactly how banks’ required disclosure would change under each option. We want to hear from banks of any practical concerns they have about implementing any of the proposed changes, and from both banks and users of disclosure statements about the usefulness of the revised disclosure, with views on the pros and cons of the alternatives where we are proposing them. 9. A particularly important area of feedback from banks will be information on the relative costs of making the disclosure changes, in the areas where we are proposing different options. This will be an important factor in helping us to decide whether the benefits of full Basel III implementation justify the additional costs. 10. Our proposed approach for full implementation of the Basel III rules includes the need for a new form of disclosure statement to contain the full terms and conditions of each capital instrument issued by a bank, which would be signed off and published on the date of issue of the instrument, separate from banks’ existing quarterly disclosure statements. We are not proposing to put any such disclosure requirement in place by 31 March, and this paper does not contain the details of that. If, following this consultation, we opt for compliance with the Basel III rules, we plan a follow-up consultation over March-April 2013, with a view to completing that element of the new requirements by 30 June 2013. 11. We are issuing this paper for a four week consultation period. The first round of disclosure changes needs to be in force by 31 March 2013, and therefore needs to be published in the Gazette by 1 March.

4 Ref #4986399 Contents 1: Introduction...........................................................................................................................................5 2: Home country approaches.....................................................................................................................7 3: Frequency..............................................................................................................................................7 4: Areas of disclosure to be changed.........................................................................................................8 4(a): Composition of capital.................................................................................................................8 Full and half year requirements.................................................................................................................................. 8 Reconciliation .......................................................................................................................................................... 11 Transitional disclosure ............................................................................................................................................. 12 Off-quarter requirements.......................................................................................................................................... 13 4(b): Terms of capital instruments .....................................................................................................13 Option 1: continuing our current approach .............................................................................................................. 14 Option 2: implementing the Basel III rules.............................................................................................................. 15 Discussion of the options......................................................................................................................................... 18 Implementation issues with the above options......................................................................................................... 20 4(c): Summary of NZ-incorporated bank capital ratios .....................................................................21 Full year and half-year requirements........................................................................................................................ 21 Off-quarter requirements.......................................................................................................................................... 24 4(d): Presentation of parent bank / parent banking group ratios etc...................................................25 4(e): Counterparty credit risk (CCR) .................................................................................................26 5: Costs and benefits ...............................................................................................................................27 6: Next steps............................................................................................................................................29 Annex 1: Composition of capital – continuing the current approach .....................................................30 Annex 2: Composition of capital – adopting the Basel template approach............................................33 Annex 3: Main features of capital instruments – continuing current approach......................................43 Annex 4: Basel proposed template for main features of capital instruments..........................................46 Annex 5: Proposed changes in disclosure about overseas parent bank / head office capital adequacy..48 Annex 6: Summary of changes in Orders in Council needed by 31 March 2013...................................50 Annex 7: List of consultation questions in this paper.............................................................................51

5 Ref #4986399 1: Introduction 1 We recently issued for consultation a proposed update to the Reserve Bank’s capital adequacy framework, to implement the Basel III capital adequacy enhancements in New Zealand. This mainly consists of draft revisions to the Reserve Bank Banking Supervision Handbook documents BS2A and BS2B1 . The deadline for submissions was 9 October, and we plan to impose the revised framework via changes in banks’ condition of registration from 1 January 2013. 2 The Basel III package of enhancements issued by the Basel Committee on Banking Supervision (“BCBS”) also includes changes to the calculation of capital requirements for counterparty credit risk on derivative contracts (“CCR”). We have recently issued another consultation paper proposing how we will reflect these changes in BS2A and BS2B2 . The current plan is to implement those changes also from 1 January 2013. 3 The BCBS published rules in June 2012, entitled “Composition of capital disclosure requirements”3 (the “Basel III disclosure rules”). These are intended to address problems with the lack of transparency and cross-jurisdiction comparability of banks’ capital positions, which may have contributed to uncertainty during the financial crisis. Implementation is required by 30 June 2013. 4 The current BCBS capital adequacy disclosure requirements (the so-called “Pillar 3”) focus mainly on the detailed breakdown of the credit, market and operational risks that a bank faces, and how these translate into capital requirements. The new Basel III disclosure rules complement these requirements by mandating much more detailed disclosure on the way that the bank’s regulatory capital base is defined, and about the features of the individual instruments that contribute to its capital. 5 We incorporated Pillar 3 into our existing disclosure regime for banks4 in March 2008, as part of our overall implementation of the Basel II capital regime. Rather than copying Pillar 3 line by line into our disclosure requirements, we adapted it to provide sufficient detail for New Zealand purposes while avoiding making bank disclosure statements excessively long and imposing unnecessary costs on the banks. A key high-level decision on which this paper seeks views is the extent to which we should import the full Basel III disclosure rules into our disclosure regime. 1 BS2A: Capital Adequacy Framework (Standardised Approach) and BS2B: Capital Adequacy Framework (Internal Models Based Approach). Draft revisions to BS2A are at http://www.rbnz.govt.nz/finstab/banking/4932418.pdf and to BS2B are at http://www.rbnz.govt.nz/finstab/banking/4932421.pdf. 2 http://www.rbnz.govt.nz/finstab/banking/5009094.pdf 3 http://www.bis.org/publ/bcbs221.pdf 4 Our disclosure regime is set out in two Orders in Council: Registered Bank Disclosure Statements (New Zealand Incorporated Registered Banks) Order (No 2) 2012 (the “local OIC”) and Registered Bank Disclosure Statements (Overseas Incorporated Registered Banks) Order (No 2) 2012 (the “branch OIC”).

6 Ref #4986399 6 Whether or not we decide to reflect the new Basel rules, our bank disclosure regime includes a number of items that will need to be updated in time for the first reporting date after banks become subject to the Basel III upgrade of our capital adequacy framework. On our current plans, that date is 31 March 2013. These items are in the following five broad areas— (a) Composition of capital. Existing tables showing the composition of total capital will be out of date, in the sense of referring to superseded terms, once the new Basel III categories of capital come into force. The Basel III disclosure rules include a detailed template for banks to disclose the breakdown of capital and the amounts being phased in or out during the transitional period, as well as requiring full reconciliation of capital components with balance sheet items. The choice, broadly, is either to revise our existing disclosure requirements consistent with our current approach, or to meet the full letter of the Basel III disclosure rules. (b) Terms of capital instruments. We currently require “material terms” to be disclosed for each class of capital instruments. The Basel III disclosure rules include another detailed template that a bank must fill in for each instrument it has issued, and so produce a “main features report” of all of its capital instruments. Again, our choice is either to make minor updates so that our requirements refer to the new capital categories, or to reflect the Basel template in our disclosure requirements. The Basel rules will also require each bank to make available on its website the full terms and conditions of every capital instrument it currently has on issue, so we also consider below the costs and benefits of adding that requirement in New Zealand. (c) Capital ratio summaries: These now need to include the new Common Equity Tier 1 (CET1) ratio, and we need to agree on the best way to present the conservation buffer, countercyclical buffer, and the various minimum requirements. (d) Capital ratios for overseas parent banks / banking groups, and information on which Basel methodology is applied in the home country. This disclosure also needs updating, to handle the likely Basel III implementation in the home countries of overseas-owned New Zealand banks. This is the only change needed that will affect the overseas bank branches. (It also affects locally-incorporated banks that have overseas bank owners.) (e) Counterparty Credit Risk (CCR). The CCR changes include the introduction of new risk-weighting categories for exposures to qualifying Central Counterparties (CCPs). This potentially requires disclosures changes. 7 This paper sets out our proposals for updating our disclosure requirements under each of these headings in turn. Under the first two headings above, we present different options depending on whether we aim just to update our current disclosure to reflect Basel III

7 Ref #4986399 definitions, or to comply fully with the Basel rules. Under the next two headings ((c) and (d) above), we set out a single set of proposals to seek comments at the detailed drafting level. For CCR, we discuss the disclosure changes that could potentially be required, but conclude in the end that the best option is no change for now. 8 We pose a number of consultation questions at relevant points throughout the paper. Submissions should not necessarily be limited to answering these questions, nor do they need to answer all of these questions. The Reserve Bank welcomes all relevant comments on the proposals in this paper. The full list of consultation questions is summarised in Annex 7. 2: Home country approaches 9 For all New Zealand-incorporated banks that have overseas bank owners, the home country banking supervisor is a member of the Basel Committee. Although details are not yet available, we would generally expect these supervisors to stick closely to the full letter of the Basel III disclosure rules. This includes APRA, who have announced that they will be consulting on their approach to Basel III disclosure early next year. 10 We expect that a bank whose parent banking group is implementing the full Basel III disclosure rules will benefit from some synergies in adopting the same approach in New Zealand. 3: Frequency 11 The existing Basel II Pillar 3 requires most of the specified information to be published semi-annually. General qualitative descriptions (of risk management systems and the like) are required annually. Large internationally active banks and other “significant” banks are required to disclose Tier 1 and total capital ratios, and the main components of those ratios, in the “off quarters” (that is, the first and third quarter of the financial year). 12 Our current implementation of Pillar 3 is consistent with this, although it treats all locally￾incorporated banks as if they were “significant”: they are required to disclose the same (full) level of detail at the half year as at the full year, and high-level summary information in the off quarters. The wider scope of our off-quarter disclosure requirements reflects the historically greater importance attached to disclosure in New Zealand, as a host jurisdiction, than elsewhere, although we did cut back the extent of it in our major Disclosure Review (2009-11). Quarterly disclosure also assists cross-bank comparison, since New Zealand banks have a variety of full year balance dates. 13 The Basel III disclosure rules require banks to publish the additional disclosure of composition of capital with the same frequency as they publish their financial statements. Although the rules do not specify whether this refers only to annual financial statements, or

8 Ref #4986399 includes any interim financial reporting, the document states that this frequency is expected typically to be quarterly or half-yearly. The Basel paper also states that the Pillar 3 off￾quarter requirements for major internationally-active or significant banks will continue. 14 Based on these considerations, we do not intend to change the current disclosure frequency of the full detail of capital requirements (risk-weighted assets etc), and we plan also to keep the disclosure of the full details of the breakdown of capital at the same frequency as currently, ie six-monthly. We will leave our off-quarter disclosure requirements for capital adequacy in its current high-level summary form. 15 However, when it comes to disclosure of the main features and of the detailed terms and conditions of individual capital instruments, the Basel III disclosure rules in effect require real-time updates whenever there is a new issue or redemption. This would not fit easily within the structure for our current disclosure documents. We discuss further how we could implement this aspect of the Basel rules under heading 4(b) (terms of capital instruments) below. 4: Areas of disclosure to be changed 4(a): Composition of capital Full and half year requirements 16 The first table in Annex 1 is what we currently require banks to disclose at the full and half year. Clearly a significant amount of this table will be out of date after 1 January 2013, given the major Basel III changes to the components of capital. We give details below of the two options for replacing this table, one continuing our current approach, the other implementing the Basel template approach. Option 1 for Full/ Half Year: continuing current approach 17 The second table in Annex 1 shows how we would adapt our existing disclosure requirements to build in the new Basel III capital concepts, but along similar lines to our current approach. Note that one row is only applicable to banks accredited to use internal models (“BS2B banks”): the row including eligible impairment allowances in excess of expected losses in Tier 2 capital. The version of the table for the BS2B banks would include this, the version for the other banks (the “BS2A banks”) would exclude it. Q1: Do you think the proposed update suitably reflects the Basel III changes in capital definitions?

9 Ref #4986399 Option 2 for Full / Half Year: incorporating the Basel template 18 The first part of Annex 2 shows how each of the items in the Basel III template for the composition of capital corresponds to components of capital specified in the proposed new BS2A and BS2B. (Note that BS2A has only one area of difference from BS2B in the definition of capital, namely the treatment of provisions.) The aim of this analysis is to show how New Zealand-incorporated banks would complete the boxes in the template from the items they need to identify to calculate their capital ratios under BS2A or BS2B. 19 In our view, this would be relatively straightforward. Most of the applicable rows in the template correspond to a specific defined element in BS2A and BS2B. (This is not surprising, given that our amendments to BS2A and BS2B have made only minor departures from Basel III.) In a few cases, banks would need to split out a single defined amount in our capital definitions to fill in two or three rows of the template (in practice banks already do this where different components are material, eg goodwill and other intangibles). The template has rows for “national specific regulatory adjustments” under each category of capital. Various small areas of difference between our approach and the precise Basel III approach can be reflected in these rows. (This is set out in more detail in Annex 2.) 20 We note that at least 23 out of the 85 rows of the Basel template are not applicable for New Zealand. But if we do go for the template option, we think it is important that banks use the exact row numbers and titles given in the template, as otherwise that would defeat Basel’s objective of precise international comparability. However, we do not see the point in including the non-applicable rows in the text of the local OIC, and in addition we would not require banks to report rows that happen to be nil in their case (although they would be free to do so if they chose). 21 The second part of Annex 2 sets out a draft of the new clause to replace existing clause 1 in Schedule 11 of the local OIC, applicable to BS2B banks. Clause 1 in Schedule 9 (for BS2A banks) would be the same, apart from excluding a few rows (as detailed in the Annex) which are not applicable to BS2A banks. This table starts with the exact row titles and numbers from the Basel template, but excludes those which are not applicable and adds in the necessary detail in the rows for “national specific regulatory adjustments”. Q2: Do you foresee any practical difficulties in disclosing the information in the form required by the Basel template? Q3: Do the proposed new clauses for the local OIC make it sufficiently clear what your bank would be required to disclose?

10 Ref #4986399 Option 1 versus Option 2: considerations 22 We do not have any data on the comparative compliance costs of the two options. In reaching a view on the best way forward, it would be very helpful to have information from the banks to allow us to quantify the costs as much as possible (section 5 below specifies the information we need). Although it seems likely that the full Basel III rules approach is more costly, it also has some benefits which may justify greater costs. 23 The Basel Committee’s stated objective in going down the template route is to allow exact comparability across internationally active banking groups. To quote, “It is often suggested that lack of clarity on the quality of capital contributed to uncertainty during the financial crisis.” Each specified, numbered item should mean exactly the same thing for every bank. Basel has agreed that “internationally-active banks across Basel member jurisdictions will be required to publish their capital positions according to the common template”. 24 The following table summarises what we see as the pros and cons of the two options, apart from the question of their relative costs: Cons of Basel option Pros of Basel option The Basel framework applies to internationally active banking groups, on a consolidated basis, so is not automatically required for New Zealand banks. There are reputation benefits for New Zealand in complying with an internationally agreed standard, which will likely come to be regarded as best practice for any banking supervisor. The greater impetus for international harmonisation of standards post-GFC adds to this benefit. Continuing with our own approach, as illustrated in Annex 1, would result in broadly the same material components of capital being disclosed as under the Basel template. Although we express our disclosure requirements generically rather than spelling out each possible item by name, we do ask banks to specify each deduction, and specify each capital instrument. The template approach would allow interested readers to carry out much more easily an exact comparison of our banks’ capital composition with that of international banking groups and of other overseas banks subject to this requirement. We have previously adapted Basel requirements to meet their spirit rather than their letter (the original implementation of Pillar 3 in March 2008). If it is agreed that a template approach is desirable, there is no point in a template differing from the Basel standard. There may be few, if any, readers interested in being able to compare the capital make-up of the four big Australian subsidiaries or of the other smaller banks with overseas banks, and to the extent there are, continuing with our untemplated approach should still allow them to do so adequately. For at least the big four Australian subsidiaries, it may be more efficient for them to publish this information on the same basis that we expect their parents will be required to. There would be advantages for interested parties in being able to see the subsidiaries’ capital position on a basis exactly comparable with that of their parent groups. The template would add bulk back into banks’ disclosure statements after we have recently gone to great lengths to make them more focussed on essential information and easier to navigate. Components of capital currently take up half a page at most whereas the template might need at least two pages. The additional volume of material can be justified if it allows the information already being disclosed to be more easily understood and compared across banks. The nature of a bank’s capital base is key information for anyone interested in a bank’s financial strength.

11 Ref #4986399 Q4: Do you have any comments on the relative merits of the two options? Reconciliation 25 An additional requirement in the Basel III disclosure rules is to provide a reconciliation of the components of regulatory capital with figures included in the financial statements. This is not amenable to a template approach, but the Basel paper outlines the process involved: (a) The first step in the process is to restate the balance sheet prepared for group financial statements in accordance with the “regulatory scope of consolidation” (ie, that used for calculating capital adequacy requirements). This step will not be necessary for New Zealand banks, since we use a single definition of “banking group” for both our capital adequacy requirements and our disclosure requirements. (b) The rest of the process involves expanding the lines of the financial statement balance sheet to display all of the components used in the capital composition template, and showing how they map to that template. 26 We think that it is desirable to have a periodic tying back of the regulatory capital total to balance sheet items. We propose to add a reconciliation requirement whether or not we opt for the full Basel approach. 27 On the question of frequency, we require banks in their half-year and off-quarter disclosure statements to include only interim financial statements, prepared in accordance with NZ IAS 34. Interim financial statements include only a rather summary version of the balance sheet, and we therefore think that by comparison with the full year, it would need considerably more work to break down the available figures in the way needed for the reconciliation. An additional benefit of carrying out the reconciliation for the full year disclosure statement is that the full year financial statements are subject to full audit. Balancing these costs and benefits, we think an annual reconciliation will be sufficient. 28 The proposed change in the local OIC to bring this requirement into effect is the following new clause to be inserted in both Schedule 9 (for BS2A banks) and Schedule 11 (for BS2B banks).

12 Ref #4986399 In Schedules 9 and 11 of the local OIC, add a new clause: 1A Reconciliation of capital to balance sheet (1) For the full year disclosure statement, a reconciliation that shows how each item disclosed in the table required by clause 1 is determined from information reported in the registered bank’s banking group financial statements. (2) Subclause (1) does not require a reconciliation for items in the table that do not apply, or have a nil or zero value. 31 Note that the clause 1 referred to in this new clause 1A will require the breakdown of the composition of capital under either the Basel template approach or the continuation of our existing approach. The figures disclosed for clause 1 should be the amounts contributing to the actual total figure for regulatory capital. We therefore expect that the reconciliation would include the following information: (i) the nominal amount as at 1 Jan 2013 of any instrument subject to phase-out, and the percentage phase-out being applied; and (ii) the nominal amount of instruments for which the amount included in capital may be less for a variety of reasons, including potential tax and other offsets arising upon conversion or write-down, and amortisation of Tier 2 instruments. Q5: Do you agree that readers of disclosure statements will find such a reconciliation useful? Q6: Is the proposed text for the local OIC sufficient to ensure that banks will disclose the above information on phase-out details and eligible amounts of capital? Transitional disclosure 32 The Basel III rules include a transitional expanded variant of the template given in Annex 2, to be used over 2013-2018, which has some additional (unnumbered) rows and an extra column to deal with transitional treatments of capital deductions. 33 However, the RBNZ’s implementation of Basel III includes only limited and simple transitional arrangements. These are for directly-issued Tier 1 and Tier 2 instruments that do not qualify under Basel III as AT1 or Tier 2 respectively. This means that we can use the steady-state version of the template from the outset. Rows 33 and 47 of the Basel template in Annex 2 show the remaining eligible amount of capital contributed by such instruments. Our alternative non-templated approach in Annex 1 includes two rows corresponding to these.

13 Ref #4986399 34 We think it will be useful to have continued disclosure of the January 2013 base amount, to make clearer what is the total amount subject to phase-out, and how the eligible amount will reduce until 2018. As noted above, we expect this to be captured as a matter of course in the reconciliation disclosure. Off-quarter requirements 35 In line with the general discussion of frequency above, we think the off-quarter disclosure of the composition of capital should remain a brief summary. In the local OIC, we propose the following change in Schedule 10 (for BS2A banks) and Schedule 12 (for IRB banks): In Schedules 10 and 12 of the local OIC, replace clause 2 with the following: 2 Capital (1) The information in subclause (2)— (a) in respect of the capital of the registered bank’s banking group; and (b) derived in accordance with the conditions of registration relating to capital adequacy. (2) The following information at the reporting date: Capital Common Equity Tier 1 capital (before deductions) Common Equity Tier 1 capital (net of all deductions and adjustments) Additional Tier 1 capital (before deductions) Additional Tier 1 capital (net of all deductions and adjustments) Total Tier 1 capital Tier 2 capital (before deductions) Tier 2 capital (net of all deductions and adjustments) Capital

Q7: Do you agree with the proposed summary of capital for off-quarter disclosure? 4(b): Terms of capital instruments 36 Annex 3 part 1 shows our current disclosure requirement for the terms of capital instruments. The Basel III rules specify another template (see Annex 4) for the main features of a bank’s capital instruments. The idea is that this would be completed as a “main features report”, with a separate column for each capital instrument issued by the bank. The Basel III rules also require each bank to make available separately on its website the full terms and conditions of each capital instrument issued. The rules envisage in effect

14 Ref #4986399 real-time updating: whenever a bank issues a new instrument, it would need to update its main features report and publish the terms and conditions of the instrument. 37 As in the previous Section 4(a), we consider two broad options, namely whether to update disclosure in line with our current approach, or to go for full Basel implementation. There are some additional choices to be made within the full Basel approach. In this section we do not consider off-quarter disclosure separately, because the frequency of disclosure is intertwined with the various options. Option 1: continuing our current approach 38 The second part of Annex 3 shows a draft updated version of the current requirements given in the first part. 39 This update makes the changes that are needed in any case to reflect the new Basel III categories of capital. The proposed changes go a little beyond this, to reflect the following considerations: (a) More specified detail is currently required on equity than on other instruments. But it is typically non-equity instruments that have the more complex features, and which may therefore be of more interest for readers. So we now think it is preferable to specify the same level of detail across all instruments. Annex 3 therefore combines the two current lists of specified features. (b) Among the features specifically mentioned are conversion and write-down features, to reflect the particular importance that the Basel III capital criteria attach to them. (c) Consistent with the Basel template, we think it is important for readers to know for each instrument whether it is subject to phase-out under the transition arrangements, and if so, to be able to see the whole timetable under which it is being phased out. 40 The reference to “registered bank” in subclause 4 of the existing requirement for BS2A banks appears to be an oversight. This area of disclosure all relates to banking groups only, and any new requirements will take that into account. 41 This disclosure is currently required six-monthly. In light of experience following our Disclosure Review, one bank asked us to consider reducing this frequency to annual, on the basis that this is static information that changes rarely. But although the terms and conditions of a particular financial instrument do not generally change once it has been issued, we note that the half year disclosure statement (“DS”) contains comprehensive detail on a bank’s capital adequacy position. We therefore think that the benefits for a reader of being able to refer to capital instrument details within the one document outweigh the drawback of having this material in the half year DS (which has become much shorter following our Disclosure Review).

15 Ref #4986399 42 However, requiring only six-monthly disclosure would mean that details of any newly￾issued capital instrument might wait up to nine months to be disclosed, by contrast with the real-time updates required by the Basel III rules. To better meet the spirit of the Basel rules, we therefore propose that information on any instruments issued since the previous full or half year reporting date be included in the off-quarter disclosure statements. The proposed text in Annex 3 reflects this disclosure frequency. Q8: Do you have any concerns with these proposed revisions to the existing disclosure of key features of capital instruments? Option 2: implementing the Basel III rules 43 Under this option, we discuss first the Basel requirement that each bank must publish on its website the full terms and conditions of every capital instrument when it is issued. Dealing with this requirement dictates a new disclosure approach, which then has implications for how we handle the Basel requirement for the templated “main features report”. Full terms and conditions 44 The full terms and conditions of a capital instrument typically amount to a lengthy and technical legal document. We do not currently require disclosure of this information in banks’ disclosure statements, and it seems very likely to us that if we did so, it would make them so much longer that it would considerably reduce their value for readers, while at the same time imposing a significant cost on the banks. Our starting point is therefore that we would want the full terms and conditions to be published, if at all, as separate documents. 45 Our disclosure regime for banks is provided for by sections 81 to 83 of the Reserve Bank of New Zealand Act 1989 (“the Act”). The relevant clauses for our consideration here are – (Extract from Reserve Bank of New Zealand Act 1989) 81 Public disclosure of information or data by registered banks (1) The Governor-General may, by Order in Council made on the advice of the Minister that is given in accordance with a recommendation of the Bank, prescribe information or data that must be published by— (a) all registered banks; or (b) any class of registered banks specified in the order. (2) A registered bank to which an Order in Council applies must publish the information or data specified in the order— (a) in a document to be known as a disclosure statement; and (b) in the manner and with the frequency specified in the order. (3) The information or data that may be prescribed in an Order in Council includes, without limitation, information or data about—

16 Ref #4986399 (a) the corporate matters of a registered bank; and (b) the financial matters of a registered bank; and (c) the prudential matters of a registered bank; and (d) any other matters relating to the business, operation, and management of a registered bank. (4) ... 82 Disclosure statements must be signed (1) Every disclosure statement that a registered bank is required to publish under section 81 must be dated and signed,— (a) in the case of a body corporate, by every director of the body corporate or by each director's agent authorised in writing to do so; and (b) ... 46 Before our Disclosure Review, the approach of our disclosure regime was based around the idea of a single “disclosure statement” being made up of three components, namely the GDS (“General Disclosure Statement”), KIS (“Key Information Summary”) and the SDS (“Supplemental Disclosure Statement”). The SDS was used for disclosure of certain lengthy legal documents such as guarantee documentation and netting agreements, to avoid their cluttering up the main GDS. Although the SDS contained largely static information that was usually unchanged for many quarters, the approach then meant that it was nevertheless subject to the quarterly publication and directors’ sign-off requirements, as part of the “disclosure statement”. In feedback to the Disclosure Review, banks gave this as the reason why there were material compliance costs in keeping a PDF of their SDS on the bank’s website. 47 With our Review, we changed the approach so that various disclosure statements are required. We believe that this also gives us a more efficient way of implementing this aspect of the Basel III disclosure rules than using the former approach: we can tailor a disclosure statement to meet this need, so that the full terms and conditions for each new capital instrument that a bank issues would be a separate disclosure statement within the meaning of section 81(2) of the Act. This would be governed by new requirements for the frequency and manner of publication, which would be entirely separate from those for a bank’s existing disclosure statements. This would allow us to require that each set of terms and conditions must be published on the bank’s website when the instrument is issued, and must be retained there until the instrument is retired. 48 While directors’ sign-off of any disclosure statement is required under the Act, this approach would mean that it would only have to be fulfilled once for each new instrument. This approach would also allow publication to be timely, rather than delayed until the next available quarterly reporting date.

17 Ref #4986399 Main features template 49 The Basel III disclosure rules envisage the main features template forming the basis of a single “main features report” that summarises all of the capital instruments (including equity) issued by a bank. This would be updated whenever there is a new issue, or a redemption, conversion or write-down of an existing issue. The first two would be relatively infrequent events for New Zealand banks, and the last two would only arise in the event of severe stress. So this main features report would not need regular updating for this reason. 50 However, one problem is that row 8 of the template report requires the dollar amount that each instrument contributes to regulatory capital as of the most recent reporting date. The Basel rules state that the main features report should ideally be included in the bank’s published financial reports, or at least there should be a link to it from the financials. We think it would be unnecessary to impose a requirement that the main features report is both included in quarterly disclosure statements and separately re-published whenever there is a separate trigger (new issue etc). However, we see genuine benefits for readers in having access to a templated summary of this sort, and therefore propose the following options to achieve that more efficiently. Option 2 sub-option (1) 51 A bank would publish its main features report as a separate disclosure statement available on its website. Rather than requiring a bank to keep template row 8 up to date with the latest dollar amounts of regulatory capital, we would specify standard wording for Row 8 such as “for amount recognised in regulatory capital, see the bank’s most recent disclosure statement” (and possibly require a hyperlink). A bank would only need to re-publish this main features report upon issue of a new capital instrument, or the redemption, write-down or conversion of any existing capital instrument. Under this option, summary terms and conditions would still be included in the bank’s existing disclosure statements for the full and half year, but we would not include the off-quarter update for any newly-issued instruments proposed in the non-Basel option (Option 1 above), since a timely update is provided by the separate disclosure. Option 2 sub-option (2) 52 A bank would publish a single new disclosure statement each time it issues a new capital instrument, containing up-front the template completed for that instrument, followed by the full terms and conditions of that instrument. The problem with Row 8 would be dealt with as under sub-option (1). Each such separate disclosure statement would only need to be re￾published on write-down or conversion of the instrument it relates to. As with sub￾option (1), summary terms and conditions would still be included in the bank’s main disclosure statement for the full and half year, but there would not be off-quarter updates.

18 Ref #4986399 Option 2 sub-option (3) 53 A bank would include the main features report within its regular disclosure statement. This would replace the summary terms and conditions as currently required, and as with the non-Basel option above, the full report for all instruments would be required in the full year and half year DSs: and in the off-quarter DS, the template would be required for any new instruments issued during the most recent quarter, to minimise the delay in disclosure compared to the strict Basel III approach. In this case Row 8 would be completed as specified in the BCBS rules. Discussion of the options 54 This following table shows the timing and form of disclosure of each of the three possible components under all four options (the non-Basel option, and the three variants on the Basel option): Component Option Summary description (updated from our current approach) Basel template of main features Full terms and conditions Option 1 (Non-Basel) Full-year and half-year DS: summary of all existing instruments. Off-1/4 DS: summary of any new instruments issued during latest quarter. None. None. Option 2 (1) Full-year and half-year DS only: summary of all existing instruments. Main features report for all instruments published separately on the bank’s website: updated on new issue or redemption of any instrument. For each new instrument issued: published on the bank’s website in a new PDF on the day it is issued. Option 2 (2) Full-year and half-year DS only: summary of all existing instruments. For each new instrument issued: published separately on the bank’s website on the day it is issued, in a new PDF also including the full terms. See column to left: published on website on issue date, in the same PDF as the template of main features. Option 2 (3) None: replaced in DSs by template. Full-year and half-year DS only: main features report for all instruments currently issued. Off-1/4 DS: template for any new instrument issued during latest quarter. For each new instrument issued: published on the bank’s website in a new PDF on the day it is issued. 55 To give an idea of how much disclosure is involved, the following table shows how many separate capital instruments (including equity) the five biggest banks disclosed in their most recent disclosure statements:

19 Ref #4986399 ANZN ASB BNZ Kiwibank Westpac Number of capital instruments 6 3 6 2 3 56 Across all the options, the points about frequency and timeliness apply: in our view, there is limited value in regularly re-publishing information that does not change; but when a new instrument is issued, there is value in readers having access to its details soon after issue date rather than waiting for the next full DS to be published. Many of the general questions noted in paragraph 24, on whether or not to go down the full Basel III approach, also apply equally here. Option 1 (non-Basel) 57 This is almost certainly the lowest-cost option. This, in effect, continues our current approach, although it adds off-quarter updates for any new instruments issued during the quarter. All material terms and conditions of each instrument are disclosed in a descriptive form. The obvious main drawback is that is not at all Basel-compliant. Option 2 sub-option 1 58 This option is as close to full Basel compliance as we think reasonable: we regard the exception for row 8 of the template as a practical solution, since readers will see the latest amount of regulatory capital for each instrument in the context of the bank’s latest capital adequacy figures, in its main disclosure statement. This option continues our existing disclosure statements along similar lines, while adding two additional forms of disclosure statement. Although these latter represent gross additional cost, we believe that the mechanism we are proposing to achieve this will keep this cost to a minimum. The advantages of this option include the benefit of full Basel compliance in itself, and also the likely benefits for readers of being able to see important features of capital instruments tabulated in this way, rather than set out sequentially in descriptive text, as at present. Option 2 sub-option 2 59 This is broadly Basel-compliant: for each instrument, the full terms and conditions and the template summary are published whenever required. However, this would not satisfy the Basel objective of a single main features report. This format also seems somewhat less helpful compared to sub-option 1: the reader has to open a separate (large) PDF to see the summary details of each capital instrument, rather than being able to see and compare them all in one table. There may be some minor cost savings for banks compared to sub￾option 1, since, for the most part, there will be one new document to be published, only when a new capital instrument is issued.

20 Ref #4986399 Option 2, sub-option 3 60 This sub-option is also broadly Basel-compliant. Compared to sub-option 2, there is a single main features report (included in the full and half year disclosure statement), but the compliance shortfall is that publication of the template for a new instrument has to wait for publication of the next disclosure statement. With quarterly reporting and a three month deadline, this means a delay of up to six months rather than real-time updates. Compared to sub-options 1 and 2, this sub-option avoids the duplication of both having the descriptive summary features of capital instruments in the regular disclosure statement, and having the templated features in a separate document. One practical issue is how feasible it would be for banks to include the main features report within the layout of their regular disclosure statements. Q9: Please give your views on the benefits or otherwise of full Basel III implementation in this area, and on any practical challenges with any of the three options proposed for achieving that. Implementation issues with the above options 61 Option 1 (non-Basel) would be implemented entirely by the changes to the text of the local OIC proposed in Annex 3. Within Option 2 (Basel), sub-options 1 and 2 would also include the same changes in the full and half year disclosure, but would not require the off￾quarter update. Sub-option 3 would need the Basel template to be incorporated in the local OIC. The existing text of the local OIC will be out of date by 31 March 2013, so one or other of these changes needs to be in place by then. 62 The Basel template for terms and conditions of capital instruments is set out in Annex 4. We are not including in this consultation proposed text for the local OIC to impose a requirement on banks to provide the information in the template, but if we go down the full Basel III path we will need to do so, and if we choose Option 2 (3) we will need to have that in place by 31 March 2013. Answers to the following questions will help us to draft suitable text to be included in an Order in Council. Q10: Do you foresee any problems in being able to provide the information required by the Basel main features template, as specified in the Basel rules? Q11: Which different instrument types do you think the RBNZ should list as the menu options for completing row 7 of the template, and do you foresee problems in writing a specific list into the text of the local OIC? Q12: Do you think the explanatory text in the Basel III rules gives sufficient clarity on what a bank must provide under each row?

21 Ref #4986399 63 Any of the sub-options under Option 2 would additionally involve the establishment of one or two new forms of disclosure statement. Since these would not be needed to replace superseded existing requirements, the 31 March deadline does not apply. Hence we are not including in this consultation the detailed text of new or amending Orders in Council to set up these additional new requirements. If, following the current consultation, we do decide to follow the detailed Basel III rules approach, we will consult again early in 2013 on the necessary details (see below, Section 6: Next steps). 64 At this stage, our initial thinking on some features of the additional disclosure statements that would be required is as follows: • We would propose to put the additional changes into effect by 30 June 2013, which is the deadline set in the Basel III disclosure rules themselves. • Although the Basel III rules stipulate publication of terms and conditions when a capital instrument is issued, we will consult on how exactly to define that date, and whether publication on the same day is feasible. • We will specify requirements to ensure that banks make these capital disclosure statements readily accessible to readers, and we think a reasonable way to achieve this would be to require that the links to them are available on the same web page as for the main DSs. • The “steady-state” requirements will be for a bank to publish a separate disclosure statement for each new capital instrument when it is issued. We will therefore propose transitional arrangements, to ensure that banks publish the information for each existing instrument within some reasonable timeframe after the switch-on date. Q13: Do you have comments at this stage on these suggested features of any separate new disclosure statements? 4(c): Summary of NZ-incorporated bank capital ratios Full year and half-year requirements 65 Banks currently disclose the following: • Banking group: Tier 1 and total capital ratio derived in accordance with the bank’s conditions of registration • Registered bank (ie solo-consolidated): Tier 1 and total capital ratios derived in accordance with BS2A / BS2B (as applicable). 66 Banks do not currently have to disclose the minima they have been set for their group capital ratios (although many choose to do so). Given the greater complexity of the minimum requirements under Basel III, we think it is now desirable to require an explanation to be included in banks’ disclosure requirements.

22 Ref #4986399 67 The Basel III template for the composition of capital includes some rows on the overall ratios. (See rows 61-68 in Annex 2.) So if we opt for full adoption of that template (as discussed in section 4(a) above), the required ratios will be shown within the template in any case. However, we think it will remain helpful to pull out the key ratios and the applicable minima in a summary table, updated for Basel III. 68 The Basel III buffer requirement is made up of a capital conservation buffer, a countercyclical buffer, and a G-SIB (“global systemically important bank”) buffer. Our proposed initial condition of registration for the buffer only specifies the whole buffer requirement, not its parts. However, we have made clear that at present it consists entirely of the conservation buffer, and at any future point when we do use the countercyclical buffer, we will make it clear how much that contributes to the total buffer. The G-SIB component on the other hand will not be applicable in New Zealand in the foreseeable future. We therefore propose to require disclosure of the total buffer requirement, along with the amount of the conservation buffer and countercyclical buffer that make it up. 69 The current disclosure includes the requirement to show comparative figures for the previous corresponding period. We propose to retain this, but to handle the change-over to the Basel III minimum capital requirements, banks will not have to calculate figures for previous periods for which they did not have to calculate those figures at the time. 70 The following is therefore the proposed clause to replace the current Schedule 9, clause 11 (for BS2A banks) and Schedule 11, clause 15 (for BS2B banks): In Schedule 9 replace clause 11, and in Schedule 11 replace clause 15, with the following: 11 /15 Capital ratios (1) The information in subclause (2)— (a) in respect of the registered bank’s banking group; and (b) derived in accordance with the conditions of registration relating to capital adequacy. (2) The following information as at the reporting date: Common Equity Tier 1 (CET1) ratio Tier 1 capital ratio Total capital ratio Ratio as at reporting date Minimum ratio requirement CET1 surplus to minimum requirement, available to meet buffer requirements (as % of RWAs) Total CET1 buffer requirement of which: conservation buffer requirement of which: countercyclical buffer requirement

23 Ref #4986399 (3) The information required to be disclosed under subclause (2) must include comparative figures for the previous corresponding period. (4) Subclause (3) does not require a comparative figure to be produced for a previous corresponding period if that figure had not previously been required to be disclosed for the previous corresponding period. 71 By contrast with group ratios, banks’ solo capital ratios are not currently subject to minimum requirements. But we remain of the view that solo ratios are of sufficient interest to require disclosing. Given this, and given the importance now attached to the CET1 ratio as a measure of capital adequacy, we think there is a strong case for adding a bank’s solo CET1 ratio to the required disclosure. But there are no applicable minimum requirements to be disclosed at the solo level, nor any applicable CET1 buffer, so there seems no point in disclosing the solo CET1 surplus ratio. 72 Disclosure at the solo (registered bank) level should therefore consist solely of the CET1 ratio, Tier 1 ratio, and total capital ratio. For BS2A banks, this means replacing Schedule 9 clause 12 as follows: In Schedule 9 of the local OIC, replace clause 12 with the following: 12 Solo capital adequacy (1) The information in subclause (2)— (a) in respect of the registered bank; and (b) derived in accordance with Capital Adequacy Framework (Standardised Approach) (BS2A). (2) The following information as at the reporting date: (a) Common Equity Tier 1 capital ratio; (b) Tier 1 capital ratio; and (c) total capital ratio. (3) The information that is required to be disclosed under subclause (2) must include comparative figures for the previous corresponding period. (4) Subclause (3) does not require a comparative figure to be produced for a previous corresponding period if that figure had not previously been required to be disclosed for the previous corresponding period. 73 For BS2B banks, the update is complicated by the switch from Basel I to Basel II solo capital ratio disclosure that is currently under way. We are expecting to have an amending Order gazetted before end-November that will make the required amendments to Schedule 11 clause 16, to take effect from 31 December 2012. We propose to then update the same clause again with effect from 31 March 2013, to read as follows:

24 Ref #4986399 In Schedule 11 of the local OIC, replace clause 16 with the following: 16 Solo capital adequacy (1) The information in subclause (2)— (a) in respect of the registered bank; and (b) derived in accordance with Capital Adequacy Framework (Internal Models Based Approach) (BS2B). (2) The following information as at the reporting date for the registered bank on a solo basis: (a) Common Equity Tier 1 capital ratio; (b) Tier 1 capital ratio; and (c) total capital ratio. (3) The information that is required to be disclosed under subclause (2) must include comparative figures for the previous corresponding period. (4) Despite clause 16 in subpart 1 of Part 2, a comparative figure that must be disclosed under subclause (3) for a date on or before 30 September 2012 may be the figure previously determined in accordance with Capital Adequacy Framework (Basel I Approach) (BS2) for the date on or before 30 September 2012. (5) If a comparative figure is determined in accordance with Capital Adequacy Framework (Basel I Approach) (BS2) and disclosed in reliance on subclause (4), the disclosure of the comparative figures must be accompanied by a statement that identifies the capital adequacy frameworks that have been used to calculate the respective comparative figures. (6) Subclause (3) does not require a comparative figure to be produced for a previous corresponding period if that figure had not previously been required to be disclosed for the previous corresponding period. Off-quarter requirements 74 Locally-incorporated banks currently disclose the following in the off-quarters: Banking group: Tier 1 and total capital ratio derived in accordance with the bank’s conditions of registration We do not require solo capital ratios to be disclosed at the off-quarter. 75 The summary disclosure of a banking group’s capital ratios is currently the same for the off-quarters as for the full and half-year. Although off-quarter capital adequacy disclosure is otherwise in much more summary form than for the full and half-year, these group capital ratios are the key numbers in that summary. We therefore propose to expand the

25 Ref #4986399 off-quarter disclosure of the key group ratios to reflect the Basel III changes, in the same way that we are doing for the full year and half year summaries. 76 The following is therefore the proposed change to Schedule 10 (for BS2A banks) and to Schedule 12 (for BS2B banks): In Schedules 10 and 12 of the local OIC, replace clause 1 with the following: 1 Capital ratios (1) The information in subclause (2)— (a) in respect of the registered bank’s banking group; and (b) derived in accordance with the conditions of registration relating to capital adequacy. (2) The following information as at the reporting date: Common Equity Tier 1 (CET1) ratio Tier 1 capital ratio Total capital ratio Ratio as at reporting date Minimum ratio requirement CET1 surplus to minimum requirement, available to meet buffer requirements (as % of RWAs) Total CET1 buffer requirement of which: conservation buffer requirement of which: countercyclical buffer requirement Q14: Do you think these proposed updates for the disclosure of summary capital ratios are the most appropriate way to reflect the new Basel III capital regime? 4(d): Presentation of parent bank / parent banking group ratios etc 77 A New Zealand-incorporated bank that is a subsidiary of an ultimate parent bank is required to include some information in its full and half year disclosure statements on the capital ratios of its ultimate parent bank, and ultimate parent bank group, and on the capital adequacy requirements imposed on the parent bank group by the home country supervisor. 78 A New Zealand branch of an overseas-incorporated bank is required to disclose very similar information about the capital adequacy of the overseas bank and its overseas banking group. One key difference is that this disclosure is required every quarter.

26 Ref #4986399 79 The detail of these current requirements is set out in Annex 5, with some minor proposed changes marked up that are needed to reflect Basel III. The rationale for these changes is the following: (a) We propose to add the CET1 ratio of the overseas/ parent bank, reflecting the importance of that ratio. The inclusion of the words “if applicable” is intended to handle any timing differences in minimum CET1 ratios being imposed by the home country supervisor of any of our banks. (b) We propose to continue the disclosure of whether the overseas/ parent bank is using the standardised or the internal models approach for calculating its capital requirements for credit and operational risk. We think there is some confusion around the terms “Basel II” and “Basel III”, but we take the view that Basel III is a package of reforms that updates Basel II rather than replacing it. The proposed wording reflects this. We think we can safely drop the reference to the home country supervisor using Basel I at this point. (c) We currently require locally-incorporated banks, but not branches, to provide a pointer to Pillar 3 (capital adequacy) information provided by the parent / overseas bank. However, we think that it is, if anything, more important for branches than for subsidiaries to disclose information on the overseas bank’s capital adequacy, since it is essentially the only information in a branch’s disclosure statement that reveals anything about the branch’s solvency. We therefore propose to bring this aspect of the branch disclosure into line with that for locally-incorporated banks. (d) For the same reason, we plan to keep the current greater frequency of this disclosure for branches than for locally-incorporated banks. Q15: Do you think these proposed updates for the disclosure of overseas parent group capital adequacy are the most appropriate way to reflect the new Basel III capital regime? 4(e): Counterparty credit risk (CCR) 80 The proposed CCR changes include a new risk-weighted asset (RWA) calculation for trade exposures to qualifying CCPs. The total RWA would be the sum of the credit-equivalent amount of trades with the CCP, risk-weighted at 2%, plus any exposure the bank has to the CCP’s default fund, risk-weighted at 1250%, with a cap on the sum of these two items of 20% of the trade exposure. This is in effect a standardised treatment, which would apply to both BS2A and BS2B banks. 81 For disclosure purposes, any such RWAs will fall under the heading of “off-balance sheet exposures” under the standardised treatment. These are covered by clause 3, Schedule 9 for

27 Ref #4986399 BS2A banks, and clause 6, Schedule 11 for BS2B banks. The trade exposures would fall under the sub-heading of “market related contracts”, and any exposure to a default fund would, as we currently understand it, count as a direct credit substitute. In this area of disclosure we do not require a breakdown of each class of exposure into different risk￾weighting categories, rather we just require a figure for the average risk weight for that class. This means that the new risk-weighting category for qualifying CCPs can be handled within the existing disclosure requirements. (Note that exposures to non-qualifying CCPs are treated as bilateral exposures, and are thus included within existing risk-weighting categories in any case.) 82 It may be that in due course information on banks’ exposures to CCPs, qualifying or otherwise, will be of sufficient interest that it should be disclosed separately as a matter of course. For now however, we think it makes better sense to wait and see how New Zealand banks’ use of CCPs develops, as well as first finalising the policy changes proposed in our consultation on CCR. We therefore propose not to make any changes in this area, but to keep it under review. Q16: Do you agree that making no change is the most appropriate solution for handling banks’ potential exposures to qualifying CCPs, at least initially? 5: Costs and benefits 83 The Reserve Bank is required to publish a Regulatory Impact Assessment (RIA) when it implements a material policy change. We plan to publish a RIA when we have decided on and implemented the changes in our disclosure regime proposed in this consultation (with any refinements made in light of feedback). 84 The changes proposed in this paper are mainly driven by the updates in our capital adequacy requirements that are needed to implement Basel III. Those changes have been separately consulted on, and we have published an RIA of them. For most of the disclosure updates proposed in this paper, the alternative of not making any change is not a viable option. 85 In a few key areas we are proposing alternative approaches. Some of the alternatives quite clearly impose higher costs than others, but we also believe they deliver greater benefits. Those benefits cannot realistically be quantified, but in this paper we have discussed the relative benefits of the different options above, and sought views on our analysis. 86 The relative costs of the different options can at least in principle be quantified. To help reach decisions on the best way forward, we need the best available estimates of the costs of the various components of the proposals. To come up with those estimates, we need data from banks on what they expect the costs to be, in the following areas:

28 Ref #4986399 (a) initial implementation: the one-off costs of changing processes to include the new information in disclosure statements; (b) the continuing recurring costs of providing the new information in quarterly disclosure statements and (potentially) the new form of disclosure statements whenever new capital instruments are issued; and (c) any other type of cost not included in the above. 87 Please could you provide information on the costs (and comparative costs) of the following proposals: (a) components of capital (six-monthly): comparatives costs of either updating the disclosure in line with our current approach, or introducing the Basel II template approach. (b) reconciliation (annual): the costs of adding the requirement to reconcile regulatory capital components to financial statement figures. (c) main features of instruments: the cost of updating the six-monthly disclosure in line with our current approach, the additional cost of requiring any off-quarter update, and the comparative cost of, alternatively, replacing the disclosure in the main DS with the Basel template key features report. (d) main features: the additional cost of publishing full terms and conditions of each instrument as a separate disclosure statement on the bank’s website. (e) main features: the additional cost of publishing separately on the bank’s website a main features report using the Basel template, updated whenever there is a new issue/ redemption / change in terms of capital instruments. (f) other updates: the costs of updating the existing disclosure of summary capital ratios, and of overseas parent bank group capital information, as proposed in sections 4(c) and 4(d) of this paper. 88 In providing this data, it would be very helpful if banks could use the following approach to derive the annual cost of the additional time their staff would need to spend on compliance: estimate the amount of additional hours employees would spend on preparing the each type of disclosure statement each time it needs to be published; multiply by the estimated hourly total cost to the bank of employing each of those employees (including wages and overhead costs); and then multiply that figure by the number of times per annum the exercise would be carried out (eg, in the case of the full composition of capital table, twice; or in the case of individual instrument terms and conditions, however often the bank expects to issue new instruments on average). (This follows the so-called “Standard Cost Model” methodology.)

29 Ref #4986399 89 More generally, we would appreciate any other background information that will help us to understand the robustness of the estimates. This could include for instance high and low values of assumptions. 90 Although if we opt for the full Basel III rules route we will be consulting again on the second stage of changes needed, please include best estimates of the cost of those further changes now. Please ignore the costs of calculating numbers that are needed in any case to comply with the new Basel III capital requirements. Also, ignore any costs that would have been incurred in any case as a result of the overseas parent banking group having to comply with home supervisor implementation of these new disclosure requirements. 6: Next steps 91 The deadline for comments on this consultation paper is 14 December 2012. 92 The combination of the time needed to get Orders in Council made and the intervening Christmas / summer period means that the overall timeline is already quite tight. Working back from the end-point gives the following key stages: 14 December deadline for comments (4 week comment period) early February Amending Orders and associated reports for Minister finalised 1 March (at the latest) Amending Orders gazetted 31 March 2013 (at the latest) Revisions to Orders come into effect 93 If we decide in the light of feedback on this consultation paper that we will implement the full details of the Basel III disclosure rules, as discussed above the amendments to the disclosure regime will be made in two stages. The changes to the existing disclosure statements will be implemented on the above timetable in any case. There would also need to be new types of disclosure statement created, and we would issue a further paper to consult on the details of those. (This would only be for locally-incorporated banks.) The timetable for this would be as follows: March/April 2013 Consult on details of new Order (or amendments to local Order) early May New (or amending) Order and associated reports for Minister finalised 31 May (at the latest) New/amending Order gazetted 30 June 2013 (at the latest) New/amending Order comes into effect

30 Ref #4986399 Annex 1: Composition of capital – continuing the current approach The current disclosure requirement is the following clause in Schedule 9 of the local OIC (for BS2A banks) and Schedule 11 (for BS2B banks): 1 Capital (1) The information in subclause (2)— (a) in respect of the capital of the registered bank’s banking group; and (b) derived in accordance with the conditions of registration relating to capital adequacy. (2) The following information as at the reporting date: Capital Tier one capital Issued and fully paid up ordinary share capital Perpetual fully paid up non-cumulative preference shares Revenue and similar reserves Current period’s audited retained earnings Tier one minority interests Less: deductions from tier one capital (specify each deduction) Plus: other adjustments to tier one capital (specify each adjustment) Total tier one capital Tier two capital Upper tier two capital Unaudited retained profits Revaluation reserves Upper tier two capital instruments (specify) Lower tier two capital Term subordinated debt Other capital elements with original maturity of five years or more Total tier two capital Tier one capital plus tier two capital Less: deductions from total capital (specify each deduction) Plus: other adjustments to total capital (specify each adjustment) Total capital

31 Ref #4986399 To update this requirement to reflect the new Basel III categories of capital but keep the current approach to disclosure, we propose the replacement clause below. The version for BS2B banks in Schedule 11 would include the row for “Eligible impairment allowance in excess of expected loss”, whereas the version for BS2A banks in Schedule 9 would exclude this row: 1 Capital (1) The information in subclause (2)— (a) in respect of the capital of the registered bank’s banking group; and (b) derived in accordance with the conditions of registration relating to capital adequacy. (2) The following information as at the reporting date: Capital Common Equity Tier 1 capital Issued and paid-up ordinary share capital plus related share premium Retained earnings Accumulated other comprehensive income Minority interests eligible in CET1 Less: deductions from Common Equity Tier 1 capital (specify each deduction) Total Common Equity Tier 1 capital Additional Tier 1 capital Qualifying AT1 instruments plus related share premium (specify) of which: classified as equity under generally accepted accounting practice of which: classified as liabilities under generally accepted accounting practice Instruments subject to phase-out from AT1 (qualifying amount) (specify) AT1 instruments issued by fully consolidated subsidiaries and held by third parties Less: deductions from Additional Tier 1 capital (specify each deduction) Total Additional Tier 1 capital Total Tier 1 capital Tier 2 capital Qualifying Tier 2 instruments plus related share premium (specify) Instruments subject to phase-out from Tier 2 (qualifying amount) (specify) Tier 2 instruments issued by fully consolidated subsidiaries and held by third parties Revaluation reserves Eligible impairment allowance in excess of expected loss [for BS2B banks only]

32 Ref #4986399 Less: deductions from Tier 2 capital (specify each deduction) Total Tier 2 capital Total capital The figures disclosed should be the amounts contributing to the actual total figure for regulatory capital.

33 Ref #4986399 Annex 2: Composition of capital – adopting the Basel template approach (1) Analysis of Basel template versus our proposed Basel III revisions to capital The following table shows (in the first two columns) the exact row numbers and row definitions of the Basel III template for disclosing the composition of capital. (The rows in italics match those in the Basel document, and are used there to show rows that will not apply in the Basel III framework after 1 Jan 2022.) The third column summarises briefly how each row in the template corresponds to terms defined in BS2A and BS2B, in our proposed implementation of the Basel III capital adequacy requirements. (The paragraph references use the numbering in the proposed new versions of BS2A and BS2B which we issued for consultation in September 2012: please note that we cannot rule out some changes in this numbering once the new versions of BS2A and BS2B are finalised.) The pale blue shading shows the rows that are not applicable in New Zealand. Basel disclosure template Closest equivalents in BS2A and BS2B Common Equity Tier 1 capital: instruments and reserves 1 Directly issued qualifying common share (and equivalent for non-joint stock companies) capital plus related stock surplus Issued and paid-up ordinary share capital meeting the CET1 criteria (BS2A:7(2)(a), BS2B:2.8(a)); plus share premium resulting from the issue of CET1 ordinary share capital (BS2A:7(2)(b), BS2B:2.8(b)). 2 Retained earnings Retained earnings (BS2A:7(2)(c), BS2B:2.8(c)) 3 Accumulated other comprehensive income (and other reserves) Accumulated other comprehensive income and other disclosed reserves [but with certain exclusions specified, including some revaluation reserves eligible for Tier 2] (BS2A:7(2)(d), BS2B:2.8(d)) 4 Directly issued capital subject to phase-out from CET1 (only applicable to non-joint stock companies) N/A 5 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) Minority interests arising from the issue of ordinary shares to third parties by a fully consolidated subsidiary (BS2A:7(2)(e), BS2B:2.8(e)) 6 Common Equity Tier 1 Capital before regulatory adjustments Sum of the above Common Equity Tier 1 capital: regulatory adjustments 7 Prudential valuation adjustments N/A (relates to market risk – not included in our Basel II implementation) 8 Goodwill (net of related tax liability) Goodwill and other intangible assets net of any associated deferred tax liability (BS2A:7(3)(a), BS2B:2.9(a)). [= sum of Basel items 8, 9 and 20, without taking out the item 20 threshold amount.] 9 Other intangibles other than mortgage-servicing rights (net of related tax liability) Included in row 8.

34 Ref #4986399 10 Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability) Deferred tax assets, with netting of deferred tax liabilities only if various criteria are met. (BS2A:7(3)(b), BS2B:2.9(b)). [= sum of Basel rows 10 and 21, without deducting row 21 threshold amount] 11 Cash-flow hedge reserve Cash-flow hedge reserve (BS2A:7(3)(c), BS2B:2.9(c)). 12 Shortfall of provisions to expected losses Any deduction arising from total expected loss being higher than impairment allowances (BS2B:2.9(n)). (This only applies to IRB banks, no equivalent in BS2A.) 13 Securitisation gain on sale (as set out in paragraph 562 of Basel II framework) N/A (we have not implemented the full Basel securitisation treatment) 14 Gains and losses due to changes in own credit risk on fair valued liabilities Same as Basel. (BS2A:7(3)(i), BS2B:2.9(i)). 15 Defined-benefit pension fund net assets Defined benefit superannuation fund asset on the balance sheet (BS2A:7(3)(k), BS2B:2.9(k)). 16 Investments in own shares (if not already netted off paid-in capital on reported balance sheet) Holdings of the registered bank’s own ordinary shares. (BS2A:7(3)(l), BS2B:2.9(l)). 17 Reciprocal cross-holdings in common equity Reciprocal cross-holdings in the capital of banking, financial and insurance entities (unless deducted under specified other requirements) (BS2A:10(3)(a), BS2B:2.25(a)). 18 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold) Defined as in Basel, except we refer to bank, NBDT or insurance entity (or overseas equivalent). (BS2A:10(3)(b), BS2B:2.25(b)). 19 Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) Defined as in Basel, except we refer to bank, NBDT or insurance entity (or overseas equivalent), and we require deduction of full amount of any investment where more than 10% of the investee’s capital is owned. (BS2A:10(3)(c), BS2B:2.25(c)). 20 Mortgage servicing rights (amount above 10% threshold) Full amount is already included in row 8, ie we don’t allow the 10% threshold. 21 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability) Full amount is already included in row 10, ie we don’t allow the 10% threshold. 22 Amount exceeding the 15% threshold This relates to rows 19, 20 and 21, and doesn’t apply since we aren’t applying the threshold allowances for those. 23 of which: significant investments in the common stock of financials N/A 24 of which: mortgage servicing rights N/A 25 of which: deferred tax assets arising from temporary differences N/A 26 National specific regulatory adjustments We have several additional deductions, specified in BS2A sections 7(2)(d), 7(3)(d) to 7(3)(h), 7(3)(j), 7(3)(m) and 10(3)(d); and in BS2B sections 2.8(d), 2.9(d) to 2.9(h), 2.9(j), 2.9(m), and 2.25(d). Also certain items are excluded directly from accumulated reserves in

35 Ref #4986399 row 3 above. (Discussed further below.) 27 Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions As required by BS2A section 10(1) and BS2B section 2.23. 28 Total regulatory adjustments to Common Equity Tier 1 Sum of the above. 29 Common Equity Tier 1 capital (CET1) Row 6 – row 28 Additional Tier 1 capital: instruments 30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus Instruments issued by the registered bank (or an SPV of the registered bank), meeting the specified criteria (BS2A:8(2)(a), BS2B:2.13(a)), plus share premium resulting from the issue of AT1 instruments (BS2A:8(2)(b), BS2B:2.13(b)). 31 of which: classified as equity under applicable accounting standards Determined by NZ GAAP, not BS2A or BS2B. 32 of which: classified as liabilities under applicable accounting standards Determined by NZ GAAP, not BS2A or BS2B. 33 Directly issued capital instruments subject to phase-out from Additional Tier 1 See BS2A section 6(3), BS2B section 2.5. Instruments that qualify as Tier 1 under Basel II but not Basel III are phased out over 1.1.2014 to 31.12.2017. 34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1) Instruments issued by a fully consolidated subsidiary of the registered bank and held by third parties (meeting the specified AT1 criteria) (BS2A:8(2)(c), BS2B:2.13(c)). 35 of which: instruments issued by subsidiaries subject to phase-out As for row 33 36 Additional Tier 1 capital before regulatory adjustments Sum of relevant rows above. Additional Tier 1 capital: regulatory adjustments 37 Investments in own AT1 instruments We do not allow this in AT1 in the first place (see BS2A:10b(1)(j), BS2B:2.29(j)). 38 Reciprocal cross-holdings in AT1 instruments As for row 17. (“Corresponding deduction” approach.) 39 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above 10% threshold) As for row 18. (“Corresponding deduction” approach.) 40 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions) Defined as in Basel, except we refer to “bank, NBDT or insurance entity (or overseas equivalent)”. Basel’s threshold deduction option is only available for CET1 (see row 19) – here, Basel requires deduction of full amount of any investment over 10% of the investee’s capital, and we match that. (BS2A:10(3)(c), BS2B:2.25(c)). 41 National specific regulatory adjustments We have an additional requirement that AT1 instruments without full voting rights must be no more than 25% of total Tier 1. (BS2A:8(6), BS2B:2.17)

36 Ref #4986399 42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions See BS2A:10(1), BS2B:2.23. 43 Total regulatory adjustments to Additional Tier 1 capital Sum of relevant rows from 37-42 above. 44 Additional Tier 1 capital Row 36 – row 43 45 Tier 1 capital (T1 = CET1 + AT1) Row 29 + row 44 Tier 2 capital: instruments and provisions 46 Directly issued qualifying Tier 2 instruments plus related stock surplus Instruments issued by the registered bank (or an SPV of the registered bank) meeting the specified criteria, plus any associated share premium (BS2A:9(2)(a) and 9(2)(b); BS2B:2.19(a) and (b)). 47 Directly issued capital instruments subject to phase-out from Tier 2 See BS2A section 6(3) and BS2B section 2.5. Instruments that qualify as Tier 2 under Basel II but not Basel III are phased out over 1.1.2014 to 31.12.2017. 48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2) Instruments issued by a fully consolidated subsidiary of the registered bank and held by third parties (meeting the specified Tier 2 criteria) (BS2A:9(2)(c), BS2B:2.19(c)). 49 of which: instruments issued by subsidiaries subject to phase-out N/A 50 Provisions IRB banks only: where impairment allowances are greater than expected loss, the excess can be included up to 0.6% of credit RWAs. (BS2B: 2.19(e).) 51 Tier 2 capital before regulatory adjustments Sum of relevant rows above. Tier 2 capital: regulatory adjustments 52 Investments in own Tier 2 instruments We do not allow this in Tier 2 in the first place (BS2A:10c(1)(k), BS2B:2.30(k)). Compare row 37 above. 53 Reciprocal cross-holdings in Tier 2 instruments As for row 17. (Corresponding deduction approach.) 54 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above the 10% threshold) As for row 18. (Corresponding deduction approach.) 55 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions) As for row 40. (Corresponding deduction approach.) 56 National specific regulatory adjustments We don’t have any separate adjustments as such, but we do include revaluation reserves in Tier 2 (Basel recognises them in CET1). 57 Total regulatory adjustments to Tier 2 capital Sum of relevant rows from 52-56 above 58 Tier 2 capital (T2) Row 51 – row 57 59 Total capital (TC = T1 + T2) Row 45 + row 58 60 Total risk weighted assets BS2A:5, BS2B:2.2(g)

37 Ref #4986399 Capital ratios and buffers 61 Common Equity Tier 1 (as a percentage of risk weighted assets) See BS2A section 11a, BS2B section 3.1A. 62 Tier 1 (as a percentage of risk weighted assets) BS2A:12, BS2B:3.2. 63 Total capital (as a percentage of risk weighted assets) BS2A:13, BS2B:3.3. 64 Bank-specific buffer requirement (minimum CET1 requirement plus capital conservation buffer plus countercyclical buffer requirements plus G-SIB buffer requirement, as a percentage of risk weighted assets) Set in banks’ conditions of registration (but we do not include the minimum CET1 requirement in the definition of “buffer”). Our requirement is in terms of dividend restrictions if the buffer ratio falls below 2.5%; the Basel equivalent is total CET1 ratio falling below 7%. 65 of which: capital conservation buffer requirement Currently equals row 64 by default 66 of which: bank specific countercyclical buffer requirement We would split this out when relevant 67 of which: G-SIB buffer requirement N/A 68 Common Equity Tier 1 available to meet buffers (as a percentage of risk weighted assets) Defined as “buffer ratio” in BS2A:13a, BS2B:3.4A. This matches the Basel definition (ie Basel here excludes the base 4.5% requirement before adding the buffers on top). National minima (if different from Basel 3) (items 69-71: all N/A) 69 National Common Equity Tier 1 minimum ratio (if different from Basel 3 minimum) N/A 70 National Tier 1 minimum ratio (if different from Basel 3 minimum) N/A 71 National total capital minimum ratio (if different from Basel 3 minimum) N/A Amounts below the thresholds for deduction (before risk weighting) 72 Non-significant investments in the capital of other financials Relates to rows 18, 39 and 54 above. (See BS2A sections 10(1), 10(3)(b) and 10(5), BS2B sections 2.23, 2.25(b) and 2.27). The aggregate up to the 10% threshold is reported here, and is included in risk-weighted assets. 73 Significant investments in the common stock of financials Relates to rows 19, 40 and 55 above. N/A: always nil in our case, since we do not allow a threshold (see BS2A:10(3)(c) and BS2B:2.25(c)). 74 Mortgage servicing rights (net of related tax liability) Relates to rows 8 and 20 above. N/A, since we do not allow a threshold. (Deducted as part of goodwill and other intangibles, see BS2A:7(3)(a) and BS2B:2.9(a).) 75 Deferred tax assets arising from temporary differences (net of related tax liability) Relates to row 21 above. N/A, since we require full deduction of all deferred tax assets, with no threshold (see BS2A:7(3)(b), BS2B:2.9(b)). Applicable caps on the inclusion of provisions in Tier 2 76 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach (prior to application of cap) N/A – we are not allowing provisions in capital under BS2A. 77 Cap on inclusion of provisions in Tier 2 under N/A

38 Ref #4986399 standardised approach 78 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings￾based approach (prior to application of cap) Row 50 above = min (row 78, row 79). (See BS2B, section 2.19(e).) 79 Cap for inclusion of provisions in Tier 2 under internal ratings-based approach (See BS2B, section 2.19(e).) Items 80-85: Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2018 and 1 Jan 2022). All N/A in our case – our phase-outs end by 1 Jan 2018. Adaptations needed to Basel III template for inclusion in our disclosure requirements The whole purpose of a template approach is to ensure that the same breakdown, with the same titles and row numbers, is used around the world. However, of the 85 rows in the Basel template, a total of 23 are not applicable under our implementation of Basel III (shaded light blue above). We therefore propose not to include these rows in the text of the local OIC. We will also not require banks to show other rows (apart from titles and sub-totals) for which they currently have a zero or nil value. But it will be important that for the items they do disclose, banks use the same row number and title as in the Basel template. CET1 deductions Our implementation of Basel III includes several additional deductions from CET1, in both BS2A and BS2B, which carry forward existing deductions from Tier 1 capital. These have no equivalents in the Basel III framework, but the Basel III template allows for such differences in its row 26, “national specific regulatory adjustments to CET1”. We propose that each of these deductions be disclosed as a separate “of which” element to row 26. AT1 limit We are including a limit on AT1 of 25% of Tier 1 capital, which goes beyond what Basel III requires. To reflect this limit within the template, we are proposing that the full amounts of eligible AT1 instruments are disclosed in rows 30-36, and any excess to the 25% limit is shown as a “national specific” deduction from AT1 capital in row 41.1. Accumulated other comprehensive income Unlike the Basel III text, our definition of accumulated other comprehensive income in BS2A and BS2B specifies certain items that must be excluded from CET1. For best fit with the template and comparability with other jurisdictions, we propose that row 3 of the template, “accumulated other comprehensive income (and other reserves)” would show this amount before removing the excluded items. The items to be excluded would then be reflected elsewhere in the template as follows: • revaluation reserves that qualify for inclusion in Tier 2 capital would be shown as a national specific adjustment (ie deduction) from CET1 in row 26.2, and as a national

39 Ref #4986399 specific adjustment (ie addition) to Tier 2 in row 56.1. This has the effect of including revaluation reserves as part of the gross (pre-adjustment) figure for CET1, in line with Basel III, but then moving revaluation reserves from CET1 to Tier 2, in line with our definitions of CET1 and Tier 2 capital. • The other two exclusions are “reserves that are earmarked to particular assets or particular categories of banking activities” and “reserves held on account of any assessed likelihood of loss”. To the extent that the amount reported in row 3 includes any amounts under either of these headings, they would be removed from CET1 by means of a single (combined) national specific deduction from CET1 in row 26.2. Treatment of threshold items There is one area in which we propose to make a small change to the definition of rows in the template. The Basel III framework provides an optional threshold treatment for three items to be deducted from CET1. Under this treatment, only the amount of the item that is in excess of 10% of CET1 is deducted from CET1. We have chosen not to adopt this threshold approach, but instead require full deduction of each of the items. These items are: • significant investments in unconsolidated financial entities; • mortgage servicing rights; • deferred tax assets arising from temporary differences. Exactly as worded, the template requires the “amount above 10% threshold” for each of these items to be shown in rows 19-21; and the amounts up to the 10% threshold to be reported in rows 73-75 (these latter amounts are risk-weighted rather than deducted from capital, if the threshold option is adopted). We propose to use rows 19-21 to disclose the full amount of each item, and to change the row titles to clarify that this is the case. If we left these rows unchanged, we would need to add three further “national specific regulatory adjustments” to row 26, for reporting the amounts up to the threshold deducted under our Basel III treatment. We think this degree of difference from the template is justifiable, as the alternatives would be possibly confusing, and since this reflects an option that is available in any case under Basel III. Since we have not chosen the threshold option, rows 22-25 and 73-75 of the template are among those that are not applicable in New Zealand. (2) Proposed new text for local OIC to implement Basel template Reflecting the discussion above, the following is the proposed new version of clause 1 of Schedule 11 in the local OIC. This is how we would implement the Basel template approach, for required disclosure by BS2B banks in their full and half year disclosure statements. Clause 1 in Schedule 9 for BS2A banks would be the same, except that rows 12, 50, 78-79 and the heading

40 Ref #4986399 “Applicable caps on the inclusion of provisions in Tier 2” would be excluded, since these items are only applicable to BS2B banks. 1 Capital (1) The information in subclause (2)— (a) in respect of the capital of the registered bank’s banking group; and (b) derived in accordance with the conditions of registration relating to capital adequacy. (2) The information described in the following table as at the reporting date: Basel template number Description Common Equity Tier 1 capital: instruments and reserves 1 Directly issued qualifying common share capital plus related stock surplus 2 Retained earnings 3 Accumulated other comprehensive income (and other reserves) 5 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) 6 Common Equity Tier 1 Capital before regulatory adjustments Common Equity Tier 1 capital: regulatory adjustments 8 Goodwill (net of related tax liability) 9 Other intangibles other than mortgage servicing rights (net of related tax liability) 10 Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability) 11 Cash-flow hedge reserve 12 Shortfall of provisions to expected losses 14 Gains and losses due to changes in own credit risk on fair valued liabilities 15 Defined-benefit pension fund net assets 16 Investments in own shares (if not already netted off paid-in capital on reported balance sheet) 17 Reciprocal cross-holdings in common equity 18 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital (amount above 10% threshold) 19 Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) 20 Mortgage servicing rights (amount above 10% threshold) 21 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability) 26 National specific regulatory adjustments, of which: 26.1 any reserves included in row 3 which are earmarked to particular assets or particular categories of banking activities, or which are held on any account of any assessed likelihood of loss

41 Ref #4986399 26.2 any revaluation reserves included in row 3 which are eligible for inclusion in Tier 2 capital (= row 56.1 with minus sign) 26.3 credit enhancements provided to associated funds management and securitisation vehicles that are required to be deducted 26.4 credit enhancements provided to any member of an affiliated insurance group, that are required to be deducted. 26.5 funding provided to an affiliated insurance group, that is required to be deducted. 26.6 aggregate funding provided to all affiliated insurance groups and associated funds management and securitisation vehicles, that is required to be deducted 26.7 advances of a capital nature provided to connected persons, as determined in accordance with Connected Exposures Policy (BS8) 26.7 unrealised revaluation losses on securities holdings required to be deducted. 27 Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions 28 Total regulatory adjustments to Common Equity Tier 1 29 Common Equity Tier 1 capital (CET1) Additional Tier 1 capital: instruments 30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus 31 of which: classified as equity under applicable accounting standards 32 of which: classified as liabilities under applicable accounting standards 33 Directly issued capital instruments subject to phase-out from Additional Tier 1 34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1) 35 of which: instruments issued by subsidiaries subject to phase-out 36 Additional Tier 1 capital before regulatory adjustments Additional Tier 1 capital: regulatory adjustments 37 Investments in own Additional Tier 1 instruments 38 Reciprocal cross-holdings in Additional Tier 1 instruments 39 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above 10% threshold) 40 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions) 41 National specific regulatory adjustments 41.1 Additional Tier 1 capital ineligible for inclusion since in excess of 25% of total Tier 1 capital. 42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions 43 Total regulatory adjustments to Additional Tier 1 capital 44 Additional Tier 1 capital 45 Tier 1 capital (T1 = CET1 + AT1) Tier 2 capital: instruments and provisions 46 Directly issued qualifying Tier 2 instruments plus related stock surplus 47 Directly issued capital instruments subject to phase-out from Tier 2 48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2) 50 Provisions 51 Tier 2 capital before regulatory adjustments Tier 2 capital: regulatory adjustments 52 Investments in own Tier 2 instruments 53 Reciprocal cross-holdings in Tier 2 instruments

42 Ref #4986399 54 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above the 10% threshold) 55 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions) 56 National specific regulatory adjustments 56.1 reserves arising from a revaluation of tangible fixed assets, including owner-occupied property, eligible for inclusion in Tier 2 capital. 56.2 foreign currency translation reserves 56.3 reserves arising from revaluation of securities, eligible for inclusion in Tier 2 capital. 57 Total regulatory adjustments to Tier 2 capital 58 Tier 2 capital (T2) 59 Total capital (TC = T1 + T2) 60 Total risk weighted assets Capital ratios and buffers 61 Common Equity Tier 1 (as percentage of risk weighted assets) 62 Tier 1 (as percentage of risk weighted assets) 63 Total capital (as percentage of risk weighted assets) 64 Bank-specific buffer requirement (minimum CET1 requirement plus capital conservation buffer plus countercyclical buffer requirements plus G-SIB buffer requirement, as percentage of risk weighted assets) 65 of which: capital conservation buffer requirement 66 of which: bank specific countercyclical buffer requirement 68 Common Equity Tier 1 available to meet buffers (as percentage of risk weighted assets) Amounts below the thresholds for deduction (before risk weighting) 72 Non-significant investments in the capital of other financials Applicable caps on the inclusion of provisions in Tier 2 78 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings￾based approach (prior to application of cap) 79 Cap for inclusion of provisions in Tier 2 under internal ratings-based approach (3) For an item of information in the table, the Basel reference number and the corresponding description of the information must be included alongside the information. (4) An item does not need to be included in the information if it— (a) does not apply in the circumstances of subclause (1); or (b) has a nil or zero value. (5) Despite subclause (4) the information associated with the following items must be included in all circumstances even if it needs to be indicated as not applying, nil or zero: (a) item 6; (b) items 28 and 29; (c) item 36; (d) items 43, 44 and 45; (e) item 51; (f) items 57, 58, 59 and 60; and (g) items 61, 62, 63, 64, 65, 66, and 68.

43 Ref #4986399 Annex 3: Main features of capital instruments – continuing current approach (1) Our current requirements BS2A banks are required to disclose the following in their full year and half year disclosure statements (Clause 2 of Schedule 9 of the local OIC): 2 Capital structure (1) The information in subclauses (2) to (4) in respect of the registered bank’s banking group. (2) For each class of equity share capital— (a) whether it is included in tier one capital or tier two capital; (b) the material terms and conditions applying to that class including (but not limited to)— (i) voting rights; (ii) redemption, conversion or capital repayment options or facilities and their relevant terms or conditions; (iii) terms or conditions of any predetermined dividend rate; (iv) provision for any variation or suspension of dividend payments; (v) any maturity date; and (vi) any options granted or to be granted pursuant to any arrangement, the consideration given or to be given, the expiry date for the exercise and the total number of shares subject to such option; (c) the total of cumulative preferred dividends in arrears; and (d) a brief description of any other material terms and conditions of issue of the securities including provisions of related contracts or arrangements. (3) For every other class of capital instrument included in capital: (a) whether the class constitutes upper or lower tier two capital; (b) the priority or ranking in point of security, payment or claims of the class; and (c) all other material terms and conditions of issues of the class, including any related contracts or arrangements. (4) The nature and amount of each reserve in respect of the registered bank and its banking group. For BS2B banks, the equivalent is clause 2 of Schedule 11. The intended effect is the same as for BS2A banks, although subclause 2(4) is slightly different: (4) The nature and amount of each reserve included in capital for banking group.

44 Ref #4986399 (2) Proposed update of current form of disclosure to reflect Basel III changes Under all options, we need to update the existing clauses in the local OIC to reflect the new capital categories under Basel III. As discussed in the main text, in the non-Basel option this would be done as a stand-alone change, with a requirement for off-quarter updates added. Under the Basel options, if we create a separate disclosure statement for the detailed Basel III template for terms and conditions, this continuation of the existing style of summary would continue to be part of the main disclosure statement (but without adding off-quarter updates). In each of these cases, the following clause 2 would replace the current clause 2 in both Schedule 9 (BS2A banks) and Schedule 11 (BS2B banks). 2 Capital structure (1) The information in subclauses (2) to (4) in respect of the registered bank’s banking group. (2) For each instrument included in total capital disclosed in clause 1— (a) whether the instrument is included in Common Equity Tier 1 capital, Additional Tier 1 capital or Tier 2 capital; (b) whether the instrument is subject to phase-out from eligibility as capital, and if so the schedule on which it is being phased out; (c) the material terms and conditions of the instrument, including where applicable, but not limited to— (i) voting rights; (ii) issuer of the instrument; (iii) issue date; (iv) any maturity or scheduled redemption date; (v) any options or facilities for early redemption, conversion, write-down or capital repayment and their relevant terms or conditions; (vi) terms or conditions of any predetermined servicing obligations; and (vii) provision for any variation or suspension of dividend or coupon payments; (d) the total of cumulative preferred dividends or interest payments in arrears; (e) the priority or ranking in point of security, payment or claims of the instrument; and (f) a brief description of any other material terms and conditions of issue of the securities, including any related contracts or arrangements. (3) Any options granted or to be granted pursuant to any arrangement, over any equity share capital disclosed in clause 1, and in respect of any such option— (a) the consideration given or to be given; (b) the expiry date for the exercise of the option; and (c) the total number of shares subject to the option.

45 Ref #4986399 (4) The nature and amount of each reserve included in capital for the banking group. Additionally, for the non-Basel option only, the following new clause would be added to Schedules 10 and 12 (for BS2A and BS2B banks respectively), to require updates in the off￾quarters for any new instruments issued since the most recent full-year or half-year reporting date: 2A Capital structure (1) The information in subclauses (2) to (4) in respect of the registered bank’s banking group. (2) For each instrument included in total capital disclosed in clause 1 that has been issued between the reporting date for the previous disclosure statement and the reporting date for the disclosure statement— (a) whether the instrument is included in Common Equity Tier 1 capital, Additional Tier 1 capital or Tier 2 capital; (b) whether the instrument is subject to phase-out from eligibility as capital, and if so the schedule on which it is being phased out; (c) the material terms and conditions of the instrument, including where applicable, but not limited to— (i) voting rights; (ii) issuer of the instrument; (iii) issue date; (iv) any maturity or scheduled redemption date; (v) any options or facilities for early redemption, conversion, write-down or capital repayment and their relevant terms or conditions; (vi) terms or conditions of any predetermined servicing obligations; and (vii) provision for any variation or suspension of dividend or coupon payments; (d) the total of cumulative preferred dividends or interest payments in arrears; (e) the priority or ranking in point of security, payment or claims of the instrument; and (f) a brief description of any other material terms and conditions of issue of the securities, including any related contracts or arrangements. (3) Any options granted or to be granted pursuant to any arrangement, over any equity share capital disclosed in clause 1, and in respect of any such option— (a) the consideration given or to be given; (b) the expiry date for the exercise of the option; and (c) the total number of shares subject to the option. (4) The nature and amount of each reserve included in capital for the banking group.

46 Ref #4986399 Annex 4: Basel proposed template for main features of capital instruments The Basel main features template, exactly as it appears in the Basel III disclosure rules, is shown below. The Basel rules also include an annotated version of this, clarifying what should be provided in each row5 . A number of the rows feature a menu approach, with the answer to be drawn from a specified list. The remaining rows require free text answers (if applicable). If we choose one of our full Basel III disclosure options, we will need to write text for an Order in Council that requires banks to provide the information that the template and its associated explanatory text specify. 1 Issuer 2 Unique identifier (eg CUSIP, ISIN or Bloomberg identifier for private placement) 3 Governing law(s) of the instrument Regulatory treatment 4 Transitional Basel III rules 5 Post-transitional Basel III rules 6 Eligible at solo/ group/ group & solo 7 Instrument type (types to be specified by each jurisdiction) 8 Amount recognised in regulatory capital (Currency in mil, as of most recent reporting date) 9 Par value of instrument 10 Accounting classification 11 Original date of issuance 12 Perpetual or dated 13 Original maturity date 14 Issuer call subject to prior supervisory approval 15 Optional call date, contingent call dates and redemption amount 16 Subsequent call dates, if applicable Coupons/dividends 17 Fixed or floating dividend / coupon 18 Coupon rate and any related index 19 Existence of a dividend stopper 20 Fully discretionary, partially discretionary or mandatory 21 Existence of step-up or other incentive to redeem 22 Non-cumulative or cumulative 23 Convertible or non-convertible: if convertible, the following items – 24 Conversion trigger (s) 25 Fully or partially convertible 26 Conversion rate 27 Mandatory or optional conversion 28 Specify instrument type convertible into 5 See full details in Annex 3 of the Basel rules at http://www.bis.org/publ/bcbs221.pdf.

47 Ref #4986399 29 Specify issuer of instrument it converts into 30 Write-down feature: if yes, the following items – 31 Write-down trigger (s) 32 Full or partial 33 Permanent or temporary 34 If temporary, description of write-up mechanism 35 Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument). 36 Non-compliant transitioned features 37 If yes, specify non-compliant features

48 Ref #4986399 Annex 5: Proposed changes in disclosure about overseas parent bank / head office capital adequacy Proposed changes are shown with red text and through-lining. Changes in local OIC for New Zealand incorporated banks: Schedule 9, clause 14 (BS2A banks) and Schedule 11, clause 18 (BS2B banks). 14 / 18 Information about ultimate parent bank and ultimate parent banking group (3) If the registered bank is a subsidiary of an ultimate parent bank,— (a) the most recent publicly available information for the following in respect of the registered bank’s ultimate parent bank and ultimate parent bank group: (i) the Common Equity Tier 1 ratio if applicable; (ii) the tier one capital ratio; (iii) the total capital ratio; and (iv) the date to which the measures of Common Equity Tier 1 capital (if applicable), tier one capital and capital relate; and (b) a statement as to— (i) whether or not the ultimate parent bank or ultimate parent banking group is required by the appropriate banking supervisory authority in its country of domicile to calculate hold minimum capital requirements at least equal to that specified under either the Basel I approach, the Basel II (standardised) approach or the Basel II (internal models based) approach and if so, which; and (ii) to the extent that the information is publicly available, whether or not the ultimate parent bank or ultimate parent bank group meets the capital requirements imposed on it by the appropriate banking supervisory authority in its country of domicile as at the latest reporting date; and (c) the methods by which users can access Pillar 3 disclosure information, if it has been published, on the implementation of the Basel II capital adequacy framework by the ultimate parent bank or ultimate parent bank group. (4) The information that is required to be disclosed under subclause (1) must include comparative figures for the previous corresponding period. Changes in branch OIC for overseas incorporated banks: Schedule 9, clauses 5 and 6. 5 Capital ratios (1) The most recent publicly available information specified in respect of the capital ratios of the registered bank and its overseas banking group, including the following information:

49 Ref #4986399 (a) the Common Equity Tier 1 ratio if applicable; (b) the tier one capital ratio; (c) the total capital ratio; and (d) the date to which the measures of Common Equity Tier 1 capital (if applicable), tier one capital ratio and total capital ratio relate. (2) The information that is required to be disclosed under subclause (1) must include comparative figures for the previous corresponding period to the extent that the information is publicly available. 6 Minimum capital requirements (1) A statement as to— (a) whether or not the registered bank or its overseas banking group is required by the appropriate banking supervisory authority in its country of domicile to calculate hold minimum capital requirements at least equal to that specified under either the Basel I approach, or the Basel II (standardised) approach, or the Basel II (internal models based) approach and if so, which; and (b) to the extent that the information is publicly available, whether or not the registered bank or its overseas banking group meets those the capital requirements imposed on it by the appropriate banking supervisory authority in its country of domicile as at the latest reporting date.; and (2) the methods by which users can access Pillar 3 disclosure information, if it has been published, on the implementation of the Basel II capital adequacy framework by the registered bank and its overseas banking group.

50 Ref #4986399 Annex 6: Summary of changes in Orders in Council needed by 31 March 2013 The following table lists the clauses in the local Order that will need updating or adding, and the options we are proposing for how that should be achieved: Nature of disclosure requirement Standardised banks IRB banks Nature of change proposed Full year/ Half year full components of capital Schedule 9, clause 1 Schedule 11, clause 1 Either in line with current approach, or Basel template. Off-quarter summary components of capital Schedule 10, clause 2 Schedule 12, clause 2 In line with current approach. Full year reconciliation Schedule 9, new clause 1A Schedule 11, new clause 1A In line with current approach (but to meet new Basel requirement). Full year/ Half year terms and conditions of capital instruments Schedule 9, clause 2 Schedule 11, clause 2 Either in line with current approach – or using the Basel template, if we choose the full Basel option and also do not put this in a separate “main features” disclosure statement (sub￾option (3)). Off-quarter update of terms and conditions of any newly issued capital instruments Schedule 10, new clause 2A Schedule 12, new clause 2A Either in line with current approach (but off-quarter updates are new) – or using the Basel template, if we choose the full Basel option and also do not put this in a separate “main features” disclosure statement (sub￾option (3)). Full year/ Half year summary group ratios Schedule 9, clause 11 Schedule 11, clause 15 In line with current approach Full year/ Half year summary solo ratios Schedule 9, clause 12 Schedule 11, clause 16 In line with current approach Off-quarter summary group ratios Schedule 10, clause 1 Schedule 12, clause 1 In line with current approach Ultimate parent bank group capital adequacy Schedule 9, clause 14 Schedule 11, clause 18 In line with current approach In the branch Order, the only changes needed are in Schedule 9, clauses 5 and 6 (quarterly disclosure of the bank’s and banking group’s capital ratios, and of the capital requirements imposed by the home country supervisor).

51 Ref #4986399 Annex 7: List of consultation questions in this paper Q1: Do you think the proposed update suitably reflects the Basel III changes in capital definitions? Q2: Do you foresee any practical difficulties in disclosing the information in the form required by the Basel template? Q3: Do the proposed new clauses for the local OIC make it sufficiently clear what your bank would be required to disclose? Q4: Do you have any comments on the relative merits of the two options? Q5: Do you agree that readers of disclosure statements will find such a reconciliation useful? Q6: Is the proposed text for the local OIC sufficient to ensure that banks will disclose the above information on phase-out details and eligible amounts of capital? Q7: Do you agree with the proposed summary of capital for off-quarter disclosure? Q8: Do you have any concerns with these proposed revisions to the existing disclosure of key features of capital instruments? Q9: Please give your views on the benefits or otherwise of full Basel III implementation in this area, and on any practical challenges with any of the three options proposed for achieving that. Q10: Do you foresee any problems in being able to provide the information required by the Basel main features template, as specified in the Basel rules? Q11: Which different instrument types do you think the RBNZ should list as the menu options for completing row 7 of the template, and do you foresee problems in writing a specific list into the text of the local OIC? Q12: Do you think the explanatory text in the Basel III rules gives sufficient clarity on what a bank must provide under each row? Q13: Do you have comments at this stage on these suggested features of any separate new disclosure statements? Q14: Do you think these proposed updates for the disclosure of summary capital ratios are the most appropriate way to reflect the new Basel III capital regime? Q15: Do you think these proposed updates for the disclosure of overseas parent group capital adequacy are the most appropriate way to reflect the new Basel III capital regime? Q16: Do you agree that making no change is the most appropriate solution for handling banks’ potential exposures to qualifying CCPs, at least initially?