Comments on the Proposed Review of Capital Settings

Comments on the Proposed Review of Capital Se�ngs (9 December 2025) Elena Carle� and Brunella Bruno Below, we present our comments on the proposed 2025 review of key capital se�ngs, corresponding to the consulta�on paper publicly released on 25 August 2025. As such, these comments do not take into account any poten�al changes or op�ons proposed in subsequent documents. We begin with a brief overview of the main proposed changes and consulta�on outcomes. We then provide comments on the ra�onale for the review, the approach to risk appe�te, and several specific aspects of the proposal. Finally, we offer some concluding remarks and sugges�ons for further improvement of the pruden�al framework.

1. The review
   1.1. Ra�onale and assessment criteria
   The review of capital se�ngs arises from the purpose, as set out in the Terms of Reference, to assess whether the level of capital requirements established under the 2019 Capital Review remains appropriate to support a stable financial system, one in which “resilient ins�tu�ons and market infrastructure enable a produc�ve and sustainable economy, ul�mately promo�ng the prosperity and well-being of all New Zealanders”. Thus, the need for this review stems from concerns that the current capital se�ngs may be overly conserva�ve and might be constraining growth and compe��on in New Zealand. The proposed changes in the review are guided by a comprehensive set of assessment criteria, including the need to i) maintain financial stability through sufficient pruden�al capital buffers, ii) ensure propor�onality through properly designed regula�on, and iii) align with interna�onal standards where appropriate. The new framework should also maintain the characteris�cs of being simple and feasible to avoid unnecessary compliance costs, while at the same �me taking into accounts how capital requirements affect deposit takers’ average funding costs and, consequently, lending rates. Finally, the new framework should be assessed in the context of other ongoing regulatory ini�a�ves concerning the establishment of a proper crisis management framework entailing resolu�on and loss absorp�on capacity (LAC) instruments. As the Reserve Bank of New Zealand (RBNZ) notes, the appropriate capital se�ngs for New Zealand ul�mately depends on how the different objec�ves and assessment criteria are balanced. The way these criteria are weighted and taken into account is also linked to the RBNZ’s risk

appe�te for capital se�ngs, which in turn can shape the final framework, as several configura�ons are possible.
1.2. Proposals
The proposals put forth in the consulta�on process vary by type of deposit takers, classified into three groups based on total asset size, with Group 1 including the largest ins�tu�ons.1 To ensure a simple, strong and propor�onate capital framework, the RBNZ’s proposals set out in the consulta�on process include three main elements:
i. Capital stack: Simplifica�on of the capital stack, by removing Addi�onal Tier 1 (AT1)
instruments and subs�tu�ng them with both Common Equity Tier 1 (CET1) and Tier 2 instruments.
ii. Risk weights: The proposal introduces a more granular approach to risk weigh�ng, with
lower risk weights for residen�al mortgages, small and medium enterprises (SMEs), and agricultural exposures. Changes to risk weights apply to all deposit takers.
iii. Capital requirements:
Two op�ons are presented concerning Group 1 banks:
a. Op�on 1: Reduces overall capital, while requiring a slightly higher CET1 ra�o compared to the 2019 standard. b. Op�on 2: Reduces CET1 requirements but introduces LAC requirement that partly replaces pruden�al capital buffers, leading to a total higher requirement rela�ve to that for total capital in 2019. The proposal for Group 2 entails lower total capital ra�os (and a lower CET1 ra�o within this total). The proposal for Group 3 entails no change in the total capital ra�o requirement rela�ve to the current framework, but a higher CET1 ra�o within it. Overall, all proposals imply a reduc�on in the amount of capital required, as a result of lower ra�os, more granular or lower risk weights, or both. 1 Precisely, Group 1: Above NZD 100 billion (> EUR 50 billion); Group 2: Between NZD 2 billion and NZD 100 billion (EUR 1–50 billion); Group 3: Below NZD 2 billion (< EUR 1 billion).

1.3. Consulta�on outcomes
The consulta�on on the review resulted in 43 submissions from different stakeholders, including deposit takers across various size groups, Australian Pruden�al Regula�on Authority, industry bodies, other organiza�ons, and individuals. The main consulta�on outcomes are reported below. − All deposit takers support the removal of AT1 instruments, but their preferences differ by size group:
i. Large banks (Group 1): Generally, support Op�on 2, with some proposing lower capital
ra�os and others sugges�ng to align capital levels in New Zealand with those required in Australia.
ii. Mid-sized banks (Group 2): Tend to prefer Op�on 1, ci�ng concerns that the LAC buffer
may dispropor�onately benefit larger banks that are able to access a broader (mostly non￾domes�c) investor base for LAC instruments.
iii. Smaller banks (Group 3): Express concern that neither op�on sufficiently enhances
propor�onality.
− Responses by other contributors are more diverse, with some advoca�ng the need to maintain capital levels as in the 2019 review, and others sugges�ng instead to go further with the proposed changes. − Strong divergence emerges regarding the output floor for internal ra�ngs-based (IRB) risk weights. Larger (Group 1) deposit takers would prefer alignment with the Australian / Basel III output floor, while smaller banks favor a higher floor to support propor�onality.
2. Comments
2.1 Macroeconomic and regulatory environment
New Zealand is not alone in exploring the relaxa�on of pruden�al frameworks originally introduced a�er the global financial crisis. Indeed, a new wave of deregula�on appears to be emerging—star�ng with the United States (US) and gradually influencing other jurisdic�ons worldwide, albeit to varying degrees. For example, in the euro area regulators are moving to simplify the pruden�al regime, par�cularly in rela�on to repor�ng requirements. Meanwhile in the United Kingdom (UK), the Pruden�al Regula�on Authority (PRA) has adopted a new secondary objec�ve—namely facilita�ng the interna�onal compe��veness and growth of the UK economy—alongside its tradi�onal stability remit. It is important to note from the outset that this new wave of deregula�on atempts is not occurring alongside a reduc�on in macroeconomic risks. On the contrary, the global environment remains fragile and subject to a variety of significant risks, including geopoli�cal tensions and the

poten�al forma�on of asset price bubbles—par�cularly in the fast-growing ar�ficial intelligence sector. In this context, certain characteris�cs of the New Zealand financial sector contribute to raise the aten�on on its poten�al fragility and call for cau�ousness in revising the 2019 pruden�al framework:
− The New Zealand banking system is perceived to be risky (as also acknowledged in the S&P’s 2025 report on banking industry country risk assessment - BICRA), being smaller, highly concentrated, and relying on external borrowing. − As a host jurisdic�on, New Zealand is subject to risks related to the presence of significant foreign subsidiaries and poten�al home/host country divergences and thus it needs to maintain banks that are self-sufficient and resilient to the extent possible. − The RBNZ, as regulator, is small and rela�vely lightly resourced, which also calls for a conserva�ve and simple regulatory approach. − By statute, in the event of a banking crisis, the New Zealand government has limited capacity to support a failing bank due to legisla�ve constraints. Taken together, these elements suggest the need for a cau�ous approach when considering revising the capital se�ngs in New Zealand and certainly do not support the proposal, put forth by some respondents in the consulta�on process, to align the capital requirements in New Zealand with those in Australia.
2.2 Risk appe�te
The review relies on a revised risk appe�te for capital se�ng. As noted, given the purpose of the review, there are several possible capital calibra�on approaches that could meet statutory objec�ves. The calibra�on among the different elements—and the priori�sa�on across criteria— ul�mately depends on the authori�es’ chosen risk appe�te. This risk appe�te has been adjusted since the 2019 Capital Review, which adopted a framework equivalent to targe�ng no more than one crisis every 200 years (a 0.5% probability of crisis per year). The current approach moves away from that benchmark toward a somewhat higher risk appe�te, which is however not equally clearly spelled out and appears to rely at least partly on interna�onal benchmarking exercises. Defining an appropriate risk appe�te raises the ques�on of who should determine it—the government, which ul�mately bears the fiscal cost of a crisis, or a technical, non-elected ins�tu�on such as the central bank. This discussion fits within the broader framework of independence and coordina�on between government and financial authori�es. Given the

complexity involved in defining the risk appe�te—and the poten�al intended and unintended consequences of se�ng more relaxed capital requirements consistent with a higher risk tolerance—clarity around ins�tu�onal responsibility is essen�al. Governments, being subject to short-term poli�cal and electoral incen�ves, may be inclined toward a higher risk appe�te, which could jus�fy looser regula�on and deliver short-term benefits (such as lower compliance costs and higher bank profitability). However, such an approach may not align with the long-term interests of the public, as it could increase systemic vulnerability and shi� the eventual costs of crises onto future governments and taxpayers. Importantly, a less conserva�ve risk appe�te inevitably increases the likelihood of both individual and systemic crises. The RBNZ and the government should therefore acknowledge the greater probability of interven�on in the financial system and the associated fiscal implica�ons. Moreover, the fiscal costs of financial crises tend to be substan�al, par�cularly in the absence of robust crisis management arrangements. Empirical evidence indicates that the direct fiscal cost of bank bailouts can reach around 7% of GDP, o�en resul�ng in a significant and persistent rise in the public debt-to-GDP ra�o. In addi�on, the permanent loss in GDP following major financial crises in advanced economies is typically es�mated at 30-40% in the first years, with even more severe effects when crises coincide with economic downturns (Laeven and Valencia, 2020). Crisis management is par�cularly important in New Zealand, where the banking sector is dominated by foreign-owned ins�tu�ons. Any effec�ve resolu�on process would therefore require close interna�onal coordina�on.
2.3 Higher Capital Requirements, lending and growth
The underlying assump�on of pruden�al regula�on is that financial stability is a prerequisite for sustainable economic growth. Well-capitalized banks are beter posi�oned to extend credit to viable borrowers - both households and businesses - thereby suppor�ng investment and overall economic ac�vity. This rela�onship holds not only in normal �mes but becomes even more cri�cal during economic downturns, when credit demand typically rises and borrower creditworthiness weakens. Empirical evidence overall supports the posi�ve link between bank capital and growth. Studies show that beter-capitalized banks tend to lend more, par�cularly during downturns, helping to smooth economic cycles (e.g., Gambacorta and Shin, 2018; BCBS, 2021 and literature therein). In line with this, �ghter pruden�al regula�on lowers the likelihood of financial crises, while there does not seem to be a clear and well-established long-term rela�onship between �ghter capital requirements and lending costs (Boissay et al., 2019). Importantly, however, while the benefits of strong capital posi�ons are clearer in the long run, the evidence also indicates the possibility of short-term transi�on costs as banks adjust to new

pruden�al standards, especially if transi�on is short. During this adjustment phase, banks may reduce lending volumes - and therefore risk-weighted assets - and/or increase lending rates to strengthen profitability and, in turn, retained earnings. Such measures temporarily improve capital ra�os, and thus compliance with regulatory requirements, but may dampen credit growth in the short term (e.g., Gropp et al., 2019; Boissay et al., 2019). New Zealand’s banking sector remains in the transi�on phase toward mee�ng the capital levels set out in the 2019 Capital Review. It is therefore premature to draw firm conclusions about the long-term impact of these reforms on economic growth. Any observed slowdown in credit ac�vity or growth may largely reflect these temporary adjustment effects rather than structural weaknesses. Consequently, reducing capital requirements is not necessarily a meaningful or sustainable strategy for s�mula�ng growth. A cau�ous and evidence-based approach remains essen�al to ensure that pruden�al objec�ves - financial stability, resilience, and sustainable lending - are not compromised in pursuit of short-term gains.
2.4 Higher capital requirements and compe��on
The rela�onship between higher capital requirements and bank compe��on is complex and difficult to establish a priori. The empirical evidence does not provide conclusive results, as the effects of stricter capital rules can vary depending on factors such as market structure, the actual cost of equity, and regulators’ risk appe�te. A direct channel operates through entry barriers: higher capital requirements may limit market entry or reduce access for smaller ins�tu�ons. An indirect channel operates through financial stability, as capital strength influences the resilience of the banking system and, in turn, the condi�ons for compe��on. The subprime crisis, for example, showed that lax regula�on (less stringent lending and capital standards) fosters unhealthy, risky compe��on. At the same �me, bank distress o�en leads to failures and greater concentra�on, thereby reducing compe��on. In fact, compe��on and financial stability are closely linked, with effects running in both direc�ons. On one hand, strong compe��on can put pressure on profit margins, encourage excessive risk-taking, weaken incen�ves to monitor credit quality, and reduce bank profitability. These factors may threaten capital soundness and undermine financial stability. By contrast, excessive market power can also be harmful. Large, dominant banks may become “too big to fail,” benefi�ng from implicit government guarantees and distor�ng market compe��on. In other words, unresolved implicit guarantees give systemically important ins�tu�ons an unfair compe��ve advantage. In the context of New Zealand, which is a highly concentrated market, greater compe��on would, in principle, be desirable also to mi�gate the “too-big-to-fail” issues that can distort compe��ve

dynamics in the market. The channel through which the current review intends to promote compe��on is by fostering greater propor�onality, par�cularly through beter differen�a�on of minimum capital requirements across bank groups and by introducing greater granularity in risk weights, which should benefit smaller ins�tu�ons. Conversely, lowering capital standards for larger banks could reinforce market power in an already concentrated system. More generally, it is important to highlight that, especially in the financial industry, compe��on should aim to promote beter-quality products, improved customer service, and greater transparency, par�cularly since financial products are complex and o�en difficult for consumers to fully assess and understand. These broader dimensions of compe��on, which are those most essen�al to New Zealanders’ well-being, have not been adequately considered and are unlikely to be directly influenced by changes in capital se�ngs.
2.5 Interna�onal comparison
While New Zealand may appear to have rela�vely stricter requirements than other jurisdic�ons, meaningful comparison requires analysing the composi�on of capital regula�on and the overall pruden�al framework (capital components, risk-weighted assets, approach to measuring credit risk—whether through internal ra�ngs-based (IRB) models or standardised approaches, supervisory and resolu�on frameworks) as well as the structural characteris�cs of each banking system (bank size and prevalent business models, home/host-country status). First, meaningful comparisons are challenging due to the specific characteris�cs of the Group 1 banks and the broader New Zealand context, where several key components of the regulatory￾supervisory toolkit are not yet fully implemented (namely, deposit insurance schemes and crisis management frameworks). In addi�on, it is important to consider the absence of Pillar 2 requirements in the New Zealand framework. These requirements are bank-specific, not always disclosed to market par�cipants (and therefore difficult to include in compara�ve analyses), and are present in other jurisdic�ons—leading to higher overall capital requirements than those explicitly set out. For example, in Europe, where Pillar 2 requirements for banks under the ECB’s supervision are disclosed, they range from approximately 1% to 3.50%. Second, business models may differ significantly across countries. Banks’ capital posi�ons o�en depend on their predominant business models. Ins�tu�ons primarily engaged in tradi�onal lending typically display more capital-intensive ac�vi�es than those more involved in investment banking ac�vi�es. The prevalent model used to measure credit risk is also an important factor to account for as, ceteris paribus, banks using the standardized approach report higher risk weights (and therefore lower capital ra�os) than banks adop�ng IRB models. When these differences are 2 See htps://www.bankingsupervision.europa.eu/ac�vi�es/srep/pillar-2-requirement/html/index.en.html for more details.

par�ally accounted for - for example, through capital coverage–based comparisons for lending ac�vi�es (as in the 2025 Capital Review, pp. 41-44), the posi�on of New Zealand major banks appears less favourable than it might ini�ally seem. More appropriate comparison peers may be found with countries that share similar features such as a high presence of foreign-owned subsidiaries and concentrated markets such as certain Eastern European banking systems. In contrast, comparisons with countries such as the UK, Canada, and Australia—although similar in market structure—should be approached with cau�on, as these jurisdic�ons have more developed and comprehensive regulatory frameworks. Finally, average bank size is also an important considera�on: comparisons with systems where the average bank size is significantly larger may not yield meaningful insights as larger banks tend to be less capitalized.3 In sum, interna�onal comparisons should be interpreted with great cau�on, especially when interna�onal alignment is one of the objec�ves driving the review process.
2.6 Propor�onality
To ensure propor�onal treatment, the current capital framework already establishes differen�ated requirements across the three bank groups. The review aims to further enhance propor�onality. The underlying ra�onale is that any changes should seek to ease capital and compliance requirements rela�vely more for smaller ins�tu�ons (namely, Group 2 and Group 3 banks). In general terms, rela�vely lower capital requirements for smaller ins�tu�ons are jus�fied by factors such as simpler business models, less complex organiza�on, smaller size, and, therefore, a lower poten�al impact on systemic stability. An associated benefit of propor�onality is that rela�vely lower requirements for smaller banks could help level the playing field and foster compe��on within a highly concentrated market and lower entry barriers, ul�mately benefi�ng New Zealanders. The review addresses propor�onality by modula�ng the amount of capital across size groups (i.e., determining the appropriate distribu�on of capital within the system), by differen�a�ng the form of capital requirements (in par�cular, introducing more complex instruments such as LAC for Group 1 banks under Op�on 2), and by reviewing risk-weighted assets (RWAs) (with the aim of benefi�ng smaller banks, namely those using standardized approaches). 3 For example, in the euro area, smaller less significant ins�tu�ons (LSIs, with total assets below €30 billion) are beter capitalised than significant ins�tu�ons (SIs) in terms of CET1 and Tier 1 ra�os. SIs appear beter capitalised only when total capital ra�os (including Tier 2) are considered. See also htps://www.bankingsupervision.europa.eu/framework/sta�s�cs/html/index.en.html

Overall, greater propor�onality is welcome, not only to promote compe��on but also to ensure that regulatory burdens remain commensurate with the systemic importance and risk profile of each ins�tu�on. However, a more propor�onate regime, par�cularly one that lowers requirements for smaller ins�tu�ons, inevitably entails accep�ng a higher probability of individual bank failures. The recent failures of mid-sized US banks in early 2023 demonstrate that weaknesses in medium-sized ins�tu�ons can s�ll trigger system-wide repercussions. Therefore, efforts to enhance propor�onality should proceed in tandem with strengthening New Zealand’s financial safety net and resolu�on framework.
2.7 Crisis management and LAC
The crisis management framework aims to manage banks in distress in an orderly fashion, while complemen�ng the pruden�al regulatory framework in strengthen the resilience of the banking system and helping prevent future financial crises. In this sense, while pruden�al regula�on focuses on maintaining the safety and soundness of banks under normal condi�ons (i.e., in “going concern”), the crisis management framework helps dealing with a crisis when a bank faces severe distress or failure. Developed by the Financial Stability Board (FSB) in 2011 in response to the 2007–2009 Global Financial Crisis, the framework aims to ensure that authori�es have the ability and the tools to step in quickly when a bank is failing, preserve cri�cal financial services, and allocate losses to shareholders and creditors rather than to the general public. To this aim, it requires countries to establish resolu�on authori�es and banks to prepare recovery and resolu�on plans. Crucial to the idea of orderly handling of a bank distress are the no�ons of bail-in and total loss absorp�on capacity (TLAC). The former is a financial mechanism requiring shareholders and creditors of a distressed bank to absorb some of the losses through the wri�ng down of their claims or through the conversion of their debt into equity with the aim to restore the bank’s capital posi�on. The later refers to the overall ability of a bank to absorb losses through the overall cushion of securi�es composed by both capital and eligible liabili�es. In line with this, TLAC requires banks to maintain a minimum amount of bailin-able instruments (referred to as LAC in the RBNZ’s current review) that are senior to Tier 2 instruments and are intended to serve primarily as loss-absorbing tools in a gone-concern situa�on, when a bank is in severe distress. This seems to be in contrast with the no�on of LAC in the RBNZ review, where, although not yet fully spelled out, LAC instruments are seen more as going concern recapitaliza�on tools rather than only as pure loss absorp�on instruments in gone concern. The crisis management framework requires interna�onal banks to operate with a Single-Point-of￾Entry (SPE) or a Mul�ple-Point-of-Entry scheme (MPE). Under the former, resolu�on ac�ons occur

at the parent level, allowing losses to be absorbed centrally and subsidiaries to con�nue opera�ng normally should the parent company have enough LAC. To this aim, the parent company issues external LAC to outside investors, which can be writen down or converted into equity during resolu�on. The recapitaliza�on is then passed to subsidiaries through internal LAC, consis�ng of instruments issued by subsidiaries to the parent company. While the internal LAC is pre￾posi�oned at the level of the subsidiary, the actual implementa�on of this mechanism depends significantly on the coopera�on between home and host regulator. In contrast, under MPE, resolu�on ac�ons take place independently at the level of subsidiaries, each being resolved under its local framework. As the crisis management framework has been introduced only recently, the evidence on its applica�on and effec�veness is s�ll scarce. However, some preliminary considera�ons emerge, which are relevant also rela�ve to the New Zealand context. The main advantage of internal LAC is the pre-posi�oning of some subordinated instruments at the subsidiary level, even if in another jurisdic�on. This implies that the subsidiary has already issued sufficient instruments available to absorb losses and to be recapitalized quickly, without wai�ng for funds or capital transfers from the parent. Thus, pre-posi�oning enhances local financial stability and meets host authori�es’ expecta�ons that subsidiaries can withstand stress independently. While valid, this mechanism will work in prac�ce only if the host regulator has the willingness and the ability to call upon these instruments in a �mely manner. Even assuming the regulator has the ability to detect problems and act swi�ly, it remains extremely difficult to define an ex ante sufficiently robust trigger point for the conversion of the LAC instruments. In par�cular, it is difficult to define whether: i) LAC instruments should be converted in a going- or gone-concern phase; ii) the trigger should be based on regulatory or market-based values; and iii) the trigger should be automa�c or discre�onary. In either case the ac�va�on of the triggers entails non-negligible risks. Automa�c triggers may lead to dangerous spirals, in par�cular in case of systemic crises or when idiosyncra�c crises may lead to contagion. On the contrary, discre�onary triggers require close monitoring of the solvency condi�ons of the bank in distress through effec�ve supervision and run the risk of not being ac�vated in a �mely manner. Also, the establishment of effec�ve supervision requires adequate resources and proper �me to build up competences. Lastly, even when the trigger is ac�vated, the use of LAC instruments involves considerable li�ga�on risk, as investors may challenge write-downs or conversions during resolu�on. Disputes o�en concern valua�on methods, creditor treatment, or due process. For example, a�er the 2017 resolu�on of Banco Popular Español, some bondholders sued the
Single Resolu�on Board (SRB) over the write-down of their instruments, claiming unfair valua�on. Similar legal challenges arose following the 2013 Cyprus bank bail-ins and the 2015 Italian bank resolu�ons. More recently, in

the case of Credit Suisse thousands of bondholders sued against the AT1 write-off occurring in a phase of going concern. Such cases highlight the need for clear legal frameworks, transparent valua�on, and proper communica�on to minimize li�ga�on risk – all elements entailing significant complexity. And, nonetheless, even in a well- designed and complex crisis management framework, the complete elimina�on of li�ga�on risk in the design of a crisis resolu�on framework is unatainable. Based on the above considera�ons, the introduc�on of LAC seems quite a challenging solu�on for New Zealand for various reasons. First, it requires designing an effec�ve crisis management framework, which would absorb substan�al �me and resources. Second, it needs a solid supervisory framework with sufficient resources and legal tools to monitor bank func�oning and provide evidence that the LAC trigger point has been passed. Even with these two elements in place, however, the reliance on LAC could present substan�al challenges in terms of li�ga�on risk, even if this is intended as internal LAC. In addi�on, the ac�va�on of LAC in an oligopolis�c banking market dominated by foreign ins�tu�ons as in New Zealand could entail substan�al contagion risk and poten�ally complex interac�ons with the banks’ home jurisdic�on.
3. Final remarks and sugges�ons for further improvements

1. The benefits of changing the current capital framework remain overall unclear. The reform
   introduced in 2019 have not yet been fully implemented, leaving the New Zealand banking system in a transi�onal phase. Empirical evidence suggests that most of the costs of regulatory transi�ons occur during this phase. While minor short-term effects on lending could be expected, consistent with empirical findings, the intended benefits (also in terms of increased lending capacity) would only emerge gradually once the full framework is opera�onal.
2. Op�on 2, involving the introduc�on of LAC instruments, is problema�c. Concerns stem from
   the complexity of these instruments and uncertainty about their effec�veness. Although LAC instruments could, in principle, provide addi�onal loss-absorbing capacity at a rela�vely lower cost, the associated risks and limita�ons (namely, their limited ability to absorb unexpected losses rela�ve to CET1 instruments) must be clearly communicated.
3. More propor�onality is welcome, but should apply not only across bank groups but also
   within them. Group 2 banks, for example, vary widely in size (poten�ally from NZD 2 billion to NZD 100 billion in assets, with the largest bank’s assets currently amoun�ng to NZD 41 billion), which risks dispropor�onate treatment under uniform requirements. Differen�ated oversight within this group could ensure a more balanced and equitable regulatory approach. Differences in ownership structures also merit aten�on. Foreign-owned banks o�en have

easier access to parent-group funding and internal capital instruments, while domes�cally owned banks may face constraints in issuing similar instruments.
4. To take account of poten�al nega�ve impact on lending, adjustments to risk weights,
par�cularly lowering them where jus�fied by empirical loss data and cyclical paterns, may be appropriate. Increasing granularity and recalibra�ng RWAs is also important as it can enhance propor�onality and efficiency, especially benefi�ng smaller ins�tu�ons that rely on standardized approaches rather than internal models. Greater granularity, if accurately calibrated, can improve the efficiency of capital alloca�on by enabling more risk-sensi�ve loan pricing and resource distribu�on. Conversely, overly simplified or miscalibrated risk weights can distort incen�ves, lead to capital arbitrage and resource misalloca�on, poten�ally driving banks to favor riskier exposures that receive the same capital treatment as safer ones. In light of this, it may be useful to reconsider the opportunity of introducing a leverage ra�o in New Zealand in the future. This would prove beneficial in two respects: by reducing model risk, as intended by the Basel Commitee, and by enhancing interna�onal comparability across countries adop�ng different capital frameworks.
5. Further improvements could be considered, even at the cost of reduced simplicity. First, more
intensive and tailored supervision can achieve greater propor�onality (even within bank groups) and allow eventual modera�on of Pillar 1 capital requirements once supervisory and ins�tu�onal reforms were fully effec�ve. This would be advisable, especially for Group 1 banks. Enhancing bank-specific supervision and reinforcing the supervisory dialogue through Pillar 2–type interven�ons for the four largest ins�tu�ons is par�cularly important in light of their systemic relevance. Such interven�ons may, on the one hand, help strengthen stability and, on the other, enhance propor�onality by reducing undue compe��ve advantages associated with being “too big to fail.” Second, to support lending through the cycle, it may be worth considering a strengthening of the macropruden�al framework by both maintaining at least the current level of countercyclical capital buffer (CCyB) (1.5% according to the 2019 review) and, mostly, introducing truly flexible tools that can be released when economic condi�ons deteriorate.
6. In the same spirit, advancing crisis-management and resolu�on frameworks is important.
Although, as episodes of crisis management in other countries have shown, solu�ons for distressed banks are inevitably challenging to implement, having resolu�on and crisis￾management plans in place is important. It may seem a simple point, but when a crisis arises, it is beter to have an established framework—however difficult to apply—than none at all. Con�nued progress in this area will enhance confidence and could, over �me, jus�fy a less conserva�ve capital framework, but only once these mechanisms are fully opera�onal.

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