New Zealand Bank Capital Adequacy Framework Underpinned by Basel Rules

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Our policy work for bank oversight

This page provides an overview of Basel 2 and Basel 3 and how we implemented these rules as part of the capital adequacy framework in New Zealand.

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About the capital adequacy framework

New Zealand's previous capital adequacy framework for locally incorporated, registered banks was based on the international Basel capital framework developed by the Basel Committee on Banking Supervision.

While our new framework is also based on the Basel framework, it has changed in a number of places to reflect the Capital Review decisions we announced in December 2019. These changes are being phased in from 1 October 2021.

Read more about our Capital review

Read more about the capital requirements for banks in New Zealand

Basel 2

From 2008 until the implementation of Basel 3 in 2013, banks in New Zealand calculated their exposure to risks based on the Basel 2 framework.

This framework is set out in ‘Basel 2: International Convergence of the Capital Measurement and Capital Standards: A Revised Framework’ on the Bank for International Settlements’ website.

See the Basel 2: International Convergence of Capital Measurement and Capital Standards: A Revised Framework

Basel 2 is made up of three pillars:

Pillar 1 involves calculating the minimum capital requirements to cover credit risk, market risk and operational risk. Credit risk is determined through the calculation of risk-weighted exposures.

Pillar 2 covers capital for other risks and overall capital adequacy.

Pillar 3 covers disclosure and is designed to reinforce market discipline on banks' capital adequacy by requiring disclosure of relevant details of banks' capital calculations.

Basel 2 placed more emphasis than Basel 1 on the sensitivity of capital to underlying risks, and incorporating risks other than credit risk into capital adequacy.

Read more about the objectives of Basel 2

Standardised approach vs internal models approach

Under Basel 2, accredited banks could either use the internal models-based approach to calculate their capital requirements or the standardised approach.

Banks that used the standardised approach were subject to conditions of registration that required them to calculate capital adequacy using the framework set out in the Banking Supervision Handbook policy document, Capital Adequacy Framework (Standardised Approach) BS2A.

From 1 October 2021, banks using the standardised approach under Pillar 1 are subject to conditions of registration that require capital adequacy to be calculated using the frameworks set out in the following documents:

BPR131: Standardised Credit Risk RWAs

BPR132: Credit Risk Mitigation

BPR140: Market Risk

BPR150: Standardised operational risk

BPR160: Insurance Securitisation and Loan Transfers

The BPR documents are available on the capital and credit risk requirements
page.

Banks using the internal models-based approach under Pillar 1 were subject to conditions of registration that required them to calculate capital adequacy using the framework as set out in the Banking Supervision Handbook policy document ‘Capital Adequacy Framework (Internal Models-Based Approach) BS2B’. The models-based approach is also referred to as the internal ratings-based (IRB) approach and the approved banks are sometimes described as ‘IRB banks’.

From 1 October 2021, banks using the internal models-based approach under Pillar 1 are subject to conditions of registration that require capital adequacy to be calculated using the frameworks set out in:

BPR133: IRB Credit Risk RWAs

BPR134: IRB Minimum System Requirements

BPR140: Market Risk

BPR151: AMA Operational Risk

BPR160: Insurance Securitisation and Loan Transfers

The BPR documents are available on the capital and credit risk requirements
page.

Since October 2014, all IRB banks (those approved to use the internal models approach) are required to maintain an internal models compendium that is agreed with us as part of their conditions of registration.

ANZ Bank New Zealand, ASB Bank, Westpac New Zealand and Bank of New Zealand (BNZ) were accredited to use internal models for credit and operational risk. For these four major banks to retain their accreditation status, they had to comply with a number of ongoing accreditation requirements.

For banks registered as branches in New Zealand, Basel 2 developments had disclosure implications only.

Basel 3

In December 2010, the Basel Committee on Banking Supervision (the Basel Committee) released the new global regulatory standards for bank capital adequacy and liquidity . These standards were commonly known as Basel 3 and made the following main changes to the Basel 2 capital adequacy framework:

strengthening the definition of regulatory capital

increasing the minimum requirements

introducing new buffers to help banks withstand economic and financial stress.

To learn about how we applied the Basel 3 updates to banks, see the following Bulletin article:

Bulletin Article: Our application of the Basel III capital requirements for banks

Capital Review

How we applied these rules changed from 1 October 2021 onwards, as a result of our December 2019 Capital Review decisions. Among other things, these build on the Basel 3 changes by:

further strengthening the definitions of capital instruments

phased increases in both the minimum requirements and the buffers.

Read more about our Capital review

Read more about the capital requirements for banks in New Zealand

Timeline of our adoption of Basel rules

The following table has a timeline of consultation relating to Basel 2 and 3 from more recent to oldest.

Month and year

Details of consultation

December 2019

Final Capital Review decisions announced.

April 2017

We began a review of the capital adequacy framework for locally incorporated registered banks.

August 2015

We published the submissions to our consultation on BS16 and definition of capital in BS2 and our response to submissions.

The revised requirements were provided in the following Banking Supervision Handbook documents: BS2A, BS2B, BS16 and took effect from 1 November 2015.

June 2015

Consultation on minor changes to the requirements to recognise instruments as regulatory capital.

July 2014

We updated our Capital Adequacy Framework (Internal Models-Based Approach (BS2B) to incorporate internal model change approval requirements. From October 2014, all internal ratings-based (IRB) banks were required to maintain an internal models compendium as part of their conditions of registration.

December 2012

We published our response to submissions for our October 2012 consultation concerning counterparty credit risk and other related requirements. We also published our response to the September 2012 consultation.

October 2012

Consultation paper on proposed implementation of the final capital-related aspects of Basel 3 including draft changes to BS2A and BS2B.

September 2012

We published a consultation package on proposed changes to the Banking Supervision Handbook to put into effect Basel 3 requirements including changes to BS1, BS2A and BS2B.

We also published our response to submissions for our November 2011 and March 2012 consultations, and a regulatory impact assessment of Basel 3 capital requirements.

May 2012

We made some key decisions on Basel 3, which took into account our cost-benefit analysis, submissions received and the Australian Prudential Regulation Authority’s development of Basel 3. We wrote to banks outlining our decisions.

March 2012

We published a consultation paper on further elements of Basel 3 including the operation of the capital buffer and countercyclical buffer, and minimum requirements to ensure all classes of capital instruments fully absorb losses at the point of non-viability.

November 2011

We published a consultation paper on the implementation of Basel 3 setting out key proposals.

June 2011

We released finalised changes to the capital adequacy framework requiring banks using the internal models-based approach to hold more regulatory capital for rural lending portfolios. The intent of the policy was to align banks' farm lending capital requirements with risk in the sector.

May 2011

We released the general principles for Basel 3 as part of the May Financial Stability Report (Chapter 6).

April 2011

We issued a consultation paper proposing changes to our capital adequacy framework. After the consultation we published a summary of submissions.

December 2007

We finalised our approach to implementing Pillar 2 of Basel 2 following consultation.