New Zealand pushes earlier adoption of parts of Basel III

The Reserve Bank of New Zealand (RBNZ) is proposing to implement the capital conservation and countercyclical buffers of the Basel III framework in full from January 1, 2014 – two years ahead of the timetable set down by the Basel Committee.

The proposals were included in a consultation paper, Further elements of Basel III capital adequacy requirements in New Zealand, which the RBNZ released last week. In addition, banks will have to meet the minimum capital ratios in full from 2013, as set out in a previous consultation paper from the RBNZ released in November 2011.

The latest consultation paper sets out the bank’s proposals for several elements of the framework: the operation of the conservation buffer; the countercyclical buffer; and minimum requirements to ensure that all classes of capital instruments fully absorb losses at the point of non-viability (loss absorbency). Basel III also introduces a capital conservation buffer of 2.5% above common equity Tier I capital to absorb losses during periods of financial and economic stress.

Common equity Tier I must first be used to meet the minimum capital requirements before the remainder can contribute to the capital conservation buffer. If a bank’s capital ratio falls below the capital requirements, including the conservation buffer, the bank’s ability to distribute earnings will be restricted. Basel III proposes to reduce the percentage of earnings that can be distributed as the level of capital falls.

However, the RBNZ is proposing a stricter approach where as soon as a bank falls below the conservation buffer, it will be prevented from making any distributions until the full 2.5% conservation buffer is restored.

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