RBNZ Unveils Major Capital Review Findings: What It Means for Banks and the Economy

The Reserve Bank of New Zealand (RBNZ) has released sweeping new decisions from its capital review that will reshape how banks fund themselves, how much they can lend, and ultimately what households and businesses pay for credit. The new framework lowers the most expensive form of capital compared with the 2019 settings, introduces new loss-absorbing debt, and brings New Zealand closer to Australian and global norms while still prioritising financial stability.

Background to the RBNZ Capital Review

The RBNZ’s capital review began in the late 2010s with the aim of making New Zealand’s banking system safer after the global financial crisis and concerns over high household debt. The 2019 decision substantially increased required capital for banks, especially the big four Australian-owned banks, with full implementation planned by 2028.​

At that time, RBNZ set total capital requirements for the major banks at 18 percent of risk-weighted assets, made up of 13.5 percent Common Equity Tier 1 (CET1), 2.5 percent Additional Tier 1 (AT1), and 2 percent Tier 2 capital. Treasury analysis noted this implied an increase in capital of 20–60 percent for different banks and would absorb about 70 percent of sector profits over the transition period.​

What Has Changed in the Latest Review

The latest findings revise those 2019 ambitions, easing the CET1 burden while introducing new long-term loss-absorbing debt instruments that can be written down or converted to equity in a crisis. For the big four banks, the new settings reduce CET1 capital relative to the 2019 path, while overall regulatory capital still rises because of these new instruments.​

The RBNZ states that the new rules will cut banks’ average funding costs by around six basis points relative to current capital levels and about 12 basis points relative to where funding costs would have been under the full 2019 settings. This shift marks a pivot from a “fortress” capital approach towards a more “mainstream” regime aligned with Australia and other advanced economies while still building in strong buffers.​

New Capital Ratios: Key Numbers

Under the 2019 decision, large “Group 1” banks faced a CET1 requirement of 13.5 percent and total capital of 18 percent at full phase‑in, while smaller banks faced 16 percent total capital. The new capital review relaxes these peaks and reshapes the mix of capital and loss‑absorbing debt.​

For the major banks, some options canvassed and now reflected in finalised settings involve reducing total capital requirements while introducing a layer of long‑term debt that can absorb losses. Smaller banks see their total capital requirement reduced to around 14 percent from 16 percent, lowering funding pressure while maintaining resilience.​

Overview of Capital Settings

Bank type	2019 full decision – total capital as % of RWA	New settings – indicative total regulatory requirement	Notes on composition
Major banks (big four)	18% total capital (13.5% CET1, 2.5% AT1, 2% Tier 2) ​	Similar or slightly lower total regulatory requirement, but more made up of loss‑absorbing debt and less CET1 vs 2019 path ​	Replaces some CET1 with cheaper long‑term loss‑absorbing debt; AT1 is phased out ​
Smaller banks	16% total capital under 2019 settings ​	14% total capital under new review ​	Eases burden on smaller banks while keeping a strong buffer ​
System‑wide CET1	Near‑doubling of big‑bank CET1 relative to pre‑review era under 2019 settings ​	Total CET1 expected to fall about 10%, or roughly NZ$5 billion, from current levels under new rules ​	Overall regulatory capital still rises about 18% due to new loss‑absorbing instruments ​

Introduction of Loss‑Absorbing Capacity (LAC) Debt

A headline change is the introduction of long‑term loss‑absorbing capacity (LAC) instruments for the big four banks. These are debt securities that can be written down or converted to equity if a bank runs into severe trouble, shifting some of the burden of failure from taxpayers to investors.​

Under the new framework, the big banks will issue LAC debt to their Australian parent groups, which is cheaper than raising additional CET1 equity from shareholders. The RBNZ expects total regulatory capital at the major banks to increase by about 25 percent, from NZ$57.6 billion to around NZ$72.2 billion, once LAC is fully in place.​

Funding Costs and Interest Rates

By replacing some high‑cost equity with cheaper loss‑absorbing debt, the RBNZ expects banks’ average funding costs to decline modestly compared with both current capital settings and the earlier 2019 trajectory. The central bank estimates that funding costs will fall by about six basis points relative to today’s levels and by about 12 basis points relative to what they would have been under the 2019 decision in 2028.​

The RBNZ argues that these lower funding costs should support slightly lower lending rates and better access to credit for households and businesses, and it has signalled that it will monitor whether banks pass on those benefits. Government ministers who previously warned that very high capital requirements risked raising borrowing costs and choking competition have welcomed the more balanced approach.​

Impact on Bank Lending Capacity

Reducing the CET1 requirement from the 2019 path and adjusting risk weights increases the amount banks can safely lend for any given amount of shareholder capital. Some estimates suggest that risk‑weight changes alone may reduce capital requirements across the system by around 5 percent, freeing up balance sheets, particularly for business and agricultural lending.​

At the same time, total regulatory capital, including LAC, still rises, meaning that New Zealand’s banks will hold more absorbent resources overall against losses than in the pre‑review era. The RBNZ has framed this as a “simple, strong, proportionate, and efficient” approach that both underpins resilience and supports credit growth.​

Economic Effects: GDP, Credit and Stability

When the 2019 decision was made, RBNZ modelling suggested that higher capital would add about 30 basis points to lending rates and trim GDP by up to 0.32 percent annually, with some independent analysts suggesting a GDP impact closer to 0.4–1.0 percent. The revised settings are expected to soften these costs by reversing part of the CET1 increase and leaning on cheaper instruments instead.​

The new review aims to preserve most of the financial stability benefits of higher capital while lowering the drag on growth and credit availability, especially in sectors such as housing, small business, and agriculture. With GDP forecast growth around 1.1 percent in the six months to December in recent projections, policymakers are keen to avoid unnecessary credit constraints as the economy navigates higher rates and a cooling property market.​

Alignment with International Standards

Critics of the 2019 settings argued that New Zealand’s capital regime had moved well above international norms, risking competitiveness and over‑capitalising the banking system. The new capital review explicitly benchmarks New Zealand more closely against Australia’s prudential rules, particularly for housing risk weights on loans with loan‑to‑value ratios below 70 percent.​

By aligning standardised risk weights with those set by the Australian Prudential Regulation Authority (APRA) for lower‑risk housing loans, while keeping higher weights for riskier, high‑LVR lending, the RBNZ seeks a more finely tuned system that reflects actual risk while avoiding unnecessary capital burdens. This alignment should also reduce regulatory arbitrage and complexity for the big banks that operate across both countries.​

Phase‑In Timelines and Transition

The original 2019 framework envisaged a seven‑year transition from mid‑2020 through to 2027, later stretched to 2028 due to the pandemic. The new capital review confirms that the updated settings will begin phasing in from early 2026, with full implementation still targeted for the late‑2020s to give banks and markets time to adjust.​

During the transition, banks are expected to manage their balance sheets by retaining earnings, optimising risk weights, and gradually issuing the new LAC instruments rather than suddenly calling for fresh equity. This staged approach aims to avoid sudden loan repricing or rapid deleveraging, smoothing the impact on borrowers and the broader economy.​

What It Means for Households and Businesses

For households, the capital review findings mean bank funding remains robust, depositors are better protected, and mortgage rates may be marginally lower than they would have been under the original 2019 capital path. While nobody should expect dramatic cuts strictly from this change, even a few basis points matter at large mortgage sizes and over long terms.​

For businesses, especially small and medium‑sized firms and farmers, more proportionate risk weights and slightly lower funding costs should support credit availability, particularly in productive sectors that rely heavily on bank loans. At the same time, by embedding a credible resolution framework through LAC, the new regime is designed to keep financial crises less likely and less damaging, protecting jobs and investment in the long run.​

Outlook: Balancing Safety and Growth

The RBNZ’s latest capital review findings represent a recalibration rather than a reversal: banks will still end up holding materially more regulatory capital than before the review era, but with a more efficient mix that reduces funding costs and supports lending. By combining slightly lower CET1 requirements, new loss‑absorbing debt, and more risk‑sensitive weights, the central bank is betting that New Zealand can sustain both a resilient banking system and a healthy flow of credit to the real economy.​

For banks, the message is clear: plan early for LAC issuance, keep passing through funding gains to borrowers, and continue strengthening risk management. For households and businesses, the new rules should mean more secure banks, modestly better borrowing conditions than under the tougher 2019 track, and a financial system better prepared for future shocks without sacrificing growth.​