Orr spells out view on capital requirements

Reserve Bank governor Adrian Orr says the central bank thinks there’s a sweet spot in which it can require banks to hold more capital “with no trade-off to efficiency”.

Orr has already warned banks that the central bank’s review is going to require them to hold more capital.

The Reserve Bank plans to release its final consultation paper in mid-December.

Orr told a Business NZ forum in Auckland that central bank officials “expect to hear one side of the story loud and clear, that capital costs banks. We need to hear a broader perspective than that to best reflect New Zealand’s risk appetite.”

New Zealand banks have to hold at least 8 per cent of their risk-weighted assets as capital and a 2.5 per cent buffer but all the banks significantly exceed that minimum.

Orr said that’s because banks aim to achieve a high credit rating. “The ratings agencies are fallible, however, given they operate with as much ‘art’ as ‘science’.”

The most bank owners can lose is their invested capital if their bank fails, while the wider public loses much more, Orr said.