The Reserve Bank of New Zealand is set to consider whether to postpone further the capital review of local banks after the stress test revealed that banks can draw on their buffers to meet customers’ need during challenging economic times.
In December 2019, the central bank had decided to delay the implementation of capital review, including the proposed increase in capital requirement, until at least July 1, 2021. The RBNZ said it will be considering over the months ahead whether further delays are warranted.
The current events underscore the importance of banks building strong capital buffers. Banks would be in a stronger position to withstand worsening economic conditions if they had been implemented prior to this downturn.
“The onset of the COVID-19 pandemic provides a stark reminder to us all of the importance of being prepared for the unexpected, especially when you are a systemically important bank at the core of New Zealand’s financial system,” Deputy Governor Geoff Bascand said.
The more capital a bank holds, the better it can weather economic storms and meet customer needs during tough times like now, Bascand added.
The stress test noted that capital ratio of banks would fall below the regulatory minimums if they face 1 in 200 year event. However, all banks would show above regulatory minimum capital under pessimistic baseline scenario that characterize one in 50 to 75 year event.
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