Lower capital, lower funding costs, more competition
New Zealand’s Reserve Bank has confirmed a major reset of bank capital rules that it says will keep the system resilient while lowering funding costs and, over time, lending rates.
“Following the completion of the review commissioned by the board in March, we are pleased to announce modernised capital rules that will support an efficient and resilient financial system,” said Rodger Finlay (pictured left), chair of the RBNZ board in a media release.
“We recalibrated our risk appetite to have regard to our new Financial Policy Remit, and to reflect important developments since 2019, including the introduction of the Depositor Compensation Scheme, and more intensive supervision, enforcement, and resolution approaches.
"This led us to ease common equity requirements across the system by around $5 billion compared to current levels, while still remaining confident in our system resilience.”
The package includes reduced requirements for common equity, more granular risk weights, simplification of capital instruments, and greater alignment of instruments for the big four banks with Australian settings.
“Our approach is simple, strong, proportionate, and efficient," said Reserve Bank governor Anna Breman (pictured right). "These new settings will reduce the overall cost of deposit takers’ funding, which we expect to see passed on as benefits to New Zealanders through increased lending and reduced rates, which we will monitor closely.”
According to interest.co.nz, the changes will cut the big four banks’ common equity tier one (CET1) capital by about $3.4 billion, or 7%, from the $46 billion they held in September, and will be phased in between 2026 and 2029, with reductions of up to $1.9 billion for mid‑sized banks and up to $70 million for small deposit takers.
Housing risk weights shift, more support for smaller lenders
As part of the review, the Reserve Bank has reworked how risk is measured across different loan types.
“We recalibrated our risk appetite… This led us to ease common equity requirements across the system by around $5 billion… while still remaining confident in our system resilience,” Finlay said.
Interest.co.nz reports that, “based on strong evidence provided by stakeholders,” the RBNZ will align standardised risk weights for housing loans with loan‑to‑value ratios (LVRs) below 70% with those used by Australia’s prudential regulator APRA, while risk weights for higher‑LVR loans will stay unchanged.
The central bank says “small and mid-sized deposit takers should see a proportionately larger reduction than the four large banks, which should allow them to grow and compete more effectively.”
Funding costs down, potential tailwind for mortgage rates
interest.co.nz says replacing the most expensive CET1 with cheaper loss‑absorbing capital (LAC) means banks’ average funding costs are expected to fall by around six basis points compared with today’s capital levels, and by about 12 basis points relative to the 2028 settings under the 2019 capital review, which is “expected to support improved access to credit.”
The Reserve Bank notes that CET1 is “the highest quality and most expensive form of capital,” and that the new mix of capital is designed to preserve safety while lowering the overall cost of funds.
Breman has committed to tracking how much of this benefit reaches borrowers: “We will be monitoring closely the impact of our new settings, including on lending rates, and we will be publishing our findings every two years.”
Finance Minister Nicola Willis welcomed the changes, arguing that lower regulatory costs should help reduce lending costs, strengthen competition – especially for smaller deposit takers – and “open the door to more lending to the agriculture sector,” Interest.co.nz reported.
What this means for Kiwi mortgage advisers
For mortgage advisers, the key takeaways are:
- Regulatory capital headwinds are easing, particularly for low‑LVR housing and smaller lenders.
- Banks’ average funding costs are expected to fall, giving lenders more room to sharpen pricing over time.
- Competition from mid‑sized and smaller deposit takers could increase as their relative capital burden falls.
As the new settings phase in from 2026, advisers can watch for sharper home loan offers, especially on lower‑LVR lending and from challenger banks looking to grow market share.
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