Government Welcomes Reserve Bank Move to Ease Bank Capital Requirements

The Reserve Bank announced it will adjust risk weights and unwind some of the additional capital buffers imposed five years ago.

Finance Minister Nicola Willis has welcomed the Reserve Bank of New Zealand’s (RBNZ) decision to scale back several capital requirements first introduced in 2019, saying the changes will help strengthen banking competition, reduce pressure on lending costs, and support vital sectors such as agriculture and small business.

The Reserve Bank announced it will adjust risk weights and unwind some of the additional capital buffers imposed five years ago. Those earlier requirements were designed to improve financial stability but have since drawn concerns from industry, economists, and policymakers about their unintended impact on borrowing costs and competition.

Capital Settings Were Dampening Lending and Competition

Willis says feedback since 2019 has consistently pointed to issues with the earlier capital framework.

“Concerns have been raised that the Reserve Bank’s capital settings may be undermining competition and reducing lending to New Zealanders.”

Higher capital requirements increase the amount of money banks must hold in reserve, which can reduce their ability to lend and raise the cost of loans for households, farmers, and businesses.

“Higher costs for banks translate to higher lending costs for New Zealanders and, potentially, less lending to the agricultural and other important sectors.”

Government Remit Directed Reserve Bank to Protect Competition

The Government signalled its expectations clearly last year when Willis issued a new Financial Policy Remit, directing the Reserve Bank to ensure its prudential regulation did not constrain competition or disadvantage smaller deposit takers.

Today’s changes reflect that shift in priorities.

“The new requirements announced today remain prudent and strike a better, more graduated balance between risk and competition.”

Smaller Banks and Agriculture Sector to Benefit

A key part of the Reserve Bank’s update is the adjustment of risk weights—the settings that influence how much capital banks must hold against different types of lending.

Lower or recalibrated risk weights will:

• Enable smaller banks and deposit takers to compete more effectively with the large Australian-owned banks

• Support increased lending to the agriculture sector, which relies heavily on accessible credit

• Provide more room for competitive mortgage rates and lending products across the market

Willis says these adjustments will help rebalance a system long dominated by the big four banks.

Gradual Implementation as Part of Wider Banking Reforms

The Reserve Bank intends to phase in the new rules over several years to ensure stability while giving banks time to adapt. The changes form part of a broader programme aimed at strengthening competition, enhancing consumer choice, and ensuring credit remains available throughout the economy.

“These changes are part of a larger suite of measures to increase competition in the banking sector. The changes announced today will be introduced gradually over the coming years.”

Willis says the reforms support the Government’s broader economic strategy:

“They support our Government’s plan to fix the basics and build the future.”

With the adjustments now formally announced, banks, farmers, first-home buyers, and small businesses are expected to benefit from a more competitive and less restrictive lending environment.