New Zealand Banks’ Vulnerabilities and Capital Adequacy

Author/Editor:

B. Jang ; Masahiko Kataoka

Publication Date:

January 11, 2013

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The paper finds that, given New Zealand’s conservative approach in implementing the Basel II framework, New Zealand banks’ headline capital ratios underestimate their capital strength. A comparison with Canadian, UK and Australian banks highlights the impact of New Zealand’s more conservative approach. Stress tests in the paper show that four large New Zealand banks could withstand sizable stand-alone shocks to their exposure to either residential mortgages (calibrated on the Irish crisis experience) or corporate lending. However, combined shocks to both residential mortgages and corporate lending would put more pressure on the banks’ capital. Given high bank concentration and large offshore wholesale funding needs, the merits of higher minimum capital requirements for systemically important domestic banks could be considered, together with other measures to be implemented.

Series:

Working Paper No. 2013/007

Subject:

Banking Basel II Capital adequacy requirements Financial institutions Financial regulation and supervision Loans Nonperforming loans Residential mortgages

English

Publication Date:

January 11, 2013

ISBN/ISSN:

9781475561371/1018-5941

Stock No:

WPIEA2013007

Pages:

23

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