RBNZ – Page 5 – Digital Finance Analytics (DFA) Blog

Reserve Bank NZ consults on new nationwide investor LVR restrictions

The Reserve Bank has today released a consultation paper proposing changes to loan-to-value restrictions (LVRs) to further mitigate risks to financial stability arising from the current boom in house prices. The proposals simplify the current policy by applying two nationwide speed limits for owner-occupier and investor lending.

New Zealand house prices have increased by around 50 percent since 2010, driven by strong immigration, low mortgage rates and sluggish housing supply. With house prices becoming increasingly disconnected from underlying household incomes and rents, there is significant potential for house prices to fall very rapidly if the factors currently supporting the market reverse. Average house prices in New Zealand are now around 6.5 times average household income. When combined with the preexisting imbalance built up prior to the GFC, the house price-to-income ratio is further from its historical average than in almost any other OECD country

Rising investor defaults pose significant risks to the financial system, with a growing body of international evidence suggesting that loss rates on investor lending are significantly higher than owner-occupiers during severe housing downturns. There are caveats to applying evidence from other economies to New Zealand, including that mortgage origination standards can vary significantly across countries and time. These problems are mitigated by focussing on the differential between default rates for investors and owner-occupiers identified in international studies. Moreover, the tendency for higher investor default rates is consistent with a range of structural characteristics of investor loans in New Zealand. Direct evidence for New Zealand or Australia is limited as there has not been a severe housing downturn for many decades.

“The banking system is heavily exposed to the property market with residential mortgages making up 55 percent of banking system assets. Investor lending has been increasing rapidly and is a significant contributing factor to the current market strength. The proposed restrictions recognise the higher risks associated with such lending,” Governor Graeme Wheeler said.

Investor lending is growing strongly, rising from around 28 to 36 percent of overall mortgage lending over the past eighteen months. This suggests that the share of investor loans on bank balance sheets has increased significantly (especially given that more than half of investor loans have been on interest only terms in recent months). Despite tighter LVR restrictions, the investor share of sales has increased in both Auckland and the rest of New Zealand. This suggests that many Auckland investors have been able to increase borrowing capacity by
revaluing their existing properties.

Under the proposed new restrictions:

No more than 5 percent of bank lending to residential property investors across New Zealand would be permitted with an LVR of greater than 60 percent (i.e. a deposit of less than 40 percent).

No more than 10 percent of lending to owner-occupiers across New Zealand would be permitted with an LVR of greater than 80 percent (i.e. a deposit of less than 20 percent).

Loans that are exempt from the existing LVR restrictions, including loans to construct new dwellings, would continue to be exempt.

These proposed new restrictions would take effect on 1 September 2016 and simplify the LVR policy by removing the current distinction between lending in Auckland and the rest of the country.

Mr Wheeler said: “The drivers of the housing market strength are complex and action is required on many fronts that extend well beyond financial policy. Broad initiatives to reduce the underlying housing sector imbalances need to remain a top priority.

“A sharp correction in house prices is a key risk to the financial system, and there are clear signs that this risk is increasing across the country. A severe fall in house prices could have major implications for the functioning of the banking system and cause long-lasting damage to households and the broader economy.

“LVR restrictions to date have improved the resilience of bank balance sheets by reducing banks’ exposure to riskier mortgages. This policy initiative is intended to further improve the resilience of bank balance sheets, and it will assist in restraining credit and housing demand.

“We expect banks to observe the spirit of the new restrictions in the lead-up to the new policy taking effect.”

Consultation concludes on 10 August.

Mr Wheeler said that the Bank is progressing its work on potential limits to high debt-to-income ratio lending, which would be a potential complement to LVR restrictions.

“We have had positive initial discussions with the Minister of Finance on amending the Memorandum of Understanding on Macro-prudential policy to include this instrument.”

How RBNZ Makes Its Cash Rate Decision

The New Zealand Reserve Bank today published a Bulletin article that explains the monetary policy decision-making process. Seven times a year, the Reserve Bank makes a decision on the appropriate Official Cash Rate (OCR) setting.The Reserve Bank conducts monetary policy to achieve the goals of the Policy Targets Agreement, but is faced with significant uncertainty when making OCR decisions.

A robust system is needed to address the inherent uncertainty that the Reserve Bank faces when making these decisions. The Bulletin article describes the detail of this process. The article discusses: the research behind a monetary policy decision; how the Governing Committee reaches a monetary policy decision; how the Bank communicates the decision to its key stakeholders; and how the decision-making framework is reviewed in the face of new developments.

The Bulletin article notes that a key element of the monetary policy decision making process is the need for constant review and innovation, and the Reserve Bank’s approach to decision making will continue to evolve over time.

NZ Housing risks require a broad policy response

Growing imbalances in the housing market require policy action on a number of fronts, New Zealand Reserve Bank Deputy Governor Grant Spencer said today. In an excellent speech he draws important links between the elements driving house prices, and also underscores the limits of the banks range of options, especially considering the target inflation range of 1-3%.

New Zealand is experiencing a housing market boom. House prices are increasing at 13 percent per annum nationally, and at 15-20 percent in Auckland and close-by regions. Evidence from housing cycles in several advanced economies suggests that the longer this continues, the more likely there will be a severe correction.

Speaking to the Wellington Branch of the New Zealand Institute of Valuers, Mr Spencer said that a range of factors had contributed to strong demand for housing, including record low interest rates, rising credit growth, and population increases.

While housing demand has been strong, the housing supply response has been constrained by rigid planning and consent processes, community preferences in respect of housing density, inefficiencies in the building industry, and infrastructure development constraints around financing and resource consents.

When the Bank had introduced LVR restrictions in 2013, they saw some markets slowing, but “House price pressures have re-emerged in Auckland following an easing in late 2015 and have also strengthened across other regions”.

New Zealand house price inflation began to accelerate again from around March 2016 as demand pressures intensified in Auckland. In the meantime, other regions were contributing to higher national house price inflation from mid-2015, particularly those areas adjacent to Auckland. Most regional centres are now experiencing annual house price inflation in excess of 8 percent. Similarly, sales activity increased across the country in the first half of 2016. Reflecting the underlying housing shortage, new listings have remained flat. Listings as a proportion of sales are now 40 percent below the previous low seen at the height of the pre-GFC boom in 2007.

He also highlighted an increase in investor purchases, and significant mortgage refinance, including increased interest-only and high debt-to-income lending. New mortgage commitments are also elevated, running at an annual rate of 35%. Debt servicing ratios are also elevated.

Supply is not meeting demand he concluded. This is a recipe for potential disaster.

The longer the boom continues, the more likely we will see a severe correction that could pose real risks to the financial system and broader economy.

Mr Spencer said a broad range of initiatives is necessary to increase the long-term housing supply response, particularly in Auckland, and to help ensure housing demand is kept in line with supply capacity.

The Reserve Bank has no direct influence over supply, but can influence housing demand through the credit channel. In this regard, we see the Reserve Bank as part of a team effort.

A dominant feature of the housing resurgence has been an increase in investor activity, which increases the risk inherent in the current housing cycle.

The Reserve Bank is considering tightening Loan-to-Value Ratios (LVRs) further to counter the growing influence of investor demand in Auckland and other regions, and to further bolster bank balance sheets against fallout from a housing market downturn. Such a measure could potentially be introduced by the end of the year.

Limits on Debt-to-Income ratios (DTIs) might also have a role to play but would be a new instrument that would have to be agreed by the Minister of Finance under the Memorandum of Understanding on Macro-prudential policy. Further investigation of this option will be undertaken.

A third option is a housing capital overlay. The Reserve Bank has already indicated that it will be conducting a full review of bank capital requirements over the coming year.

Consideration might be given to further reducing the tax advantage of investing in residential housing. Supply side issues also need attention. But much of this lays beyond the remit of the Central Bank.

He concluded that the causes of the imbalances are complex with a number of important drivers on both the demand and supply side. Addressing these imbalances will require policy action by a variety of agencies on a number of fronts. The underlying housing shortage needs to be urgently addressed, particularly in Auckland where population growth continues to outstrip housing construction. A step up in supply is required and finalisation of the Auckland Unitary Plan will be a key opportunity to facilitate such a step.

On the demand side, the key drivers are population growth and easy credit. The low cost of credit is making higher debt levels affordable, particularly for investors who can deduct interest costs from taxable income. Residential investors are accounting for an increasing share of house sales and new mortgage credit.

The Bank’s interest rate policy must have regard to financial stability concerns, but the global environment is likely to keep interest rates low for some time yet. Macro-prudential policy can assist in containing the growing risk to financial stability as the current housing market reaches new extremes. In light of the growing risk, the Reserve Bank is closely considering measures that could be progressed in the coming months.

RBNZ Enhances Mortgage Reporting – 40% New Loans Interest Only

The New Zealand Reserve Bank has introduced new statistics on residential mortgage lending by payment type (i.e. interest-only and principal-and-interest). ‘Investor’ and ‘owner-occupiers’ are defined by the intended use of borrowed funds. A particular loan application may include a portion of both interest only and principal-and-interest payment terms. Figures in the new table represent the balance of new and existing lending for each payment type, not the number of loans.

In May 2016, almost 60 percent of all new mortgage lending was on principal-and-interest payment terms, while 40 percent was on interest-only payment terms. These proportions have been fairly stable since July 2015 when the data was first available. Interest-only loans tend to convert to principal-and-interest loans after a period of time. In March 2016, 40 percent of new lending was on interest-only payment terms. However on the banks’ loan books only 28 percent of all existing mortgages are on interest-only payment terms. These proportions have been fairly steady over time.

Interest-only lending is less likely to be high loan-to-value ratio (LVR greater than 80 percent) compared to principal-and-interest lending. The proportion of high LVR new lending has
declined slightly for all payment types since data was first available in July 2015. The portion of high LVR lending for all existing mortgages is somewhat higher than for new lending (12.9 percent compared to 7.9 percent in March 2016) but this has also been declining over time. The lower ‘high-LVR’ portion on new lending is due to the LVR restrictions, which will gradually filter through to existing lending as new lending is added to the banks’ loan books.

In May 2016, about 55 percent of new lending for investor purposes was on interest-only terms compared to about 33 percent for owner-occupier purposes.These proportions have
been fairly steady over time. Only 1 percent of interest-only lending for investor purposes is above 80 percent LVR and this has been declining over time.

NZ Official Cash Rate reduced to 2.5 percent

The Reserve Bank NZ today reduced the Official Cash Rate (OCR) by 25 basis points to 2.5 percent.

Globally, economic growth is below average and inflation is low, despite highly stimulatory monetary conditions. Financial markets remain concerned about weaker growth in emerging economies, particularly in China. Markets are also focused on the expected tightening of policy in the United States and the prospect of an increasing divergence between monetary policies in the major economies.

Growth in the New Zealand economy has softened over 2015, due mainly to lower terms of trade. Combined with increases in the labour supply from strong net immigration, the slowdown has seen an increase in spare capacity and unemployment. A recovery in export prices, the recent lift in confidence, and increasing domestic demand from the rising population are expected to see growth strengthen over the coming year.

The New Zealand dollar has risen since August, partly reversing the depreciation that occurred from April. The rise in the exchange rate is unhelpful and further depreciation would be appropriate in order to support sustainable growth.

House price inflation in Auckland remains high, posing a financial stability risk. Residential building is accelerating, and recent tax and LVR measures are expected to reduce housing pressures. There are some early signs that Auckland house price inflation may be moderating.

CPI inflation is below the 1 to 3 percent target range, mainly due to the earlier strength in the New Zealand dollar and the 65 percent fall in world oil prices since mid-2014. The inflation rate is expected to move inside the target range from early 2016, as earlier petrol price declines will drop out of the annual calculation, and the lower New Zealand dollar will be reflected in higher tradables prices.

There are a number of uncertainties and risks to this outlook. In the primary sector, there are risks that dairy prices remain weak for longer, and the current El Niño results in drought conditions and weaker output. Risks to the domestic outlook include the prospect of net immigration staying high for longer and of household expenditure picking up on the back of strong house prices.

Monetary policy needs to be accommodative to help ensure that future average inflation settles near the middle of the target range. We expect to achieve this at current interest rate settings, although the Bank will reduce rates if circumstances warrant. We will continue to watch closely the emerging flow of economic data.

A Deeper Look at Recent Auckland Housing Market Trends: RBNZ

The Reserve Bank of New Zealand has published an analytic note “A Deeper Look at At Recent Housing Market Trends; Insights from Unit Record Data. It highlights the influence of investors and their impact on the overall market and the impact of LVR controls.

In October 2013 the Reserve Bank placed a temporary ‘speed limit’ on high loan-to-value ratio (LVR) residential mortgage lending, restricting banks’ new lending at LVRs over 80 percent to no more than 10 percent of total residential mortgage lending. This policy was implemented to reduce financial stability risks associated with the housing market, against the backdrop of elevated household debt, high and rapidly rising house prices, and a large share of new lending going to borrowers with low deposits. The policy had an immediate dampening effect on housing market activity and house price inflation, and facilitated a strengthening in bank balance sheets. However, since late 2014, upward pressure on the housing market has re-emerged, predominantly in Auckland, posing renewed risks to financial stability.

With the housing market showing renewed signs of strength, this paper provides a detailed overview of market conditions and examines developments following the imposition of the speed limit on high-LVR lending. We find that increased housing market activity in recent months has been driven by strong investor demand, both within and outside of Auckland, as reflected in increased investor purchases and significant growth in investor-related mortgage credit. Much of the increase in investor purchase shares has coincided with a fall in the share of movers, with the first home buyer share increasing slightly following its decline after the introduction of LVR speed limits.

We also investigate whether the LVR policy has led to an increase in cash buying activity or borrowing from institutions outside of the regulatory. We do not find evidence of the former with cash buyer shares falling in Auckland and remaining broadly flat in the rest of the country. There is some evidence of a modest increase in the share of transactions involving non-banks since October 2013, although non-bank activity remains low.

We then undertake a more detailed analysis of investor activity given their heightened prevalence in the market. The primary driver of their increased market share has been a rising incidence of small investors (that are heavily reliant on credit) in the market, as opposed to greater activity among larger investors. This suggests that the incoming changes to the LVR restrictions could have a significant dampening effect on Auckland housing market activity and house price inflation. We also find that investors are disproportionately represented at both ends of the price spectrum, contrary to popular opinion that investors predominantly buy relatively cheap properties for use as rentals.

Finally, we offer some additional insights into cash buyers, with the evidence pointing towards increased investor leverage relative to other market participants, consistent with the strong growth in investor-related mortgage commitments in recent months.

NZ’s Estimation of a Neutral Interest Rate

The Reserve Bank of New Zealand has today published a paper in its Analytical Notes series on Estimating New Zealand’s neutral interest rate. In the paper they run through a number of different methods to derive this indicator rate, and observe the mean is 4.3%. Strikingly this mean rate has been falling for a number of years, and is a further indicator of lower rates around the world.

It is important for the Reserve Bank of New Zealand to understand the extent to which current monetary policy settings are either contractionary or expansionary with respect to the macroeconomy. As a benchmark for this analysis, the Bank estimates a level of the nominal 90-day bank bill rate that it believes is neither expansionary nor contractionary. This benchmark interest rate is termed the ‘neutral interest rate’.

The neutral interest rate is unobservable and significant judgement is required to assess its current level. The Bank continually monitors the economy for possible changes in the neutral interest rate. This includes a broad assessment of consumer attitudes towards debt and risk, the economy’s potential growth rate, and international developments. Signs that the neutral rate may be changing are initially incorporated into the Bank’s risk assessment when setting policy. If the economy shows clear signs of a change in the neutral interest rate, the Bank will formally change its estimate in its various modelling frameworks.

The Bank looks at a range of model-, survey-, and market-based estimates of the neutral rate to help inform this ongoing judgement. This paper outlines the methodology the Bank uses to arrive at these model-, survey-, and market-based estimates. The Bank currently uses five key methods to help inform judgements about the neutral interest rate. These include:

• a neo-classical growth model;
• implied market expectations of long-horizon interest rates;
• analysts’ expectations of long-horizon interest rates;
• analysts’ expectations of long-horizon annual nominal economic growth; and,
• a small New Keynesian model.

These estimates suggest the nominal neutral 90-day interest rate sits between 3.8 and 4.9 percent currently. The mean of these indicators is 4.3 percent.

The Bank currently judges that the nominal neutral 90-day interest rate sits at 4.5 percent – within the range of estimates and close to the mean of these estimates. This implies that current monetary policy settings are expansionary, although these models highlight some emerging risk that the neutral interest rate is falling further. The Bank will continue to use these five methods, along with broader monitoring of the economy, to help identify any possible changes in the neutral interest rate. Furthermore, the Bank will continue to look for ways to improve its estimates, including the development of other estimation methodologies.

NZ Monetary policy supporting growth and inflation goal

The NZ Reserve Bank confirmed that at this stage some further monetary policy easing is likely to be required to maintain New Zealand’s economic growth around its potential, and return CPI inflation to its medium-term target level.

Further exchange rate depreciation is necessary, given the weakness in export commodity prices and the projected deterioration in the country’s net external liabilities over the next two years, Governor Graeme Wheeler said.

Speaking to an ExportNZ/Tauranga Chamber of Commerce audience, Mr Wheeler said that in mid-2014, New Zealand’s terms of trade were at a 40-year high, but over the past 15 months the economy has experienced several shocks. Export prices for whole milk powder have fallen 63 percent since February 2014, and oil prices are currently more than 50 percent below their June 2014 level. Net immigration and labour force participation are at historic highs, and the real exchange rate has declined steadily since April 2015.

Over the past two years, annual CPI inflation has been in the lower half of the 1 to 3 percent target band, except for the period since the December quarter 2014 when the fall in oil prices brought CPI inflation to very low levels. The Bank expects annual CPI inflation to be close to the midpoint of the 1 to 3 percent target range by the first half of 2016.

“Under the Bank’s flexible inflation targeting framework, the Policy Targets Agreement specifically recognises that annual CPI inflation will fluctuate around the medium-term trend due to factors such as exceptional movements in commodity prices – like those experienced since mid-2014,” Mr Wheeler said.

“There are, however, several risks and uncertainties around the inflation outlook. These include the future path of the exchange rate, which will be influenced by future commodity prices, and the speed with which the recent depreciation feeds through to higher inflation.”

Mr Wheeler said that, despite recent declines, the exchange rate remains above the level consistent with current economic conditions.

“At current levels of export prices, a more substantial exchange rate depreciation will be required to stabilise the net external liabilities position relative to GDP.”

Mr Wheeler added that there is potential for further downward pressure on global dairy prices. “Also, over coming months, the Federal Reserve and the Bank of England are likely to begin the process of normalising their interest rates, which could assist our currency lower.”

Turning to interest rates, Mr Wheeler said that current monetary policy settings are providing stimulus to the economy at a time when output looks to be growing around 2.5 percent, slightly below potential, and core inflation remains a bit below the mid-point.

He said that some local commentators have predicted large declines in interest rates over coming months that could only be consistent with the economy moving into recession. “We will review our growth forecasts in the September Monetary Policy Statement but, at this point, we believe that several factors are supporting economic growth. These include the easing in monetary conditions, continued high levels of migration and labour force participation, ongoing growth in construction, and continued strength in the services sector.”

Mr Wheeler said that, in returning inflation to the mid-point of the target band, the Bank has to avoid unnecessary volatility in output, interest rates, and the exchange rate.

“Our judgement in the current circumstances is that aiming to return inflation to around its medium-term target level in about nine to 12 months’ time is an appropriate speed of adjustment. This may not always be the appropriate speed of adjustment. Nor does it mean that the Bank will necessarily deliver a precise outcome as the economy is constantly experiencing shocks and disturbances that policy may need to counter or accommodate.

“Having the scope to amend policy settings, however, is a key strength of the monetary policy regime. In response to these developments, the Bank will review and, if necessary, revise its policy settings to meet its price stability objective. The time path of inflation may change as monetary policy is recalibrated, but the overall goal of meeting the specifications of the PTA will remain the central focus of policy.”

Mr Wheeler also noted that the Bank is conscious of the impact that low interest rates can have on housing demand and its potential to feed into higher house price inflation. Lower interest rates risked exacerbating the already extensive housing pressures in Auckland by stimulating housing demand, although, outside of Auckland, nationwide house price inflation is currently running at an annual rate of around 2 percent. However, in the present situation, raising interest rates would be inappropriate as it would put upward pressure on the exchange rate and further dampen CPI inflation.

“The Bank continues to be concerned about the financial stability risks and risks to the broader economy that would be associated with a major correction in Auckland house prices. In the current circumstances, macro prudential policy can be helpful in reducing some of the pressures arising from the Auckland housing market. The proposed LVR measures and the Government’s policy initiatives that it announced in the 2015 Budget should begin to ease the impact of investor activity.

“While a strong supply response over several years is needed to address Auckland’s housing imbalance, macro-prudential policy can help to lower the financial and economic risks while important regulatory and infrastructure issues are addressed and additional investment in new housing takes place.”

RBNZ Cuts Official Cash Rate to 3%

The NZ Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 3.0 percent.

Global economic growth remains moderate, with only a gradual pickup in activity forecast. Recent developments in China and Europe led to heightened uncertainty and increased financial market volatility. Particular uncertainty remains around the impact of the expected tightening in US monetary policy.

New Zealand’s economy is currently growing at an annual rate of around 2.5 percent, supported by low interest rates, construction activity, and high net immigration. However, the growth outlook is now softer than at the time of the June Statement. Rebuild activity in Canterbury appears to have peaked, and the world price for New Zealand’s dairy exports has fallen sharply.

Headline inflation is currently below the Bank’s 1 to 3 percent target range, due largely to previous strength in the New Zealand dollar and a large decline in world oil prices. Annual CPI inflation is expected to be close to the midpoint of the range in early 2016, due to recent exchange rate depreciation and as the decline in oil prices drops out of the annual figure. A key uncertainty is how quickly the exchange rate pass-through will occur.

House prices in Auckland continue to increase rapidly, but, outside Auckland, house price inflation generally remains low. Increased building activity is underway in the Auckland region, but it will take some time for the imbalances in the housing market to be corrected.

The New Zealand dollar has declined significantly since April and, along with lower interest rates, has led to an easing in monetary conditions. While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices.

A reduction in the OCR is warranted by the softening in the economic outlook and low inflation. At this point, some further easing seems likely.

RBNZ Updates On Basel III

The NZ Reserve Bank today published an article in the Reserve Bank Bulletin that describes the Reserve Bank’s implementation of the Basel III capital requirements. It is one of the clearest articulation of Basel III that we have read, and is recommended to those seeking to get to grips with the complexity of the evolving capital requirements. In addition, you can read our article on Basel IV (the next iteration) here.

The GFC highlighted several shortcomings in the policies and practices of some financial institutions, particularly in North America and Europe, and in the regulatory requirements for banks in respect of capital. In the lead-up to the GFC, some financial institutions were highly leveraged (that is, their assets were funded by high levels of debt as compared to equity), with capital that proved insufficient to absorb the losses that they incurred. In several countries, governments provided funds to support failing banks, effectively protecting holders of certain capital instruments from bearing losses, which came at a cost to taxpayers. The complexity of capital rules, interaction with national accounting standards, and differences in application resulted in inconsistencies in the definition of regulatory capital across jurisdictions. Further, insufficient capital was held in respect of certain risks. This made it difficult for the market to assess the true quality of banks’ regulatory capital and led some market participants to turn to simpler solvency assessment methods.

The BCBS responded with new requirements for bank capital, collectively known as Basel III, which built on the existing frameworks of Basel I and Basel II. Basel III strengthens the minimum standards for the quality and quantity of banks’ capital, and aims to reduce bank leverage and improve the risk coverage of the Basel Capital Accords. One of the purposes of Basel III is to make it more likely that banks have sufficient capital to absorb the losses they might incur, thus reducing the likelihood that a bank will fail, or that a government will be called on to use taxpayer funds to bail out a bank. Basel III also introduced an international standard on bank liquidity. Overall, these requirements increase resilience in the financial sector and reduce the probability of future systemic collapses of the financial sector.

The RBNZ Bulletin article explains the rationale behind the Basel III capital requirements, identifies and discusses their significant features, explains how the Reserve Bank has applied the requirements in New Zealand, and examines the development of the New Zealand market for instruments meeting the Basel III definition of capital.

The changes to the Capital Accord brought into effect by Basel III included: enhancing the requirements for the quality of the capital base;increasing the minimum amount of capital required to be held against risk exposures; requiring capital buffers to be built up in good times that can be drawn down in times of economic stress; introducing a leverage ratio requirement; and enhancing the risk coverage of the capital framework. Draft international minimum standards for liquidity were also proposed for the first time as part of the Basel III package. The liquidity requirements are not discussed in this article. The Basel III capital standards have been widely adopted worldwide. The Reserve Bank has largely adopted the Basel III capital requirements. As New Zealand banks were well capitalised at the time Basel III was issued, the Reserve Bank was able to put the Basel III capital requirements in place in New Zealand ahead of the timetable set by the BCBS for Basel III implementation.