Further decisions on bank risk weights released

2023-06-13 13:02:23 · RBNZ

The Reserve Bank of New Zealand has released its finalised risk weighting decisions following consultation with industry stakeholders.

In September 2022, we published our Risk Weights Omnibus Consultation paper, seeking feedback on some issues deferred from our Capital Review.

The Consultation addressed issues including First Home Loans underwritten by Kāinga Ora; Sovereigns, Public Sector Entities and Multilateral Development Banks; Reverse Residential Mortgage Loans; Cross-Method Guarantees (the treatment of a subset of loans where guarantees cross over between the standardised and IRB approaches); the Business Growth Fund; and Qualifying Central Counterparties.

In April 2023, we released our finalised risk weighting under bank capital adequacy rules for exposures to the Business Growth Fund (BGF). The BGF was announced in Budget 2022 to help small and medium businesses access finance.

“We have now published our final decisions and our response to the points raised in submissions and would like to express our appreciation to all those who took the time to share their views,” Director of Prudential Policy Kate Le Quesne says.

We have also published an Exposure Draft of the associated Banking Prudential Requirements (BPR) document that covers the technical changes needed to implement the decisions. We welcome any feedback on the final drafting of this document by 21 July.

We expect that the changes made in the Exposure Draft document will take effect from 1 September 2023. We will consult banks about the relevant changes to their Conditions of Registration.

What are risk weights?

Risk weights are used to convert the actual size of an exposure into a risk-weighted asset. A more risky exposure will have a higher risk weight. Banks are required to hold a minimum percentage of capital against these risk weighted exposures. Higher risk exposures mean a bank will need more capital — money provided by the owners (shareholders) of a bank. This ensures that the owners have a meaningful stake in the bank — the more the bank’s owners have to lose, the more they will want to make sure the bank is run properly.