RBNZ Signals Banking Sector Capital Rules Review as Credit Growth Slows
The Reserve Bank is considering relaxing capital requirements for New Zealand’s major banks as credit growth slumps to its lowest level since 2021. The move comes as mortgage stress indicators climb and economists warn of potential banking sector earnings pressure heading into 2026.
- New Zealand credit growth fell to 2.1% annually in February, down from 8.3% in early 2024
- RBNZ flagging review of Tier 1 capital ratios currently set at 8.5% for major banks
- Mortgage arrears rates increased to 0.47% in Q4 2025, highest since 2020
- ANZ and Westpac shares down 12% year-to-date on earnings concerns
The Reserve Bank’s deputy governor Christian Hawkesby indicated the central bank is “actively monitoring” whether current capital buffers remain appropriate given the deteriorating credit environment. Speaking at a Wellington banking conference last week, Hawkesby suggested the 8.5% Tier 1 capital ratio requirement for systemically important banks could be “recalibrated” if economic conditions continue weakening.
“We’re seeing a marked deceleration in credit demand across all sectors,” Hawkesby told delegates. “Our regulatory settings need to remain proportionate to the risks we’re actually observing.”
The comments represent a significant shift from the RBNZ’s post-GFC stance of maintaining robust capital buffers. Credit growth across the banking system has now fallen for six consecutive months, with business lending particularly weak at just 1.2% annual growth.
Mortgage stress signals mounting
Behind the slowing credit numbers lies growing evidence of household financial pressure. Mortgage arrears have climbed steadily since mid-2025, with the 0.47% rate in December representing a 40% increase from the previous year. ASB’s chief economist Nick Tuffley warns the trend could accelerate through winter months.
“We’re seeing the lagged effects of aggressive monetary tightening finally feeding through to household balance sheets,” Tuffley said. “The question is whether this translates to broader banking sector stress.”
According to Stuff Business, the major banks have already begun tightening lending criteria, with debt-to-income ratios now averaging 5.2 times compared to 6.1 times in early 2024. This defensive positioning has contributed to the credit growth slowdown but may also be crimping banks’ own revenue prospects.
ANZ New Zealand CEO Antonia Watson acknowledged the challenging operating environment in February results, noting net interest margins had compressed to 2.31% from 2.44% a year earlier. Similar pressure is evident across the sector, with Westpac reporting a 8% decline in New Zealand banking profits for the December quarter.
Regulatory relief on horizon
The RBNZ’s potential capital rule review reflects growing concern about credit availability constraining economic recovery. Current requirements mean the big four banks hold approximately $12 billion in excess capital above minimum regulatory levels – funds that could theoretically support additional lending.
However, banking analyst Peter Stokes from Forsyth Barr cautions against expecting dramatic changes. “The RBNZ remains committed to maintaining system stability,” he said. “Any adjustments will likely be modest and conditional on sustained improvement in credit conditions.”
The central bank has indicated formal consultation on capital requirements could begin as early as May, with any changes unlikely to take effect before 2027. For now, banks are navigating the twin challenges of weak credit demand and rising provision expenses as economic uncertainty persists.
Market analysts expect the banking sector’s earnings headwinds to continue through the first half of 2026, with recovery dependent on both monetary policy easing and improved business confidence. The RBNZ’s willingness to review capital rules suggests mounting recognition that regulatory settings may need recalibrating for changing economic realities.
