WELLINGTON (Reuters) - The Reserve Bank of New Zealand (RBNZ) said on Friday it was considering almost doubling the required capital banks would need to hold to bolster the financial system's capacity to handle any shocks, sending the currency lower.
The RBNZ, which regulates the banking sector, said in a statement that the increase in capital for individual banks would depend on a number of factors but would generally be between 20 and 60 percent.
"These proposals are designed to make bank failures less frequent," said RBNZ Deputy Governor and General Manager of Financial Stability, Geoff Bascand.
"With these changes we estimate the banking system will be resilient to shocks that might occur only once every two hundred years."
The New Zealand dollar <NZD=D4> fell to a two-week low of $0.6799 from around $0.6855, in part because of jitters around the RBNZ's assessment that such large amounts of extra capital were needed.
"The market has viewed that comment by the RBNZ as negative initially," said Stuart Ive, Wellington-based dealer at OM Financial.
"Where we've seen banks up their capital requirements before it's been because there's been a strain in the system. Whilst there doesn't appear to be an immediate strain within the system, it does have a bit of a knock-on effect for sure."
The start of Asian trade and growing global risk aversion were also behind the drop, he added.
The proposed increase, which the RBNZ had flagged in its November financial stability assessment, came towards the end of a review into bank capital that began in early 2017.
The review was part of a broader global push to ramp up bank capital rules and address vulnerabilities that emerged during the 2007-09 global financial crisis.
Economists have warned that it could increase the cost of funding and tighten financial conditions. The RBNZ acknowledged that risk, but said it expected a "minor" impact on borrowing rates.
"While borrowing costs may increase a little, and bank shareholders may earn a lower return on their investment, we believe these impacts will be more than offset by having a safer banking system for all New Zealanders," Bascand said.
The RBNZ would accept feedback from March 29 and was proposing a five-year transition period to meet new requirements.
New Zealand's largest banks, subsidiaries of Australia's powerful lenders, said in separate statements that they were reviewing the proposal.
(Reporting by Charlotte Greenfield; Editing by Shri Navaratnam)
