FILE PHOTO: Reserve Bank of New Zealand Governor Christian Hawkesby speaks to media after the Financial Stability Report was released, in Wellington, New Zealand, May 7, 2025. REUTERS/Lucy Craymer/File Photo

By Lucy Craymer and Renju Jose

WELLINGTON (Reuters) -New Zealand's central bank proposed an easing of lenders' capital requirements, after criticism that the regulations reduced availability of funds in the economy and led to extra costs for borrowers.

In a consultation document released on Monday, the Reserve Bank of New Zealand (RBNZ) proposed two alternative capital requirement scenarios for deposit-taking institutions that would result in lower minimum overall capital levels.

The current, rising capital requirements were announced in 2019 with full implementation not expected before 2028. But in March, the central bank said it would be reviewing the requirements.

The requirements have been faulted by some politicians and groups such as farmers, and the lenders themselves, as contributing to higher interest rates.

"It's essential we strike the right balance - protecting depositors and the wider economy, while supporting competition and economic efficiency," RBNZ Governor Christian Hawkesby said in a statement.

New Zealand's banking system is dominated by four large Australian-owned banks: Westpac Banking Corp, ASB Bank, which is part of Commonwealth Bank of Australia, Bank of New Zealand, which belongs to National Australia Bank, and Australia and New Zealand Banking Group.

Under one of the options being studied, the capital buffer over and above the minimum capital requirements for the lenders would be reduced to 8% for the top four Australian-owned banks and to 5% for mid-sized banks. The 2019 regulations required the big banks to hold 9% and the mid-sized banks to hold 7% above the minimum.

Under a second option, the capital buffers for the biggest banks will be at 6% but requirements will be introduced for debt instruments that are able to absorb losses and can be turned into capital if an entity is in distress.

Banking Association Chief Executive Roger Beaumont said the announcement was a step in the right direction, and it was currently working with its 17 members to develop a response to the proposals.

The central bank hopes to reach a final decision on the lower capital requirements by the end of the year. It noted in the consultation document that any shift in regulation is not expected to cause a significant economic change.

New Zealand Finance Minister Nicola Willis said she welcomed the review of lenders' capital requirements, and said she saw it as lowering lending rates to New Zealanders.

RBNZ also proposed to reduce the minimum capital that deposit takers needed to hold to become licensed to NZ$5 million ($2.93 million) from NZ$30 million, which it said "reduced barriers to entry".

($1 = 1.7056 New Zealand dollars)

(Reporting by Lucy Craymer in Wellington and Renju Jose in Sydney; Editing by Rod Nickel and Muralikumar Anantharaman)