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RBNZ affirms view that Kiwibank convertible bonds don't meet capital adequacy rules

Tuesday 30th May 2017

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The Reserve Bank has affirmed its view in March that two bonds issued by state-owned Kiwibank don't qualify as regulatory capital under the Capital Adequacy Framework.



The ruling covers $100 million Tier 2 convertible subordinated bond issued on in June 2014 and $150 million of Additional Tier 1 perpetual bonds issued by Kiwibank subsidiary Kiwi Capital Funding Ltd (KCFL) in May 2015. The lender said that while the RBNZ had previously issued "non-objection" letters in relation to the bonds, it had subsequently concluded Kiwibank "had levels of control or significant influence over KCFL which it now views as inconsistent with the securities qualifying as regulatory capital."



Kiwibank cancelled an A$175 million bond issue in March as a result of the RBNZ's preliminary decision and subsequently, shareholders New Zealand Post, the New Zealand Superannuation Fund and Accident Compensation Corp poured in a collective $247 million in new equity capital to ensure Kiwibank's capital stayed within the regulator's limits.



Kiwibank said it wouldn't seek early repayment of the bonds in the wake of the RBNZ's confirmed ruling. The lender "continually assesses the quantity and mix of capital required to support its operations and meet regulatory and rating agency requirements."



The central bank is reviewing the definition of bank capital, the measurement of risks that the banks face and the minimum capital requirements and buffers to set up a regime that provides confidence in the banking sector.



At the start of this month, the RBNZ called for feedback primarily on the definitions of types of capital used to absorb losses, the frameworks used to measure risks, and whether banks have large enough buffers. Submissions on a series of questions are open until the close of business on June 9 with detailed policy proposals expected to be released later this year and the review wrapped up in early 2018.  



The review has six high-level principles: capital can readily absorb losses before they're passed on to creditors and depositors; capital requirements are set in relation to bank exposures; different methodologies to set capital needs don't create unduly different outcomes; capital requirements should be conservative compared to international lenders; the framework should be practical to administer; and the regime should be transparent. 




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