Higher risk weights applied in NZ banking

Banks in New Zealand are using risk weights, for the purpose of allocating capital, that are between half and twice as much as the risk weights that apply to the same loans when provided by the same banks in Australia.

An article in the quarterly Bulletin of the Reserve Bank of New Zealand, published today, shows the average risk weight used by banks for housing loans in New Zealand is 30 per cent. This compares with risk weights of between 15 and 20 per cent on housing loans for banks in Australia, and also compares with risk weights as low as 10 per cent that banks in New Zealand wanted to use, based on their own modeling, but were not allowed to do so.

Even after making use of the higher risk weights mandated by the RBNZ, New Zealand banks are still required to hold an addition capital buffer of 15 per cent than indicated by using this weighting to allow for defects in the banks modeling.

On rural loans the RBNZ steered banks toward using a risk weight of between 80 per cent and 90 per cent, and compared with 50 per cent in Australia.

On credit card loans banks must use risk weights of around 80 per cent, compared with between 30 per cent and 50 per cent in Australia.