s statutory objectives. more information on this review can be found here : https : / / treasury. govt. nz / news - and - events / reviews - consultation / reviewing - reserve - bank - act 2 chris hunt, “ banking crises in new zealand – an historical perspective ”, reserve bank of new zealand : bulletin, vol. 72, no. 4, december 2009. https : / / www. rbnz. govt. nz / research - and - publications / reserve - bank - bulletin / 2009 / rbb2009 - 72 - 04 - 04 second episode, i fully remember the stresses of the 1980s / early 1990s, and contributing to the subsequent fiscal and social policy adjustment. perhaps one banking crisis per lifetime is one too many? 3 for those of you that remember the events surrounding the bank of new zealand in the late 1980s, as challenging as that time was for the country, it would have been much worse had the bank not received the financial assistance it needed to avoid an outright failure. had the bank of new zealand failed and gone through new zealand ’ s liquidation process, it would have almost certainly created a massive disruption to its depositors, placed great stress on new zealand ’ s banking system, and ( even more severely ) damaged confidence in new zealand ’ s economy. while new zealand ’ s history with bank failures is limited, we all know that the past is not necessarily a good predictor of the future – so we must view bank failures in new zealand as a real possibility and ensure that banks in new zealand are resilient enough to withstand severe losses. the potential impact given our limited first - hand experience with bank failures, allow me to describe what we think some of the impacts of bank failures might be under new zealand ’ s financial system framework. as the resolution authority for banks, the reserve bank is responsible for providing advice regarding when and how to resolve a failed bank. 4 the reserve bank has several options for resolving a failed bank. under any of these options, there would likely be at least some level of disruption to the banking system as depositors would lose access – at least temporarily – to some or all of their deposits. it is also possible that depositors may never recover the full value of their original deposits. 5 we would expect that the impact of bank failures would be broader and harsher the larger and more intertwined the failed banks are with new zealand ’ s economy. not only do new zealand ’ s large banks employ a significant number of new

models ’ banks and currently consist of the large four new zealand banks. all other banks in new zealand currently use what is known as the ‘ standardised approach ’. for many years, we have observed that banks using their own internal models produce lower capital requirements relative to the other banks, which provides them with a competitive advantage that we don ’ t think can be fully justified based on differences in their underlying risk profiles. figure 3 : estimated tier 1 capital per $ 100 of residential mortgage lending, current values and proposed minimum amounts $ $ current outcome proposed minimum ( estimate ) anz asb bnz westpac kiwibank source : registered bank disclosure statements, rbnz calculations. other banks technical note : current capital outcomes are calculated using most recent quarter tier 1 capital ratios and riskweighted asset ( rwa ) amounts, representing the actual capital on banks ’ balance sheets including any voluntary capital banks operate with above current regulatory requirements. proposed minimum outcomes are calculated based on a 16 ( 15 ) percent tier 1 ratio for large ( small ) banks. the impact of proposed changes to the calibration of the irb approach are assumed in this analysis to result in irb rwa amounts that are the maximum of 1. 2 / 1. 06 times banks ’ current irb rwa amounts, or 32 percent of banks ’ current ead ( an approximate value for rwa if an 85 percent floor relative to the standardised approach is binding ) ). for irb banks, both current and proposed capital outcomes also include the value of an average expected loss deduction equal 0. 1 percent of ead, based on an average of banks ’ private reporting. to provide a comparable amount of tier 1 capital per $ 100 of lending, irb minimum capital requirements per dollar of ead are divided by 1. 037, as ead ( as calculated under irb ) is on average estimated to be equivalent to 1. 037 times the ‘ exposure amount ’ that would be calculated under the standardised approach. analysis covers non - defaulted mortgages only. as such, we are proposing to limit this gap by capping the reduction in capital that banks using their own internal models can achieve relative to all other banks. this is commonly referred to as a ‘ capital floor ’. we are proposing to set this floor and adjust another aspect of the calibration such that internal models banks risk - weighted assets will be around 90 percent of the level calculated via the standardised method. 19 going above and beyond