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New Zealand Banks’ Vulnerabilities and Capital Adequacy

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  • B. Jang
  • Masahiko Kataoka
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    Abstract

    The paper finds that, given New Zealand’s conservative approach in implementing the Basel II framework, New Zealand banks’ headline capital ratios underestimate their capital strength. A comparison with Canadian, UK and Australian banks highlights the impact of New Zealand’s more conservative approach. Stress tests in the paper show that four large New Zealand banks could withstand sizable stand-alone shocks to their exposure to either residential mortgages (calibrated on the Irish crisis experience) or corporate lending. However, combined shocks to both residential mortgages and corporate lending would put more pressure on the banks’ capital. Given high bank concentration and large offshore wholesale funding needs, the merits of higher minimum capital requirements for systemically important domestic banks could be considered, together with other measures to be implemented.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/7.

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    Length: 23
    Date of creation: 11 Jan 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/7

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    Related research

    Keywords: Banks; New Zealand; Capital; Stress testing; Basel II; capital; loss given default; probability of default; stress tests;

    This paper has been announced in the following NEP Reports:

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    1. Kevin Hoskin & Stuart Irvine, 2009. "Quality of bank capital in New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 72, pages 5-16, September.
    2. Rodrigo Cubero & Ray Brooks, 2009. "New Zealand Bank Vulnerabilities in International Perspective," IMF Working Papers 09/224, International Monetary Fund.
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