The Economic Handbrake We Can’t Afford
New Zealand’s economy is caught in a relentless cycle, bouncing between positive and negative GDP growth every three to six months like a yo-yo. The economy contracted by 0.90% in the second quarter of 2025, with GDP falling 0.5% over the year ended December 2024, following a technical recession in the September quarter. In these turbulent times, when economic momentum is more critical than ever, we’re handicapping ourselves with regulatory constraints that act as a handbrake on the very institutions that provide the lubrication our economy desperately needs.
The culprit? The doubling of bank capital ratios, a dramatic policy shift implemented through the collaboration between Adrian Orr at the Reserve Bank of New Zealand (RBNZ) and former Finance Minister Grant Robertson. The December 2019 Capital Review decisions included a significant increase in capital ratios that will fundamentally reshape New Zealand’s banking landscape by 2028 [1].
The “Big Four” banks, ANZ NZ, BNZ, ASB, and Westpac NZ, have been classified as “Domestic-Systemically Important Banks” (D-SIBs), meaning they’re considered so crucial to the economy that their failure would cause widespread damage. These banks will be required to hold a total capital ratio of at least 18% by 2028, compared to the much lower levels they previously held. Other banks, including Kiwibank, TSB, and smaller institutions, face somewhat lower but still substantially increased requirements of 16%.
To put this in perspective: capital is essentially the bank’s own money that acts as a safety buffer. The higher the capital requirement, the less money banks have available to lend to businesses and consumers. This policy response, designed to address what they characterised as a once-in-a-century crisis, has instead gummed up our economy and now represents a historical anchor dragging down our economic potential when we need to be cutting loose and sailing toward brighter days.
Banks: The Lifeblood of Economic Growth
Our banking system isn’t just a collection of financial institutions; it’s the circulatory system of our economy. Banks provide the essential mechanism, the lubrication that allows businesses to expand, entrepreneurs to innovate, and families to invest in their futures. When we constrain their ability to lend through excessive capital requirements, we’re essentially restricting the flow of economic oxygen throughout the entire system.
The Oliver Wyman report commissioned by the RBNZ found that New Zealand’s current Tier 1 capital requirements are relatively high by international standards, creating a competitive disadvantage that ripples through every sector of our economy [2]. This isn’t just a technical regulatory matter; it’s a massive shift that has fundamentally altered the competitive dynamics of our financial system and created a drag on economic growth.
The International Competitiveness Crisis
In a globalised world, economies compete not just on natural resources or innovation, but on the efficiency of their financial infrastructure. New Zealand already faces the challenge of high energy prices that make it difficult to compete with countries that enjoy cheaper power. Now we’re compounding this disadvantage by artificially constraining our banking sector with capital requirements that our competitors haven’t imposed on themselves.
International comparisons show that New Zealand banks are “in the pack” in terms of capital ratios relative to international peers, but our four largest banks reported a weighted average CET1 ratio of 10.5%, putting them in the bottom quartile on an unadjusted basis. However, the Reserve Bank has made amendments to better reflect New Zealand risks, with farm lending adjustments raising the average risk weight on banks’ exposures by around 20-30 percentage points compared to a usual implementation of the IRB framework [3].
This creates a double burden: higher costs of capital for businesses seeking to grow, and reduced lending capacity from institutions that could otherwise fuel economic expansion. It’s like running a marathon with weights strapped to our ankles while our competitors run unencumbered.
The Yo-Yo Economy Needs Stability, Not Constraints
New Zealand’s recent economic performance tells a troubling story. The New Zealand economy has contracted, on a per capita basis, for nine of the last 12 quarters, making for a deep and lengthy recession [4][5][6][7][8]. This represents a dire financial path that has been painful for all New Zealanders.
We’re caught in a pattern of brief growth spurts followed by contractions, creating uncertainty for businesses and discouraging long-term investment. In this environment, what we need is financial system flexibility, the ability for banks to respond quickly to lending opportunities that could break us out of this cycle.
Instead, we’ve imposed rigid capital constraints that reduce banks’ ability to capitalise on growth opportunities when they arise. It’s economic policy working against economic recovery.
A Political Lifeline in Economic Policy
The current context makes this review even more critical. The Reserve Bank has endured a difficult and disruptive period of late, culminating in Adrian Orr’s resignation in March 2025, three years before his contract was due to terminate [9][10]. Finance Minister Nicola Willis’s handling of Orr’s departure has not helped the situation, creating additional uncertainty around monetary policy leadership at a time when the economy desperately needs stability. Dr Anna Breman, formerly First Deputy Governor of Sweden’s Riksbank, has now been appointed as the new RBNZ Governor, beginning her five-year term on 1 December 2025 [14].
For the current government, recognising and correcting this policy overreach represents more than just good economics; it’s a potential political lifeline. Adrian Orr was appointed by Finance Minister Grant Robertson to be Governor in December 2017, with Robertson supporting Orr’s reappointment on the grounds of continuity and stability, while opposition National Party finance spokesperson Nicola Willis called for an independent review of the Reserve Bank’s performance.
Nicola Willis and Christopher Luxon have inherited an economy constrained by their predecessors’ regulatory overcorrection. Since 2019, concerns have been raised that the Reserve Bank’s capital settings may be undermining competition and efficiency in the banking industry, increasing the cost of lending to New Zealanders, and creating headwinds for economic growth [12][13].
By advocating for a return to more appropriate capital ratios, they could demonstrate decisive economic leadership and provide immediate relief to businesses and consumers struggling under current conditions. This isn’t about abandoning prudent regulation; it’s about acknowledging that the increased capital ratios were a crisis response that has outlived its usefulness.
The Path Forward
The RBNZ has opened consultation on New Zealand’s capital settings for deposit takers, with the consultation paper setting out two options for overall capital ratios, both materially reducing requirements compared with 2019 decisions [1][2]. Professor Quigley noted that the options are calibrated to a higher risk appetite than in the 2019 review, stating that “Under the Deposit Takers Act, we will have stronger tools for supervision and crisis management, as well as additional capacity and capability as a regulator. That means we can responsibly ease capital requirements, while still protecting financial stability”.
Dr Anna Breman and the RBNZ have the opportunity to demonstrate economic leadership by acknowledging that the crisis-era increases in capital ratios were appropriate for their time but inappropriate for our current needs. Returning to more appropriate levels would send a clear signal that New Zealand is serious about breaking free from its economic doldrums and positioning itself for sustainable growth.
The Robertson-Orr policy legacy has served its purpose. Now it’s time for new leadership to chart a different course, one that recognises the difference between crisis management and growth facilitation.
The Path to a Brighter Day
The handbrake has been on long enough. It’s time to release it and let our economy run at the speed it needs to compete and thrive in the modern global marketplace. The yo-yo economy can become a thing of the past, but only if we have the courage to cut the anchor and sail toward that brighter day that awaits.
Our banks are ready to power economic growth. Our businesses are ready to expand. Our entrepreneurs are ready to innovate. The only question is whether our regulators are ready to let them.
Nick Stewart
(Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha)
Financial Adviser and CEO at Stewart Group
Stewart Group is a Hawke's Bay and Wellington based CEFEX & BCorp certified financial planning and advisory firm providing personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
Article no. 426
References
[1] Reserve Bank of New Zealand. (2025). Capital requirements for banks in New Zealand. https://www.rbnz.govt.nz/regulation-and-supervision/oversight-of-banks/standards-and-requirements-for-banks/capital-requirements-for-banks-in-new-zealand
[2] Reserve Bank of New Zealand. (2025). RBNZ invites feedback on review of capital requirements for deposit takers. https://www.rbnz.govt.nz/hub/news/2025/08/rbnz-invites-feedback-on-review-of-capital-requirements-for-deposit-takers
[3] Reserve Bank of New Zealand. (2025). 2017-2019 Capital Review. https://www.rbnz.govt.nz/regulation-and-supervision/oversight-of-banks/how-we-regulate-and-supervise-banks/our-policy-work-for-bank-oversight/capital-review
[4] Trading Economics. (2025). New Zealand GDP Growth Rate. https://tradingeconomics.com/new-zealand/gdp-growth
[5] New Zealand Herald. (2025, March 19). Out of recession: New Zealand’s GDP rises 0.7%. https://www.nzherald.co.nz/business/gdp-will-todays-data-show-the-end-of-the-recession/MTNBTKWXCNATTMH5DW4U7KJLNI/
[6] Wikipedia. (2025). Economy of New Zealand. https://en.wikipedia.org/wiki/Economy_of_New_Zealand
[7] International Monetary Fund. (2024). New Zealand: Staff Concluding Statement of the 2024 Article IV Mission. https://www.imf.org/en/News/Articles/2024/03/19/mcs-new-zealand-staff-concluding-statement-of-the-2024-article-iv-mission
[8] CNBC. (2025, March 19). New Zealand exits recession as fourth-quarter growth beats forecasts. https://www.cnbc.com/2025/03/20/new-zealand-exits-recession-as-fourth-quarter-growth-beats-forecasts.html
[9] Reserve Bank of New Zealand. (2017). Review of bank capital requirements [Speech]. https://www.rbnz.govt.nz/research-and-publications/speeches/2017/speech-2017-03-07
[10] Wikipedia. (2025). Adrian Orr. https://en.wikipedia.org/wiki/Adrian_Orr
[11] Oliver Wyman. (2025). Comparing New Zealand Bank Capital Ratios to International Peers. Report commissioned by Reserve Bank of New Zealand.
[12] NZ Adviser. (2025). RBNZ reviews bank capital rules amid competition concerns. https://www.mpamag.com/nz/news/general/rbnz-reviews-bank-capital-rules-amid-competition-concerns/547311
[13] Lister, M. (2025, September 23). On Point: ep 304 | Has your home bias left money on the table? [Audio podcast]. Craigs Investment Partners. https://podcasts.apple.com/nz/podcast/on-point/id1667364727?i=1000728078149&r=84
[14] New Zealand Herald. (2025, September 24). New Reserve Bank Governor announced: Swedish economist Dr Anna Breman gets top job. https://www.nzherald.co.nz/business/new-reserve-bank-governor-announced-dr-anna-breman-gets-top-job/JRJYGHVFJZABRKDFZTJJ2UKQVE/