The Reserve Bank is considering loosening its controversial bank capital rules, fiercely defended by Adrian Orr, who resigned unexpectedly as Reserve Bank Governor three weeks ago.

The board made the decision to review the multi-billion-dollar rules, which are in place to ensure banks have enough capital to withstand a major shock.

Its decision follows Finance Minister Nicola Willis suggesting she’s worried the rules are prompting banks to be too risk averse with their lending to businesses and farmers. She has gone so far as to seek advice on if she can compel the Reserve Bank to change the rules.

It also follows the banks lobbying hard for the rules to be loosened, saying that once fully implemented in 2028, they’ll push the interest rates up by about 50 basis points. The rules can also erode bank profits, or their returns on equity.

Addressing Parliament’s Finance and Expenditure Committee as a part of its review into banking sector competition, Reserve Bank board chairman Neil Quigley said banks were profitable and not capital constrained.

However, he said the rules had become a “focal point” in a way that was “somewhat unhelpful”.

He said the board had been listening to commentary that perhaps the rules were “unduly conservative”, undermining competition and growth in the New Zealand economy.

“We think that some of those claims are incorrect, but most of the claims can be tested empirically and we consider that it is important that we respond by undertaking this assessment,” Quigley said.

He was mindful there had been some softening of capital rules in other countries, like Australia.

He said the Reserve Bank, as the banking regulator, had to maintain the confidence of the market.

He also said the capital review was unrelated to Orr abrupt announcement, almost midway through his second five-year term.

Quigley said the plan was for the review to conclude before the end of the year. He didn’t believe any response from the Reserve Bank would require legislation change.

Acting Governor Christian Hawkesby made the point the capital rules weren’t aimed at channelling capital to particular parts of the economy, as this was a decision for banks.

He hoped the review would provide an opportunity to clear up the perception that the rules were twice as heavy handed as those in Australia.

Hawkesby said the rules had to be risk-based. He noted New Zealand faces some unique risks. The country is subject to shocks and dominated by four Australian-owned banks.

Willis, in a pre-prepared statement, said, “Submissions made to the Finance and Expenditure Committee’s banking inquiry have raised concerns that New Zealand’s bank capital regime is too conservative, and that this is undermining banking competition, driving up the cost of lending and reducing growth in the New Zealand economy.

“I share these concerns and welcome the Reserve Bank board’s decision to conduct an evidence-based review of its capital regime, using international experts, and comparing New Zealand’s requirements with those in comparable countries.

“It’s important that the Reserve Bank’s prudential regime preserves the stability of our financial system, while taking care not to not impose excessive costs in the process.”

Quigley stressed the Reserve Bank was maintaining its independence in the face of pressure from the Government to look at the capital rules.

He said the rules, which the Reserve Bank started designing in 2017, will be tightened by a notch in July, as previously planned.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in Government and Reserve Bank policymaking, economics and banking.