Risk analysts who were expecting the 'Basel IV' capital accords to have a "benign" impact on the capital requirements of Australia's four major banks might need to review their judgements after the publication on Tuesday of a provocative consultation paper by the Reserve Bank of New Zealand.While the net regulatory capital impact of the new Basel standards might turn out to be marginal for the Australian operations of the major banks, the Kiwi regulator has signalled major changes to how credit and operational risks are determined at large institutions.The take-out from the RBNZ discussion paper is that the Kiwi subsidiaries of the Big Four Australian banks should expect to be carrying more regulatory capital after next year.The main driver of the Basel IV reforms is a shared concern among international regulators that banks with advanced accreditation have used their internal risk models to game prudential systems.There is now a consensus among regulators that advanced banks too frequently reconfigure (or manipulate) their models to reduce risk weights for credit and operational risk."There is international and New Zealand evidence that minimum capital requirements went down significantly after banks were permitted to use their internal models for parts of the capital calculation," the RBNZ states in the consultation document."There are incentives for banks to engineer their models to produce lower capital requirements and internationally there is some indirect evidence that banks have acted on these incentives."In New Zealand the current capital framework has handed the four Australian-owned subsidiaries - Westpac, ANZ, Bank of New Zealand and ASB - a competitive advantage in the residential mortgage and farm lending markets.As the only banks permitted to use the internal ratings based approach to determine risk weights on credit exposures, the Australian subsidiaries are putting aside up to a third less regulatory capital on mortgage and farm loans than smaller lenders whose capital requirements are set by the standardised measures set by the regulator.The RBNZ is now asking a big question about the lending profiles across the banking system: is the underlying risk faced by internal modelling banks genuinely lower than the underlying risks faced by other banks?On page 19 of the consultation paper the regulator drops a big hint as to what it thinks."The Reserve Bank acknowledges the ability of internal models to take into account many determinants of risk," states the RBNZ."But this advantage will be illusory if models are being used strategically to reduce regulatory capital requirements."There is strong suggestion in this commentary that New Zealand's approach to assessing the capital obligations of the four biggest banks is about to be brought into line with the rules that apply to smaller lending institutions.The same observation could be made in relation to the way operational risk will be treated and measured by the regulator.Under existing arrangements, the four majors' advanced accreditation earns them a discount on the amount of capital they put aside for operational risks, such as technology failures.However, Basel IV prescribes that all banks follow a new standardised approach set by a