The Reserve Bank of New Zealand’s plans to increase bank capital requirements are on hold but “far from shelved”, RBNZ governor Adrian Orr said following yesterday’s Financial Stability Report release.

The start date for the implementation of the tougher capital requirements was pushed out for a year at the start of the Covid-19 crisis, and Orr now says the timeframe for implementing them, currently set at seven years, could be lengthened.

“We assume you're going to be starting at a lower level of capital so we'll think about the transition period that we want banks to be working back towards a higher level of capital," he said.

In the FSR, the central bank said it did not want banks “to seek to achieve higher capital ratios through reducing credit availability in the current environment”.

It is also predicting banks’ losses “to rise materially” but says the New Zealand financial system remains in a solid position, with banks “resilient to all but the most severe scenarios” in its modelling.

But it does warn that under a “severe enough scenario” where unemployment rises to 18 per cent and house prices tumble to almost half current values, bank viability could come into question.

“Without significant and timely mitigating actions, banks would fall below minimum capital requirements under this scenario,” the RBNZ said.

“The Reserve Bank is working with industry to better understand the impacts that these scenarios would have on banks and to assess appropriate mitigating actions.”

It praised bank’s efforts to ease consumers’ immediate debt burdens, but added: "However, if the present economic downturn turns out to be deeper or more prolonged than banks and borrowers expect, banks will need to exercise caution not to ‘extend and pretend’ if the prospects of full repayment are diminished."