Risk-Weights For Business Growth Fund Released

The Reserve Bank – Te Pūtea Matua has released its
finalised risk weighting under bank capital adequacy rules
for exposures to the Business Growth Fund (BGF). The BGF was
announced in Budget 2022 to help small and medium businesses
access finance.

In a consultation paper released in
September 2022, we set out the factors we were considering
in our assessment of the appropriate risk weight for banks
to apply to the investments in the BGF. This is a key
component determining the level of capital that banks must
hold for this investment, Director of Prudential Policy Kate
Le Quesne says.

Following our review of submissions
received, we have announced our decision to implement a 250%
risk weight for bank investments in the BGF.

“The
central focus of our approach to risk weights is to align
the weights with underlying risk, which is in line with
international best practice,” Ms Le Quesne says.

Due
to the diversification benefits that the BGF will provide,
the risks associated with bank investments in the BGF are
likely to be lower than equity investments in a single
entity, as the BGF will invest in a wide range of entities.
This supports a lower risk weight than the 400% risk weight
for investments in single entities, which would apply under
the status quo treatment.

We will monitor BGF
developments and remain open to reconsidering whether the
risk weight remains appropriate.

What are risk
weights?

Risk weights are used to convert the actual
size of an exposure into a risk-weighted
asset. A more risky exposure will have a higher risk
weight. Banks are required to hold a minimum percentage of
capital against these risk
weighted exposures. Higher risk exposures mean a bank
will need more capital — money provided by the owners
(shareholders) of a bank. This ensures that the owners have
a meaningful stake in the bank — the more the bank’s
owners have to lose, the more they will want to make sure
the bank is run properly.

More information

Risk
weights consultation

Proposals
to enhance clarity of risk weighting requirements, September
2022

Capital
Review

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