Borrowers are likely to face higher interest costs under proposed new rules which will almost double the minimum amount of capital banks are required to hold.
But the trade off will be a safer banking system, the Reserve Bank says.
The Reserve Bank today released its long anticipated review of bank capital requirements, which will now go out for consultation.
"The proposal would see banks' capital levels increase materially," the Reserve Bank said. "We are proposing to almost double the required amount of high quality capital that banks will have to hold."
In practice, actual changes to the amount of capital banks hold will vary as some banks already hold more capital than required.
Generally, it will be an increase of between 20 and 60 per cent, the Reserve Bank said.
But while borrowing costs would rise - and bank profits may take a short term hit - a five year transition period is proposed to minimise the impact.
"While borrowing costs may increase a little, and bank shareholders may earn a lower return on their investment, we believe these impacts will be more than offset by having a safer banking system for all New Zealanders," said Reserve Bank Deputy Governor and General Manager of Financial Stability Geoff Bascand.
"Insisting that bank shareholders have a meaningful stake in their bank provides a greater incentive to ensure it is well managed. Having shareholders able to absorb a greater share of losses if the company fails also provides stronger protection for depositors," Bascand said.
"Bank crises happen more often than many people care to remember, and the economic and social costs of bank failures can be very high and persistent. These proposals are designed to make bank failures less frequent.
"With these changes we estimate the banking system will be resilient to shocks that might occur only once every two hundred years."
The Bankers Association - which represents the retail banks - has responded with a warning that raising the capital buffers too high "limits banks' ability to innovate and enhance customer outcomes."
"New Zealand's banks are currently very well capitalised and among the most stable and secure in the world. Reserve Bank stress tests show banks can withstand a 40 per cent fall in house prices," New Zealand Bankers' Association acting chief executive Antony Buick-Constable said.
However the industry would "work closely with the Reserve Bank and stakeholders during this consultation period to achieve the best outcome for customers," he said.
The Reserve Bank has been reviewing capital requirements since 2017.
It will now seek feedback through to the next deadline of March 29 2019.