Australia's big four banks say they would have to reduce their businesses in New Zealand or look at selling them off entirely if the country pushes ahead with plans to increase the amount of capital banks must hold.
The warnings were among more than 160 submissions received by the Reserve Bank of New Zealand for its proposal to raise top banks' capital ratio to 16 per cent, thereby reducing risks in case of a major financial shock.
The submissions were made public by the regulator on Monday.
New Zealand biggest lender, ANZ, said capital requirement of this size would require the bank to "review, and reconsider the size, nature and operations of the New Zealand business."
In his submission, ANZ chief executive Shayne Elliott asked RBNZ to reconsider the impact implementing the proposal would have, both in terms of quantum and form.
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ANZ, Commonwealth Bank, NAB and Westpac dominate the New Zealand banking sector and would be most affected by these new regulations.
RBNZ's proposal would require the country's 'Big Four' banks to collectively raise $NZ20 billion ($A19.2 billion) over the next five years.
Some banks say the proposed increases were "too large and too costly".
John Key, former New Zealand prime minister and chairman of the New Zealand unit of ANZ, said in his feedback that in the long run the capital proposals would cost around 20 per cent of New Zealand's GDP in present value terms, far higher than the Reserve Bank's four-to-12 per cent estimate.
Key is under pressure to step down over alleged governance failures at the local ANZ unit, which led to the abrupt departure of boss David Hisco.
"If the Australian banks are indeed faced with a significant fall in the returns on equity from their New Zealand banking subsidiaries, they will face a number of choices including whether to reduce the size of the business, demerge, or sell," Westpac chief executive Brian Hartzer said in his submission.
A number of submissions also noted that the proposals could disproportionately affect particular sectors of the economy, such as the agricultural sector and small businesses.
NAB said banks would likely limit credit availability to less profitable sectors of the economy such as farming and dairy.
RBNZ said cautious reaction from some was expected, but many, particularly the general public, supported higher capital requirements for banks to reduce risks in the event of any major shock.
"We think the costs of doing so are outweighed by the benefits - someone's cost is for society's broader benefit," RBNZ Deputy Governor Geoff Bascand said in a statement accompanying the summary of submissions.
The RBNZ is reviewing submissions and is due to announce its decision in November.
