(Reuters) - Australia and New Zealand Banking Group said its New Zealand unit would be most affected by the Australian regulatory decision to protect banks from contagion risks by limiting their exposure to their units.

ANZ said the Australian Prudential Regulation Authority (APRA) confirmed on Tuesday that it will implement a previously announced proposal to reduce core capital that Australian deposit-taking institutions hold in its units from 50% to 25%.

The changes will come into effect from January 2021, the regulator said in its statement.

Australia's No.4 lender by market value said the move may limit its ability to inject capital into ANZ Bank New Zealand, and that the unit will have to hold a larger portion of its earnings to meet capital requirements locally.

However, the lender said the final outcome of the new rules will depend on proposed capital requirements by New Zealand's central bank that is currently in the consultation phase.

It is also looking at potential exemptions from the APRA.

"We are open to considering appropriate transition arrangements on a case-by-case basis where specific entities request it," APRA Deputy Chair John Lonsdale said.

(Reporting by Nikhil Kurian Nainan in Bengaluru; Editing by Himani Sarkar)