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Banking and Business Environment

Supervision of the Financial Sector

The Reserve Bank of New Zealand

The Reserve Bank of New Zealand was established in 1934 as New Zealand's central bank by Act of Parliament. It is a statutory body and has most of the powers normally associated with a central bank. The Reserve Bank of New Zealand Act 1989 provides the Bank with autonomy to implement monetary policy within the framework of the Act and the Policy Targets Agreement entered into under the Act.

The Act also covers the Reserve Bank's supervisory and regulatory powers. Legislation affecting the financial sector is reviewed as necessary to ensure that it fits with modern banking practices. The Reserve Bank of New Zealand Act has been amended a number of times to facilitate the coordination of home and host banking supervision between New Zealand and Australia, to extend the Reserve Bank's regulatory powers to include non-bank deposit takers and insurance companies and to allow the Reserve Bank to designate payment systems.

Registered Banks

The Reserve Bank, in addition to its role in determining and carrying out monetary policy, is the supervisory authority for New Zealand's registered banks. Entities wishing to use "bank" in their name or title must be authorised under the Reserve Bank Act as a "registered bank" and are subject to prudential supervision by the Reserve Bank.

The objective of prudential supervision is to promote and maintain the overall soundness and efficiency of the financial system and to avoid significant damage to the financial system that could result from the failure of a registered bank. Until October 2008, there were no deposit insurance arrangements operating in New Zealand in respect of registered banks or other financial institutions.

In line with many countries, the New Zealand government moved in October 2008 to provide a partial guarantee of retail deposits in registered bank and non-bank deposit takers and an opt-in guarantee scheme for wholesale debt issues by New Zealand financial institutions. In March 2010, in response to improvements in the global credit markets, the Minister of Finance announced that the government would close the guarantee scheme for wholesale debt issuances by New Zealand financial institutions on 30 April 2010. The retail deposit guarantee scheme was extended to December 2011 on more restrictive terms but no banks, and only a few deposit takers opted into the extended scheme.

New Zealand's major banks are subsidiaries of Australian banks. The Reserve Bank recognises the principles underlying the Basle Concordat that the home country should supervise on a consolidated basis and the host country is responsible for the supervision of the operations in the host country. The Reserve Bank is working with the Australian Prudential Regulation Authority to improve regulatory co-ordination under this home-host model. The Government has established a Trans-Tasman Council to progress co-ordination initiatives.

The Reserve Bank utilises a combination of regulatory, self and market disciplines to deliver its objectives. Market discipline has been achieved principally by requiring banks to publish disclosure statements at quarterly intervals. The disclosure statements contain comprehensive information on a bank's financial position and risk profile, director attestations as to the adequacy and proper application of a bank's risk management system and also include the disclosure of a bank's credit rating.

To instil regulatory discipline, registered banks are required to comply with conditions of registration such as minimum capital requirements, limits on lending to connected parties and minimum liquidity ratios. In certain circumstances, a bank may be required to incorporate in New Zealand.

Should a registered bank experience financial distress, the Reserve Bank, with the approval of the Minister of Finance, has wide-ranging powers to intervene for the purpose of avoiding significant damage to the financial system. These powers include giving the bank directions, removing directors and implementing statutory management.

In 2011, the Reserve Bank issued a consultation paper on the pre-positioning requirements that banks will be expected to comply with to fully implement an Open Bank Resolution (OBR) policy. The OBR policy would allow a distressed bank to be kept open for business, providing continuity of core banking services to retail customers and businesses, while placing the cost of a bank failure primarily on the bank's shareholders and creditors rather than the taxpayer.

Before April 1987, New Zealand had four authorised banks. Bank registrations rose to a peak of 23 in August 1990. Since then a number of banks have merged with other banks or withdrawn from the market, although this decline in numbers has been partly offset by new registrations. As at 31 December 2011, there were 21 registered banks. Seventeen of these were subsidiaries or branches of foreign banks. As at June 2011, total assets of the banks registered in New Zealand amounted to $384 billion.

Most banks offer banking services on the Internet. Most of the registered banks and a few other financial institutions operate in the wholesale banking area, while some registered banks provide mainly retail banking services.

The Basel II capital adequacy framework was implemented in New Zealand in the first quarter of 2008. The four largest locally incorporated banks in New Zealand have been accredited to use internal models for credit and operational risk under Basel II. Together these banks account for over 80% of total New Zealand registered bank assets. Other locally incorporated banks are subject to the more prescriptive standardised approach under Basel II.

More recently the 'Basel III' standards have been developed by international regulators in response to the global financial crisis. The Reserve Bank generally supports the strengthening of international capital standards and New Zealand banks are well positioned to meet Basel III standards. The Reserve Bank will be assessing the impact of these standards before determining how they should apply to New Zealand.

Quantitative liquidity requirements for locally incorporated banks have been in place since 1 April 2010. The Reserve Bank is now assessing the appropriate liquidity policy for banks that operate in New Zealand as branches of overseas incorporated banks.

Payment and Settlement Systems

The major payment and settlement systems are fully electronic and the high value systems settle on a real-time gross basis. Legislation provides for the designation of settlement systems on the recommendation of the Reserve Bank and the Financial Markets Authority (joint regulators). The designation of a settlement system not only provides legal protection to the settlements effected through that system, but also makes the system subject to on-going oversight by the joint regulators, unless it classified as "pure payment systems", in which case it is regulated by the Reserve Bank only.

The Reserve Bank conducts its designation-related work for the purpose of promoting the maintenance of a sound and efficient financial system and avoiding significant damage to the financial system that could result from the failure of a participant in a settlement system. The Reserve Bank also has a broader role of payment system oversight (this role is not restricted to designated systems) and conducts this work for the purpose of promoting the maintenance of a sound and efficient financial system.

Non-bank Financial Institutions

In September 2008, new legislation was passed authorising the prudential regulation of non-bank deposit-takers following a review of the regulatory framework for these institutions. The review revealed weaknesses in the system, such as the absence of minimum entry requirements and inconsistency in prudential standards that could undermine public confidence. The Reserve Bank was designated as the prudential regulator of non-bank deposit takers, comprising finance companies, building societies and credit unions.

Non-bank deposit-takers have had to comply with regulatory requirements relating to capital adequacy, related party exposures, liquidity and governance since 1 December 2010. They are also required to obtain and disclose a credit rating from an approved rating agency, unless exempted, and must have a risk management programme setting out procedures for the identification and management of risks. Trustees, as front line supervisors of non-bank deposit-takers, are required to oversee compliance with the prudential rules formulated by the Reserve Bank.

In September 2010, the Insurance (Prudential Supervision) Bill was passed making the Reserve Bank the prudential regulator and supervisor of the insurance sector. With the passage of this legislation, the Reserve Bank is now the single prudential regulatory agency for financial institutions (ie, banks, non-bank deposit takers, and insurance companies) in New Zealand.

Further legislation, the Non-bank Deposit Takers Bill, was introduced in August 2011. The Bill would grant the Reserve Bank powers in relation to licensing, ownership, fit and proper person requirements, and powers of intervention in case of a registered deposit taker's distress or failure. The Bill was referred to Parliament's Finance and Expenditure Select Committee for its consideration.

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