The Treasury

Global Navigation

Personal tools

NZDMO
Publication

New Zealand Economic and Financial Overview 2015

Banking and Business Environment

Supervision of the Financial Sector

The Reserve Bank of New Zealand

The Reserve Bank of New Zealand was established as New Zealand's central bank by Act of Parliament in 1934. 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 over banks and non-bank deposit-taking institutions, and provides limited powers in respect of payments systems. In addition, under separate legislation, the Reserve Bank is the prudential supervisor of insurance companies.

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. There is no system of deposit insurance (although temporary guarantee arrangements were put in place in 2008 during the GFC).

New Zealand's four largest 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 works with the Australian Prudential Regulation Authority and a Trans-Tasman Banking Council of relevant government agencies meets regularly.

The Reserve Bank utilises a combination of regulatory, self and market disciplines to deliver its objectives. Regulation contributes to market discipline principally by requiring banks to publish disclosure statements at quarterly intervals. The disclosure statements contain extensive 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 wishing to operate in New Zealand 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.

The Reserve Bank has adopted the Open Bank Resolution (OBR) policy as one option available to the Minister of Finance to manage any cases of bank distress or failure. The OBR policy involves pre-positioning banks in a way that would allow a distressed bank to be kept open for business, providing continuity of core banking services to retail customers and businesses and enabling the cost of orderly resolution to fall primarily on the bank's shareholders and creditors rather than the taxpayer.

As at November 2014, there were 24 registered banks, most of which were subsidiaries or branches of foreign banks. Total assets as at 30 September 2014 were $431 billion. The loan portfolios of the registered banks are dominated by residential mortgages and business lending. A substantial portion of the business lending is in the form of farm mortgages.

Basel III standards have been developed by international regulators in response to the GFC. The Reserve Bank generally supports the strengthening of international capital standards and New Zealand banks are well positioned to meet Basel III standards as applied to New Zealand circumstances. The Reserve Bank's Basel III-related changes to its capital adequacy requirements took effect in 2013. Quantitative liquidity requirements for locally incorporated banks have been in place since 1 April 2010.

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 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. Consultations are underway on proposals to extend the Reserve Bank's powers and responsibilities in this area.

Non-bank Financial Institutions

In 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 Reserve Bank was designated as the prudential regulator of non-bank deposit-takers, comprising finance companies, building societies and credit unions. Trustees, as frontline supervisors of non-bank deposit-takers, are required to oversee compliance with the prudential rules formulated by the Reserve Bank.

In 2010, the Insurance (Prudential Supervision) Act was passed making the Reserve Bank the prudential regulator and supervisor of the insurance sector. With the passage and implementation of this legislation, the Reserve Bank is now the single prudential regulatory agency for financial institutions (i.e. banks, non-bank deposit-takers, and insurance companies) in New Zealand. The new licensing regime for insurance companies came fully into effect in 2013.

Macroprudential policy

In the wake of the GFC, many central banks and regulatory agencies have focused considerable efforts on supplementing their established prudential supervisory policies with additional tools that could help to lean against the build-up of system-wide imbalances, and build resilience in the event of future financial crises.

The Reserve Bank has been active in this area, building on its existing statutory powers and the system-wide focus that has long shaped its prudential supervision.

In May 2013, a Memorandum of Understanding was signed between the Governor and the Minister of Finance regarding the Reserve Bank's potential use of macro-prudential instruments as part of its supervisory framework for registered banks. Four possible instruments were identified by the Reserve Bank:

  • a countercyclical capital buffer;
  • changes in sectoral risk weights in response to sectoral credit imbalances;
  • adjustments to the minimum core funding requirement; and
  • loan-to-value limits for residential mortgages.

In August 2013, in response to rising house prices and some resurgence in the rate of housing credit growth, the Reserve Bank announced a “speed limit” approach to high loan-to-value ratio (LVR) residential mortgage lending undertaken by registered banks. From 1 October 2013, no more than 10% of banks' new residential mortgage lending can be in the form of loans with an LVR in excess of 80%. The restriction is envisaged as temporary, to be removed when a better balance has returned to the housing market.

The LVR limit is intended to limit the potential build-up of financial stability risks, by dampening the rate of house price inflation and the rate of growth of housing credit. A limit of this sort will tend to ease pressure on monetary policy, but is not seen as a substitute for interest rate increases in dealing with a build-up of generalised inflation pressures.

Page top