Managing Risk
The Treasury identifies, assesses and manages risks, using a risk management framework modelled on the joint Australian/New Zealand Standard 4360:2004. The framework captures the broad range of risks that affect our business, including organisational risks arising from strategic direction and environment.
The Treasury's risk management framework is implemented through business processes such as policy advice, strategic and operational planning and project management.
We are currently reviewing our risk management framework to ensure we are actively improving risk management processes across the Treasury.
The Treasury undertakes a number of specialist functions and roles where additional risk management frameworks and processes are utilised. These include:
The New Zealand Debt Management Office (NZDMO)
NZDMO is managing risks through the use of:
- specialist risk management roles
- a specific risk management framework for the portfolios managed by the NZDMO, and
- an independent advisory board to provide quality assurance on the NZDMO's activities, risk management framework and business plan.
The New Zealand Export Credit Office (NZECO)
NZECO is managing risks through the use of:
- expert underwriting analysis by international specialists who have institutional knowledge in risk assessment, and
- an independent advisory board of specialists in finance and insurance risk assessment, pricing and risk management to review the final analysis and make recommendations for approval of each transaction and undertake ongoing monitoring.
Crown risks in the financial sector
The Treasury is operating two guarantee schemes on behalf of the Crown that relate to the financial sector: the Deposit Guarantee Scheme and the Wholesale Guarantee Facility. Exposure to risks is being managed through the prudential regulation processes for registered banks, and by requiring other deposit takers who sign the guarantee to agree to certain controls on their business including:
- some restrictions on distributions to shareholders
- some assurance that the business dealings of the deposit taker are on arms-length terms
- the ability for the Crown to appoint an inspector
- the ability for the Crown to withdraw the guarantee if the business is being deliberately operated in a way to undermine the intention of the guarantee, and
- personal undertakings from directors to ensure the non-bank deposit takers comply with the guarantee.
Specific monitoring of non-bank institutions whose depositors are covered by the retail deposit guarantee takes place, with follow-up of any issues identified on a case by case basis. Banks whose depositors are covered by the scheme are monitored under the prudential supervision regime that applies to banks under the Reserve Bank Act 1989.
Deposit-taking financial institutions seeking to utilise the Crown Wholesale Guarantee Facility will be expected to have applied for a guarantee under the Crown Deposit Guarantee Scheme. In addition to the risk management under the retail scheme, the Government further manages its risk exposure by:
- limiting the availability of the scheme to financial institutions that have an investment grade credit rating (BBB- or better), and have substantial New Zealand borrowing and lending operations (but not to institutions that are simply financing a parent or related company)
- limiting the amount of debt covered by the guarantee to debt up to 125% of the total stock of eligible types of debt in issue prior to the intensification of the crisis
- establishing additional capital buffers by requiring an additional 2% Tier 1 capital buffer above the 4% regulatory minimum, and
- requiring the debt issuer to hedge and manage any foreign exchange risk.
The Treasury has a key role to play in helping the Government manage the impact of a national or regional emergency. As a Central Agency, our role includes facilitating an all-of-government response. In addition, as an organisation, we must prepare for adverse events that might disrupt our own operations or affect the safety of our staff or visitors. The Treasury has a Crisis Plan outlining the crisis response structure, roles and people required, to ensure we respond effectively to a significant emergency affecting us or the New Zealand economy. The Crisis Plan is subject to regular updates and a programme of testing.
