System's fitness for purpose
In November 2017, the Government announced it would undertake a review of the Reserve Bank of New Zealand Act 1989 (“the review”) to modernise the monetary and financial stability policy framework and the Reserve Bank's governance and accountability settings. The International Monetary Fund's (IMF) Financial Sector Assessment Programme (FSAP) for New Zealand in 2017 provided a starting point for aspects of the review.
The review was split into two phases. Phase 1 was completed in 2018 and resulted in:
- amendments to monetary policy objectives - targeting maximum sustainable employment alongside price stability as a monetary policy objective, and
- the establishment of a Monetary Policy Committee (MPC) to make decisions on monetary policy.
Phase 2 is a wide-ranging review of the financial policy provisions of the 1989 Act (including the legislative basis for prudential regulation, supervision, and crisis management) as well as the broader governance arrangements for the Reserve Bank. The review found that the role of the RBNZ had expanded significantly since the 1989 Act was introduced, and the institutional arrangements were no longer fit-for-purpose.
The RBNZ Act 2021 addresses the institutional issues identified in Phase 2 of the review. Key changes under the RBNZ Act 2021 include replacing the single decision-maker model with a decision-making governance board, clarifying the RBNZ's financial policy objective, providing formal monitoring of the RBNZ, and strengthening the RBNZ's reporting and accountability requirements. These changes will move the RBNZ closer to international best practice and New Zealand's Crown Entity Governance Model, while recognising the unique position of the RBNZ within the state sector and its operational independence.
Monitoring and review of the system will be important in ensuring that the Government's objectives are achieved (in particular, the foreign exchange reserves management framework and the liability of the Reserve Bank).
The Treasury expects to review the institutional framework five years after it comes into force. This review will provide an opportunity to evaluate the effectiveness of the new institutional arrangements and to ensure no unexpected issues have arisen. It will also allow us to examine the interaction with the new prudential framework for deposit takers.
The Deposit Takers regime is also related to this regulatory system, but is the responsibility of the RBNZ as the regulatory steward for prudential regulation. The Deposit Takers Bill (yet to be introduced) will establish a single prudential regulatory regime for deposit takers, consolidating and reforming the regulation of banks and non-bank deposit takers. The Deposit Takers Bill is expected to be introduced to Parliament in early 2022 and passed by 2023 (Note: the timeframes are indicative and may change).