RBNZ mulls giving non-bank deposit takers access to settlement accounts so they don't have to go through the big banks who get the financial benefit

The Reserve Bank (RBNZ) is considering whether it should allow two types of access to its Exchange Settlement Account System (ESAS), with one for payment services and the other for Official Cash Rate (OCR) and liquidity purposes.

This comes in an RBNZ update on the review of access eligibility criteria to use its ESAS. Currently banks, other major institutions, and the RBNZ use ESAS to settle transactions between them.

The RBNZ says feedback to its review shows "considerable demand," - mostly from Non-Bank Deposit Takers (NBDTs), for access to ESAS for earning interest at the OCR and liquidity purposes only. The latter would be so they can access high-quality liquid assets (HQLA) potentially including the likes of residential mortgage backed securities and government bonds that can be converted easily and quickly into cash, to help them meet regulatory requirements.

"This feedback raises the question of whether there should be two types of access to ESAS, for payment services [and] OCR and liquidity purposes," the RBNZ says.

"NBDTs want direct access to an ESAS account as they currently have to hold funds with existing account holders (the large banks) which get the financial benefit. The feedback warrants further research to determine the opportunities and risks of enabling membership of ESAS for the specific purpose of having an OCR account. Because it is vital that ESAS maintains its high level of integrity and reliability, any decisions on changes to the access criteria will need to take into account any undue risk to the payments system that broadening access may cause," the RBNZ says.

"Granting ESAS accounts to participants for the sole purpose of holding HQLA (as opposed to a consequence of holding ESAS balances for settlement purposes) would represent a significant change from the way ESAS was originally designed to be used. However, further consideration of these issues is warranted and will be consulted on," the RBNZ says.

NBDTs include credit unions, building societies and finance companies that collect deposits from the public.

The Reserve Bank says it received "substantial feedback" on opening up ESAS for uses beyond payment settlements.

"A respondent representing a group of NBDT clients noted that enabling NBDTs to gain access to ESAS accounts would close a gap that exists within the Reserve Bank’s stated financial stability objectives of protecting and promoting the stability of New Zealand’s financial system. They submitted that ESAS has an additional purpose of providing high-quality liquid assets to the financial system," the RBNZ says.

"Submissions from those in the cash-management industry also submitted on access to ESAS for the purpose of purchasing New Zealand currency directly from the Reserve Bank."

Furthermore the RBNZ says many submitters agreed opening the ESAS up to a broader range of participants would potentially boost competition and support innovation.

"We are working on the review's second consultation which will propose a revised ESAS access policy and criteria requirements, and we'll let you know when it's published and feedback invited, from early 2024," the RBNZ says.

The main focus of the next consultation paper will be on the draft ESAS access policy.

"Given the substantive issues raised as part of submissions, we note there will be an impact on our timeframes; we are expecting to release a second consultation paper in late Q4 [fourth quarter] 2023 – early Q1 [first quarter] 2024. This will allow us time to work through the broader issues."

Balances paid at the OCR

The RBNZ launched the review of its ESAS access policy and criteria, with the issuing of a consultation paper in June. The ESAS is the system for processing and settling payments between banks and other financial institutions. It's a real-time gross settlement system with the infrastructure owned and operated by the RBNZ.  

The RBNZ is mulling a new risk assessment framework proposed to evaluate applications to bank with it directly. The RBNZ says the ESAS helps ensure stability in the financial system and provides a direct way for its monetary policy decisions to influence the economy as it pays interest on ESAS balances at the OCR. With balances having surged on the back of the RBNZ's Large Scale Asset Purchase (LSAP) programme in 202-21 and the OCR risen sharply to 5.50% from 0.25%, this has led to questions over whether ESAS account holders should continue being paid at the OCR.

Those with ESAS accounts include ANZ, ASB, ASX, BNZ, Bank of China, China Construction Bank, Citibank, HSBC, ICBC, Kiwibank, NZX, the RBNZ, TSB, CLS (Continuous Linked Settlement), the Local Government Funding Agency, Treasury's Debt Management Office, the NZ Super Fund, Rabobank and Westpac.

Settlement cash balances were relatively low and stable before the RBNZ launched its LSAP programme in March 2020 at the onset of the Covid-19 pandemic, averaging around $7.5 billion in the decade up to 2020. The introduction of the LSAP saw the RBNZ issue a significant volume of settlement cash in order to buy government and local government bonds. The RBNZ's subsequent Funding for Lending Programme, through which it loaned banks $19 billion at the OCR, further increased settlement cash balances.

Settlement account balances peaked above $56 billion, with major banks such as ANZ NZ and BNZ having $10 billion or more in their individual accounts. They declined as the RBNZ started selling down its LSAP government bond portfolio to Treasury's NZ Debt Management unit at a rate of $5 billion per fiscal year. However, settlement institutions' balances have risen again this year and, as of September, were at $48.185 billion.

The RBNZ says it receives regular approaches from a variety of institutions seeking access to ESAS, noting broader access could enable and encourage welcome innovation in the financial system but may also pose risks. Those interested in obtaining an account include non-bank deposit takers and non-bank payment service providers. 

The RBNZ says it received 18 submissions, which it'll release later in the year. They came from banks, financial market infrastructures, trade bodies, NBDTs, non-bank payment service providers and fintechs, cash management service providers and individuals. It says one NBDT submission was made on behalf of 10 NBDTs.