Finance Minister Grant Robertson says the Government will introduce deposit insurance of $50,000 per individual per financial institution, a governance board for the Reserve Bank to oversee financial stability, and plans to follow bank reforms in Australia that aim to strengthen director and executive accountability.
The changes come in the latest Cabinet decisions from phase two of the Government's review of the Reserve Bank of New Zealand Act.
The key decisions made include:
- Responsibility for prudential regulation will remain with the Reserve Bank. This will: maximise synergies between the prudential functions and the Reserve Bank’s other functions; avoid the transition costs of establishing a new agency; and will be cost-effective given New Zealand’s size.
- The Reserve Bank will have a high level objective to protect and promote the stability of New Zealand’s financial system.
- A governance board (the Board) will be established for the Reserve Bank. This will have statutory responsibility for all the Reserve Bank’s functions, except those reserved for the Monetary Policy Committee. There will not be a statutory Financial Policy Committee.
- The two separate regulatory regimes for banks and non-bank deposit takers (NBDTs) will be united into a single ‘licensed deposit taker’ framework.
- A deposit insurance scheme will be established. The scheme will insure deposits up to a limit of $50,000 per individual, per institution.
'Protected depositors don't need to spend time monitoring the riskiness of their deposit taking institution'
With New Zealand an outlier among OECD countries in not currently having a deposit insurance scheme, this means if a deposit taking institution failed depositors would be dependent on a liquidation or receivership to try to recover their money, which the Government says could take years.
"An explicit deposit insurance scheme means that depositors will be able to have prompt and certain access to some of their money."
"Under the scheme, deposits held by New Zealanders will be protected up to a total of $50,000 at a single deposit taker. More than 90% of depositors are likely to be fully covered by the scheme, and many of the others would have most of their deposits insured. The coverage limit will be reviewed once the scheme is bedded in and better data are available. The number of depositors that are fully covered once the scheme is in place will depend on how many have multiple accounts at their institution, the Review does not currently have complete data on this. It will also depend on how responsive depositors are in splitting their accounts across banks and other deposit takers in order to maximise their coverage," the Government says.
"The funding for the scheme should come from levies collected from licensed deposit takers, i.e. a user-pays model where the costs are borne by institutions and potentially depositors benefiting from the scheme. The Government will provide a funding backstop, so that the scheme maintains public confidence even if systemic banks are under threat. Any funding provided by the government will ultimately be paid back by levies on deposit takers."
The Government says deposit insurance will mean protected depositors don't need to spend time monitoring the riskiness of their deposit taking institution, describing this as "a difficult task, even for sophisticated creditors that have large amounts of money at stake."
"The protection provided to depositors will also contribute to financial stability. The deposit insurance scheme is expected to enhance public confidence in the financial system, lowering the likelihood that financial stress is magnified by depositors withdrawing their money at the first sign of trouble."
The deposit insurance scheme will apply to all institutions that take deposits with a minimum set of supervisory and regulatory standards applied as a condition of being able to offer insured deposits.
The Government says there's more public consultation on depositor protection arrangements coming in early 2020. This will include further scoping of the deposit insurance scheme, including the nature of products it will cover, the amount and nature of prefunding for the scheme from the industry, the conditions for the government funding backstop, where the scheme will be located, and how it will be governed. Additionally there will be consultation on the possible role of depositor preference, where preferred depositors’ claims are paid out before the claims of other unsecured creditors in the event of a liquidation.
Robertson says Cabinet has confirmed a deposit insurance scheme limit of $50,000 per institution, after consulting on a range of $30,000 to $50,000. In comparison under Australia's Financial Claims Scheme, deposits are protected up to a limit of A$250,000 for each account holder at every bank, building society and credit union that is incorporated in Australia and authorised by the Australian Prudential Regulation Authority.
Two new acts of parliament coming
The NZ scheme will sit under a new Deposit Takers Act that will govern the Reserve Bank’s regulatory powers. A separate Institutional Act will outline how the Reserve Bank is governed and how it operates. Splitting the Acts allows all deposit-takers to be regulated under a single flexible framework, providing a more consistent approach to the regulation of the sector, says Robertson.
The Institutional Act will set out the Reserve Bank’s governance and accountability framework and provide for its central banking functions, including the monetary policy framework as enacted in phase one of the Reserve Bank Act review.
The two new acts will replace the 1989 Reserve Bank of New Zealand Act.
"It is intended for the Institutional Act to be introduced in mid-2020. Cabinet plans to make final policy decisions on the Deposit Takers Act and the deposit insurance scheme in mid-2020 following further consultation."
“New Zealand has a strong and stable banking system, but it is regulated by laws that are 30 years old. We’re making sure they’re up-to-date,” says Robertson.
"The Government’s proposed changes incorporate lessons from the Australian Royal Commission into banking. This includes an in-principle decision to follow recent reforms in Australia to strengthen director and executive accountability, following the recommendations in the Hayne report."
“It’s important that Kiwis have confidence in the people running our banks and know the consequences they’ll face. We’ve seen examples of how confidence was shaken overseas and we’re acting to make sure New Zealand has a world-leading accountability regime," Robertson says.
Changes will also be made to the Reserve Bank's governance. A document released by the Government notes the Reserve Bank is not a government department or Crown entity, having its own unique governance structure.
Phase one of the RBNZ Act review introduced group decision making for the formulation of monetary policy rather than having all the powers of a conventional board and chief executive sitting with the Governor. Cabinet has now decided that a governance board will be established for the Reserve Bank with responsibility for all matters, except those reserved for the Monetary Policy Committee.
The non-executive board will have between five and nine members, and responsibilities and procedures similar to those of a Crown entity board. The Governor will be the Reserve Bank’s chief executive and continue to be chairman of the Monetary Policy Committee.
The Reserve Bank’s funding will continue to be set through a funding agreement. However, some of the costs of its regulatory functions will be able to be collected through levies charged to regulated entities. A levy rate will be set in regulation, on the advice of the Finance Minister, following consultation with the Reserve Bank and the sector.
"A levy allows the costs of the regulatory function to be borne by those who benefit from the carrying out of that function. It is common for the costs of regulatory activities to be recouped through a levy...There have been no decisions on whether levies will be introduced, or the rates which will be charged. The levy would need to be calibrated to reflect legislative changes flowing from the Deposit Takers Act, which is likely to take several years. It would also need to take account of costs imposed by the deposit insurance scheme."
Co- ordination of financial sector regulators
Financial sector regulation features the Reserve Bank as prudential regulator, the Financial Markets Authority (FMA) regulates conduct, and the Commerce Commission regulates consumer credit. Additionally Treasury, the Reserve Bank, and the Ministry of Business, Innovation and Employment have policy responsibility for different parts of the financial regulatory system.
The Council of Financial Regulators (CoFR), co-chaired by the Reserve Bank and the FMA, meets quarterly to discuss financial market regulatory issues, risks and priorities. The CoFR coordinates collaborative responses to issues that require cross-agency involvement including system-wide monitoring and operational coordination. Cabinet has decided to create a legislative mandate for the CoFR to "underscore the importance of the CoFR and ensure it endures into the future."
Accountability of directors and senior executives to be strengthened
Cabinet has agreed, in-principle, to increase the accountability of the directors of deposit takers. This will be done by "imposing positive duties" such as the need to ensure that a deposit taker is run in a prudent manner, acting with honesty and integrity, and dealing with the Reserve Bank in an open and transparent manner. This would be enforced largely under a civil liability framework rather than a criminal one, with criminal sanctions reserved for cases of clear intent or recklessness on the part of directors.
Consultation planned for February 2020 will probe the design and specification of these new duties and the accompanying liability regime.
"Cabinet has also agreed that an integrated prudential-conduct ‘executive accountability regime’ should be developed which extends accountability requirements to certain senior employees of both deposit takers and insurers. This work will take place through a cross-agency process separate from the current Phase 2 Review, with consideration given to policy initiatives in other jurisdictions such as Australia. The terms of reference and timeframes for this policy work will be developed and publicly released in due course."
Strengthened RBNZ supervision powers
Cabinet has agreed in-principle to a number of changes to strengthen the Reserve Bank’s ability to supervise deposit takers, and take enforcement action in the case of breaches. This includes providing the Reserve Bank with the power to undertake on-site inspections as part of its supervision activities in addition to the introduction of a more graduated enforcement and penalty framework.
"Providing the Reserve Bank with a broader range of sanctions, such as enforceable undertaking and civil penalties, will support the Reserve Bank in shifting to a more robust supervision and enforcement model."
Firms that take deposits will be subject to a single deposit takers regime
The regulatory regime is expected to capture all lenders that offer transactional, savings and term deposit accounts to the public. This would capture the existing banks, credit unions, and building societies.
"A key outstanding question is how the regulatory regime will deal with lenders who predominately issue longer-dated secured debt, such as finance companies. Given the risks associated with this business model, as demonstrated by past finance company failures, it is important that there continues to be adequate prudential regulation and supervision of this sector. However, a number of submitters argued these entities should not be categorised as deposit takers as they offer investment products that should be differentiated from deposits and not subject to deposit insurance. The third round of consultation will seek feedback on the regulatory approach to these entities."
Modernising the framework for managing failed deposit takers including bail-in powers for the RBNZ
The Review has identified the need for a number of improvements to New Zealand’s bank resolution and crisis management regime to better align with international best practice, including learning from international experience during and after the Global Financial Crisis. Thus Cabinet has made a number of in-principle decisions to strengthen the resolution framework for deposit takers, including:
- designating the Reserve Bank as the resolution authority for deposit takers, with statutory functions, including planning for the resolution of deposit takers and exercising resolution powers
- providing for clear resolution objectives, including resolving deposit takers in an orderly manner, avoiding significant damage to the financial system and protecting public funds
- providing the Reserve Bank with the ability to ‘bail-in’ (that is, write-down or convert to equity) certain unsecured liabilities, as a new mechanism to recapitalise a failing bank, and
- establishing protections for bank creditors, including ensuring that creditors end up no worse off than they would be in an ordinary liquidation.
"Crucially, notwithstanding the Reserve Bank’s resolution planning function, deposit takers – particularly large banks – will be expected to provide substantial input into developing and maintaining their resolution plans. This reflects the need for resolution plans to closely reflect the nature of their specific business, for assessment by the Reserve Bank and as the main input to inform the Reserve Bank’s resolution planning."
"While there are a significant number of further details to work through in the development of the new resolution regime, these decisions will underpin an approach that better aligns with international guidelines. The new resolution regime will also provide the Reserve Bank with a wider range of tools to resolve a failing deposit taker without severe disruption to the financial system and without relying on taxpayer funds."
The Reserve Bank will set prudential Standards
Cabinet has agreed in-principle that Standards should be the primary instrument for setting regulatory obligations on deposit takers. Standards will be set by the Reserve Bank, independently of Ministers but will be subject to Parliamentary oversight.
"This provides a greater degree of transparency and accountability in comparison to the current approach of setting requirements through Conditions of Registration. The third round of consultation will seek feedback on procedural requirements for standard-setting."
Increased oversight of the Reserve Bank
With the Reserve Bank one of the few agencies not currently subject to the Public Audit Act, the Auditor-General will be legislatively enabled to conduct performance audits and inquiries into the Reserve Bank’s activities. This will allow the Auditor-General to examine the extent to which the Reserve Bank is carrying out its activities effectively and efficiently, and inquire into any matter concerning the Reserve Bank’s use of its own resources.
The Reserve Bank will also be subject to the Ombudsmen Act which allows the Office of the Ombudsman to investigate administrative conduct by government agencies that affects a person or a group of persons. The Ombudsman may make recommendations for improvements to an agency.
Treasury will become the formal monitor of the Reserve Bank. The role of the monitor is to assist the Finance Minister, including by keeping the Reserve Bank's operations and performance under review.
Reserve Bank welcomes changes
In a statement Reserve Bank Governor Adrian Orr says he welcomes the changes:
"Financial stability is vital in maintaining and improving the wellbeing of all New Zealanders, and the financial stability objective will give greater clarity of purpose. These changes are an important step towards modernising New Zealand’s financial stability framework and the Reserve Bank’s governance and accountability settings."
"These decisions strike a balance between maintaining the independence of the Bank and ensuring there is greater transparency and accountability about the Bank’s work," says Orr.
He says the Reserve Bank will continue working with Treasury in overseeing the review, with the third and final round of consultation set for early 2020, focusing on the details of deposit insurance and the regulatory regime.
"We will be engaging industry in the new year to discuss what the changes might mean in practice and to provide further details about the consultation."