By Gareth Vaughan
The Reserve Bank doesn't believe a global regulatory "too big to fail" framework being established for an individual country's domestic banks is relevant to New Zealand.
Toby Fiennes, the Reserve Bank's head of prudential supervision, said in a speech yesterday the Reserve Bank's prudential regulatory regime has a system-wide focus at its heart.
His comments come as international standard setters the Basel Committee for Banking Supervision, the Financial Stability Board and the International Association of Insurance Supervisors, propose a regime in which financial institutions deemed systemically important within a specific country be forced to hold higher levels of capital and be subject to more intense supervision than smaller entities.
"We are not convinced of the relevance of a D-SIFI (domestic systemically important financial institution) framework for New Zealand. Our regime already has a system-wide focus at its heart as we calibrate our regulatory settings and our work (being) capital and solvency requirements, supervisory programme, etc, to protect against system-wide risk," Fiennes said.
"We already have conservative requirements compared to the rest of the world. These requirements apply to all entities, large banks/insurers as well as small banks/insurers, and essentially mean that we already have a D-SIFI overlay - one that is applied to the whole system."
Previous Reserve Bank Governor Alan Bollard noted in a 2011 speech that the four Australian owned banks - ANZ, ASB, BNZ and Westpac - dominate the New Zealand financial system to an extent seen in few other economies, accounting for nearly 90% of the banking sector, or just over 70% of the financial system as a whole. And after last year's acquisition of AMI, Insurance Australia Group has around 60% market share of New Zealand's home and contents, and car insurance markets.
Fiennes noted the Reserve Bank looks to implement international standards in banking, insurance and financial stability where it believes they are appropriate for New Zealand conditions. But, given New Zealand's not a member of any of the relevant committees, it isn't obliged to.
The Reserve Bank describes systemically important banks as ones that are so big that their failure could have flow on effects to the banking system as a whole and the wider economy. It defines such systemically important banks as those whose New Zealand liabilities, net of amounts due to related parties, exceed $15 billion. This counts the big four - ANZ, ASB, BNZ and Westpac - in.
In January the Reserve Bank played down a working paper issued by the International Monetary Fund (IMF) that suggested New Zealand's big four banks ought to have higher minimum capital requirements. The paper said given the massive scale of the four major banks in a New Zealand context, and the fact they all have basically the same business model, careful attention must be paid to their vulnerabilities and resilience to shocks. Combined shocks to their residential mortgage and corporate lending portfolios would put pressure on their capital meaning there's merit in them holding more capital, the IMF paper said.
At the time a spokeswoman told interest.co.nz the Reserve Bank "actively and continuously" monitors areas such as bank capital requirements, the composition of bank funding and stress-testing in the context of local and global developments.
Following the global financial crisis, the international bodies have drawn up a list of global systemically important financial institutions. No New Zealand or Australian banks are currently in the list. See the full list of 28 here.
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