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The RBNZ suggests digital disruptors could boost resilience of the financial system by reducing the systemic importance of big banks

The RBNZ suggests digital disruptors could boost resilience of the financial system by reducing the systemic importance of big banks

By Gareth Vaughan

The Reserve Bank says it has no plans to introduce new regulations in response to the digital disruption of the banking sector by the likes of peer-to-peer (P2P) lenders, but will monitor developments and assess whether a regulatory response is required in the future.

The central bank and prudential regulator made these comments in a press release issued alongside a Bulletin article entitled Disruption or distraction? How digitisation is changing New Zealand banks and core banking systems. The article's authored by Amber Watson, part of the policy analysis team in the Reserve Bank's economics department.

Watson says the Reserve Bank is watching the emergence of digital disruption in the banking system. But she says there are no current plans to change the regulatory framework as a result.

"The Reserve Bank is aware of the potential impacts on financial soundness and efficiency, and incorporates this into its supervision of banks and assessments of overall system stability. The Reserve Bank will continue to assess whether and how it might respond to the digital disruption with any regulatory changes," Watson says.

The Reserve Bank, Watson adds, doesn't want to inhibit innovation within the financial system and supports fair and open access to the payments system as well as encouraging competition between participants and innovation. 

Watson notes "disruptors engaging in lending practices" are regulated by the Financial Markets Authority (FMA) and Commerce Commission, and "disruptors that participate in a payment system" are subject to the Reserve Bank’s information gathering powers under Part 5B of the Reserve Bank of New Zealand Act.

"However, there are currently no coordinated prudential regulations of ‘disruptor’ entrants to the banking system that address the risk that a systemic failure of these entities could pose for the financial system," says Watson.

P2P lenders licensed by the FMA such as LendMe are targeting high loan to value ratio residential mortgage lending and seeking bank funders and potentially shareholders. Bernard Hodgetts, the head of the Reserve Bank's macro financial department, told a year ago the Reserve Bank would keep an eye on this activity.

Daniel Foggo, an ex-pat New Zealander who is the CEO of RateSetter Australia, recently criticised NZ's P2P regulatory regime as being too light touch.

Potential to reduce the systemic importance of individual banks

Watson says digital disruption is changing the way consumers interact with banks with disruption driven by evolving consumer demands and enabled by new technologies. 

"This disruption may ultimately improve the soundness of the financial system by reducing the systemic importance of individual banking institutions, thereby decreasing moral hazard and the potential impacts of a single failure. However, in the medium term digital disruption may introduce new risks to the systems if unregulated entities provide a significant portion of banking services and if existing banks no longer have large profitability buffers. The Reserve Bank will continue to monitor the impact of digital disruption on the banking industry in line with its statutory objective to promote the maintenance of a sound and efficient financial system," says Watson.

Clunky core banking systems

Meanwhile, Watson points out a key challenge banks face in combating digital disruption is their core banking systems which in some cases are "dated, sprawling and complex technology systems resulting from years of uncoordinated developments and minor platform changes."

Currently a range of New Zealand banks are upgrading their core banking systems including BNZ, Kiwibank, Heartland Bank and Rabobank.

Watson suggests New Zealand and Australian banks appear to be actively modernising their core banking systems in response to digital disruption. 

"Two large Australian banks have replaced their core banking systems in large-scale replacement projects. The time to complete these projects was at least six years. These banks now say they are well placed to respond to threats that digital disruption will bring both now and in the future. Several smaller, domestically owned New Zealand banks have also replaced their core systems in large scale projects," she says.

"Most New Zealand banks have opted to use middleware to enable better customer-facing technologies and faster product development in the short term while replacing their core banking systems section-by-section over a longer period of time. These banks will use middleware and APIs (application programme interfaces) to smooth out the replacement process, resulting in a less disruptive, albeit more gradual, process."

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If the clunky core systems are indeed such, and a risk to us all, why has the regulator allowed the earnings stripping (cut and carry) and massive cash/dollar transfer out of the country?


Weekly Macro Insights for May 20, 2016
Another week, another Fed one-eighty. Back on March 29th, Janet Yellen reiterated her newly-found uber-dovish stance which gave the world the impression interest rate hikes were still off the table. A totally opposite message signaling a rate hike next month came out this week in minutes to a Fed meeting that took place only a few weeks after Yellen spoke. So to recap, from 2013 through mid-Feb 2016 they said they’re going to hike. Then in March 2016 they changed to no hike. Now, a month later we learn (in April 2016) they moved back to full-on hiking mode. This was confirmed by the Fed’s Dudley on Thursday this week. The inconsistency in the Fed’s messaging is not helping their waning reputation for knowing what is going on.

RBC is a massive financial institution with a formidable institutional equity trading desk in New York. When their head guy is putting out stuff like this in his morning note to clients (after the Fed minutes came out this week), you know it’s because everyone’s feeling it:

“Gold … I still like it as insurance for a Central Bank “accident” longer-term; either a Fed hike, a Chinese devaluation, or something screwy from Bank of Japan such as helicopter money.”
- Charlie McElligott, Head of RBC US Equities Salestrading, New York.


Zhu, who has a seat on Beingmate's board, says it would have been difficult for Fonterra to crack the Chinese infant formula market on its own. "We thought the best way to achieve it was through a strong local partner," she says.

Anmum infant formula is now stocked in 3000 Chinese stores and the company recently announced the brand had achieved sales growth of 107 per cent in China last year, albeit from a low base.

But as consumption continues to boom in big Chinese cities, it is taking place against the backdrop of an increasingly shaky economic outlook.

There are growing fears about the country's rapidly rising debt - the Economist magazine reckons its debt-to-GDP ratio has ballooned from 150 per cent in 2008 to 260 per cent today - and massive overcapacity in the heavy industrial sectors.

Zhu says she's confident about China's future, but debt is a big issue.

"And it's not just a debt issue - there are a lot of structural reforms that haven't been carried out yet," she says. "If you think about the last 30-plus years of reform and open door policy, it has been largely successful [but] the low hanging fruits have pretty much been taken."

Zhu says the Chinese economy is now heading into "deep water" in terms of economic reform.

"Everybody understands it's hard and there is no guarantee of success for any single programme," she says. "But the direction the country has to go in is very clear because there's no other way. You can't go back and become a closed economy like we were 35 years ago."

Zhu, however, says China's darkening economic outlook is not a reason for Fonterra to scale back investment in the country.…


P2P lending isn't in the banking system. There's no bank license, there's no ISDA allowing swap rates or OTC options positions, and there's no creation of money. All the money lent exists and there's no underlying financial position that could be created that would mean total collapse of the financial system.

P2P just fills a gap in lending (including business lending that banks refuse to do). Banks are too busy creating large volumes of mortgage lending.


the biggest risk to the banks will be the likes of google, or apple entering the financial services industry.

they excel in processing huge volumes of transactions, have state of the art servers, and possess the techonogolical firepower to blow away the incumbent banks, not to mention hold vast reserves of cash

The financial services sector outside of the main trading banks is now fragmented, and poorly regulated.

digital competition is inevitable, however the core principals of maintaining a strong capital base should not be forgotten. I wonder whether p2p and the deregulation of the sector has lead to a precarious situation.