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The IMF and a banking expert say the Reserve Bank’s light-handed approach to bank regulation needs work but the answer is not creating a separate regulatory body to take this over

The IMF and a banking expert say the Reserve Bank’s light-handed approach to bank regulation needs work but the answer is not creating a separate regulatory body to take this over

The IMF and a banking expert agree improvements can be made to how the Reserve Bank regulates the banking sector.

But this does not mean a separate regulatory entity should be created to manage this – rather, the Government should focus on the need for reforms at the central bank, they say.

IMF Asia and Pacific Division chief Thomas Helbling said on Tuesday the Reserve Bank needs to throw more weight behind the way it regulates the banking sector.

He drew on the Financial Sector Assessment Program (FSAP) report the IMF published on New Zealand last year, which outlined similar concerns.

It painted a picture of a bank regulator that's hands off on a day-to-day basis, highlighting an idiosyncratic light-handed regulatory approach. For example, its lack of on-site visits to the Australian owned banks in New Zealand.

Helbling doubled down on that idea.

“New Zealand has a three-pillar banking supervision framework. In the FSAP, our experts felt onsite supervision would be helpful to give a bit more lead time to the Reserve Bank to learn about the state of the banking system.”

Helbling is not alone in his criticism. Massey University banking expert David Tripe says New Zealand has a regulatory system that really does not work – “we don’t really have effective banking system oversight.”

There have been suggestions the regulatory side of the Reserve Bank’s job should be given to a separate entity, so it can focus solely on monetary policy. Among others this argument has been made by former BNZ chairman Kerry McDonald, and ex-Reserve Bank official Geof Mortlock.

But Tripe is not convinced this is the right approach.

He cites the Financial Services Authority (FSA), which was carved out of the Bank of England in the early 2000s.

But a few years after the Global Financial Crisis of 2007/08, it was abolished and its responsibilities were given back to the British central bank and another regulatory body, the Financial Conduct Authority.

“By the time the problems started to emerge in 2007, the FSA was staffed by lawyers and no one who really understood the banking system oversight,” Tripe says.

Helbling makes a similar point, saying establishing a new institution – like that of the FSA in the UK – is a “huge fixed cost.”

So, what to do?

Instead of creating a separate body, both Tripe and Helbling say it would be better for the Government to just better resource the Reserve Bank so it can do more on the regulatory side.

“From an international perspective, there are various models of how central banking and financial banking sector supervision is done,” Helbling says.

“Why fix it if it isn’t broken? Focus on the need for reforms perhaps more than entirely changing the entire set up.”

Tripe agrees – “but there needs to be a plan to do something that is actually going to help; the method of effective supervision is important.”

The second phase of the Reserve Bank Act review, which examines the macro-prudential side of the framework, is currently underway and this issue will be looked at closely.

Speaking to last month, Finance Minister Grant Robertson said he was aware of the criticism surrounding the Reserve Bank’s light touch regulatory approach.

“I think everyone recognises that with our Reserve Bank, we have a body that deals with core monetary policy but it has roles around regulation and financial stability that, in other jurisdictions like in Australia, are separated out.

“That means we need to look at the bank and make sure that it is fit for purpose to be able to do the job and the rules and regulations are the ones that suit our economy.”

*This article was first published in our email for paying subscribers early on Thursday morning. See here for more details and how to subscribe.

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