IMF report, that declared the RBNZ 'materially non-compliant' in 13 of 29 international bank regulatory standards, to be a key sounding board for phase 2 of RBNZ Act review

By Gareth Vaughan

An International Monetary Fund (IMF) report, that judged the Reserve Bank "materially non-compliant" in 13 of 29 international bank regulatory and supervision framework standards, will provide a key backdrop for phase two of the Government's Reserve Bank of New Zealand Act Review.

Finance Minister Grant Robertson issued the terms of reference for phase two of the review on Thursday afternoon. They note that a number of the IMF's key recommendations raise questions touching on fundamental pillars of New Zealand's financial stability regulatory framework.

"These questions include the role of statutory objectives, resourcing of the Reserve Bank, the government's interest in prudential supervision while protecting operational independence, and crisis management. Phase 2 of the Review will be considering these matters and the recommendations that the IMF made in relation to them," the terms of reference say.

As reported by interest.co.nz last year, the IMF report painted a picture of a bank regulator that's hands off on a day-to-day basis, with an idiosyncratic light handed regulatory approach.

"Overall, the lack of first-hand independent verification of prudential returns and assessment of banks’ risk management practices prevents the RBNZ from having a thorough understanding of the banks...the RBNZ’s enforcement is currently based primarily on breaches that have already occurred and is not preventive," the IMF said.

The Government notes the IMF recommended an increase in the Reserve Bank's resources for supervision and regulation, steps to strengthen cooperation with Australian authorities, and clarifications of responsibilities to reinforce the role and autonomy of the Reserve Bank as prudential regulator and supervisor.

As interest.co.nz also reported last year, the 13 of 29 international bank regulatory and supervision framework standards, or Basel Core Principles (BCP), the IMF decreed the Reserve Bank to be "materially non-compliant" in, are detailed below. The report was an IMF Financial Sector Assessment Programme on New Zealand, its first since 2004.

BCP assessment - summary of results

Core principle Compliant Largely compliant Materially non-compliant Non-compliant Not applicable
✓ FSAP assessment
BCP 1: Responsibilities, objectives & powers        
BCP 2: Independence, accountability, resourcing & legal protection for supervisors      
BCP 3: Cooperation & collaboration        
BCP 4: Permissible activities        
BCP 5: Licensing criteria        
BCP 6: Transfer of significant ownership        
BCP 7: Major acquisitions        
BCP 8: Supervisory approach        
BCP 9: Supervisory techniques & tools        
BCP 10: Supervisory reporting        
BCP 11: Corrective & sanctioning powers        
BCP 12: Consolidated supervision        
BCP 13: Home-host relationships        
BCP 14: Corporate governance        
BCP 15: Risk management        
BCP 16: Capital adequacy        
BCP 17: Credit risk        
BCP 18: Problem assets, provisions & reserves        
BCP 19: Concentration risk & large exposures        
BCP 20: Transactions with related parties        
BCP 21: Country transfer risk        
BCP 22: Market risks        
BCP 23: Interest rate risk in banking book        
BCP 24: Liquidity risk        
BCP 25: Operational risk        
BCP 26: Internal control & audit        
BCP 27: Financial reporting & external audit        
BCP 28: Disclosure & transparency        
BCP 29: Abuse of financial services        
Totals 8 8 13 0 0

RBNZ's prudential regulation powers won't be hived off

Meanwhile, the Government is ruling out separating out the prudential regulation responsibilities from the Reserve Bank. The terms of reference note interest from stakeholders in separating the prudential regulation functions out from the Reserve Bank, but says doing this is not the Government's intention. The Review will consider submissions on the rationale for retaining prudential supervision within the Reserve Bank as part of a first round of public consultation on phase two.

Those calling for the Reserve Bank to lose its prudential regulatory responsibilities include financial consultant Geof Mortlock who argues these responsibilities should be moved to a new regulatory agency, and ex-BNZ chairman Kerry McDonald who says they should be handed to the FMA.

 Issues ruled out of scope of the Review include the Reserve Bank's role as anti-money laundering supervisor for banks, non-bank depositors and life insurers, the Australian Prudential Regulation Authority becoming sole regulator and supervisor of Australian banks operating in New Zealand, and covered bonds.

Deposit insurance, climate change on agenda

The Review will consider the case for "deposit protection mechanisms and possible options, including deposit insurance." New Zealand is currently an OECD outlier in not having deposit insurance. It will also consider monitoring and managing the risk that climate change poses to New Zealand's financial stability.

As expected, the scope and objectives for macro-prudential policy will be reviewed, with the actual toolkit also under review. Key here will be whether a debt-to-income ratio tool is added to the toolkit, something Reserve Bank Governor Adrian Orr wants but Robertson is not keen on.

Funding in focus

The Reserve Bank funding model will also come under consideration, including whether some activities should be funded through industry levies.

"The Review may also have implications for the level of funding the Reserve Bank receives. This may be dealt with in parallel to the Review," the Government says.

Currently the Reserve Bank, unlike the Financial Markets Authority (FMA), receives no funding from industry levies. The big four banks, for example, pay $535,000 each annually in FMA levies. In a response to the Australian Royal Commission, the New Zealand Bankers' Association recently noted its members were "happy to support regulators" by considering how to provide further funding for the FMA and also, if appropriate, for the Reserve Bank "to enable it to perform its supervision function effectively."

The Reserve Bank receives no direct taxpayer funding through the Parliamentary appropriation process. Its main source of income is the return on investments held, which are funded by the issue of currency and by the Reserve Bank’s $2.7 billion of equity. 

Under the Reserve Bank Act, the Minister of Finance and the Reserve Bank Governor have a five-year funding agreement specifying the amount of the Reserve Bank's income to be used to meet operating expenses in each of those years. The size of the dividend paid to the Crown is determined by the Minister of Finance each August on the recommendation of the Reserve Bank. The current funding agreement, running until 30 June 2020, provides for annual funding increases of about 1%.

The Reserve Bank currently has 52 staff in its prudential supervision department. Last year's annual report showed a total of 252 full-time staff. Annual operating expenses were $56.8 million, which was $12.7 million below the central bank's funding agreement with the Government. The Reserve Bank's annual surplus was $155 million and it paid a $145 million dividend.

What's the goal?

The Government says the goal of its Review is to modernise New Zealand's monetary and financial stability policy frameworks and the Reserve Bank's governance and accountability settings. This, it says, will ensure the Act and the Reserve Bank's approach support good economic management and reflect the changing environment in which New Zealanders live and work, which will support the development of a New Zealand economy that is productive, sustainable and inclusive. The operational independence of the Reserve Bank "remains paramount" and will be protected.

The Review will be done by a review team, comprising Treasury and Reserve Bank staff. It'll be governed by a steering committee jointly chaired by the Treasury and the Reserve Bank. Suzanne Snively, who chairs a Robertson appointed Independent Expert Advisory Panel, will also be on the steering committee. The Government says the Reserve Bank brings extensive knowledge and experience to the Review. Treasury, Robertson's Panel and public consultation will provide independent views. The plan is for any major legislative amendments to be advanced within the current Parliamentary term.

Here are the terms of reference.

And here are a series of questions and answers issued by Robertson.

Phase 1 of the review focused on monetary policy.

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

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

1 Comments

And more fun & games coming out of Australia.

https://www.smh.com.au/business/banking-and-finance/dover-financial-shut...

The royal commission heard in May that Dover had employed several planners who had been terminated by other financial institutions for misconduct, despite warnings from the former employers, and used a team of young lawyers in its Vietnam office to undertake compliance tasks.

Dover also allows financial planners, including those who had failed audits at their prior employer, to conduct their own audits of whether their advice was appropriate rather than having a separate team to do so, the commission heard.