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Consultation extension to banks provided on 'technical and potentially complex implementation issues' of open bank resolution policy

Consultation extension to banks provided on 'technical and potentially complex implementation issues' of open bank resolution policy

By Gareth Vaughan

At the behest of the banks, the Reserve Bank has pushed out the deadline for consultation on its planned pre-positioning requirements for its open bank resolution policy by three months.

The June 30 deadline has been extended to September 30. A Reserve Bank spokeswoman said the extension had been provided at the request of banks.

"Given that the consultation is around technical and potentially complex implementation issues, an extension was considered appropriate," she said.

Effectively the Reserve Bank's blueprint for dealing with bank failures (or living wills), the central bank has suggested all locally incorporated banks with retail funding of more than NZ$1 billion be required to pre-position.

An open bank resolution is an option whereby the bank is open for business on the next business day after its temporary closure following an insolvency event or an event that triggered putting it under statutory management, and is able to provide customers with full or partial access to their accounts and other bank services.

The key feature of the policy is that creditors are able to access a portion of their funds immediately after the bank fails and is placed in statutory management. The bank can then quickly reopen with the unfrozen or accessible portion of funds guaranteed by government to avert a further run by creditors. Additional funds can be unfrozen at later dates as the final losses are determined.

The Reserve Bank says the policy is intended to act as a resolution tool that places the cost of bank failure primarily onto a bank's shareholders and creditors rather than taxpayers, thus minimising moral hazard and providing a continuity of core banking services. The policy, previously known as Bank Creditor Recapitalisation, was developed after a review of the central bank's crisis management policies and instruments following the 1997 Asian financial crisis.

The Reserve Bank says its outsourcing, local incorporation and governance policies were all designed to facilitate the implementation of the open bank resolution policy. Now, the pre-positioning of banks' internal systems represents the next stage in the process.

Credit rating agency Moody's Investors Service has said information technology (IT) costs associated with pre-positioning banks internal systems for open bank resolution could add negative pressure to ANZ, ASB, BNZ, and Westpac's credit ratings, although rival Standard & Poor's played this down, saying it didn't expect implementing the policy to be a significant imposition on the banks' financial strength.

See more on the proposed open bank resolution policy here.

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