International banking body, the Financial Stability Board, calls for greater crisis management coordination between NZ and Australia

International banking body, the Financial Stability Board, calls for greater crisis management coordination between NZ and Australia

By Gareth Vaughan

An international banking body, which has as its aim the development, promotion and implementation of effective regulatory, supervisory and other financial sector policies to bolster financial stability, wants to see New Zealand and Australia complete a joint resolution package to assist with cross-border crisis management.

In a peer review of Australia, the Financial Stability Board (FSB) which is hosted by the Bank for International Settlements in Basel, Switzerland, notes there has been improvement in coordination with New Zealand on crisis management. However, the FSB says the finalisation of a joint resolution package with New Zealand "would further assist" cross-border crisis management. A spokeswoman for the Reserve Bank of New Zealand declined to comment on the status of the joint resolution package.

The FSB notes that the high interdependence of the two countries banking systems led to the formation of the Trans Tasman Council on Banking Supervision (TTC) in February 2005 with the aim of boosting information sharing, promoting a coordinated response to financial crises, and guiding policy advice to governments on banking supervision. The same four banks - ASB's parent Commonwealth Bank of Australia, BNZ's parent National Australia Bank, ANZ and Westpac - dominate the banking sectors in both countries with New Zealand the biggest overseas exposure for Australia's four major banks with about 15% of their total assets.

The TTC parties, Australian Commonwealth Treasury, Reserve Bank of Australia, Australian Prudential Regulation Authority, New Zealand Treasury, and the Reserve Bank of New Zealand, signed a Memorandum of Cooperation in September 2010 on the management of trans-Tasman bank distress. This addresses the "burden sharing issue" by stating that the Australian participants will have responsibility for the design and implementation of capital support for the parent bank and the New Zealand participants are responsible for the design and implementation of capital support for the New Zealand subsidiaries.

The Reserve Bank is currently consulting with the banks on its pre-positioning for its Open Bank Resolution (OBR) policy, or living wills, which is effectively the central bank's blueprint for dealing with bank failures. The Reserve Bank has suggested all locally incorporated banks with retail funding of more than NZ$1 billion be required to pre-position for its OBR which potentially means redesigning their core banking systems.

The OBR 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. See more on the OBR here.

Guidance on the management of trans-Tasman bank distress

Meanwhile, the FSB notes that the two countries have developed "comprehensive" guidance on the management of trans-Tasman bank distress but says "finalisation of a joint resolution package" would bolster cross-border crisis management.

Of Australia, the FSB says the presence of the four big banks - with about 75% of the authorised deposit taking market - presents "important policy challenges" for the authorities.

"Their size and nature of activities means that they could pose systemic and moral hazard risks in Australia."

In New Zealand the big four - ANZ, ASB, BNZ and Westpac - account for nearly 90% of the banking sector, giving them financial system dominance seen in few other economies, as Reserve Bank Governor Alan Bollard recently pointed out.

The FSB says, however, that the Australian banks, have made good progress in reducing their dependence on offshore wholesale funding but they should continue working towards managing this risk.

In New Zealand, KPMG's annual Financial Institutions Performance Survey noted ANZ, ASB, BNZ, Westpac and Kiwibank, combined, reduced their overseas funding by just 1% during 2010 to 34%.

The FSB pulls together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The objective of its country peer reviews is to examine the steps taken, or planned, by national authorities to address IMF-World Bank financial sector assessment programme recommendations concerning financial regulation and supervision as well as institutional and market infrastructure.

The FSB is chaired by Mario Draghi, Governor of the Bank of Italy, who also takes over as European Central Bank President on November 1.

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