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Gareth Vaughan says the RBNZ's latest Financial Stability Report highlights for banks, insurers and non-bank deposit takers that their regulator will be sticking its nose into their business more often and in more ways than in the past.

Gareth Vaughan says the RBNZ's latest Financial Stability Report highlights for banks, insurers and non-bank deposit takers that their regulator will be sticking its nose into their business more often and in more ways than in the past.

By Gareth Vaughan

There may not have been a big bang headline out of Wednesday's Reserve Bank Financial Stability Report but there's a clear theme running through it.

And that is one of an increasingly proactive regulator. Both the report itself and the media briefing fronted by Governor Adrian Orr emphasised this point.

Traditionally known for its idiosyncratic light handed regulation of New Zealand's banks, the Reserve Bank has taken a hands-off approach, including not directly accessing bank records or files. This approach was put under a bright spotlight by the International Monetary Fund's 2017 Financial Sector Assessment Program report on New Zealand, with the IMF judging the Reserve Bank to be "materially non-compliant" in 13 of 29 international bank regulatory and supervision framework standards. This left me questioning whether the Reserve Bank was little more than an ambulance at the bottom of the prudential regulatory cliff.

Things have started changing since then.

The Financial Stability Report highlights the work undertaken with the Financial Markets Authority reviewing the conduct and culture of both banks and life insurers over the past year. This has led to the Government moving to introduce a conduct licensing regime for banks, insurers and non-bank deposit takers which will be overseen by the FMA.

The report also highlights a number of banks disclosing breaches of their conditions of banking registration over the last year, relating to errors in the calculation of capital adequacy and liquidity ratios that have gone undetected for years. On this the Reserve Bank reiterated the point emphasised by Deputy Governor Geoff Bascand in a June speech. That is; "The Reserve Bank will be adopting a more intensive supervisory approach." This will involve "greater verification of banks’ compliance with their conditions of registration."

The switch in emphasis to a positive assurance framework from negative assurance for the bank director attestation regime is also highlighted. This comes out of a review of the Reserve Bank's director attestation process which was criticised by the IMF.

The bank disclosure regime the Reserve Bank oversees is supported by a requirement for bank directors to attest to, i.e. sign-off on, the accuracy of information contained in bank general disclosure statements. The Reserve Bank approach to supervision relies on three pillars being self, market, and regulatory discipline. The IMF pointed out the self-discipline pillar relies on directors’ attestations to the fact that banks have adequate risk management systems in place.

Previously I had questioned whether the attestation process outsourced regulation to the regulated. As the Reserve Bank notes, many banks were attesting to compliance on the basis of negative assurance, i.e. they didn't have evidence to suggest that they were not in compliance. The Reserve Bank has "prompted" banks to review their assurance processes, and move to a positive assurance framework. 

This shift is a factor in ANZ, BNZ, Kiwibank and Heartland Bank all featuring in the dog-box at the back of the Financial Stability Report over compliance and other supervisory actions taken by their prudential regulator this year.

A U-turn on cyber-security

Elsewhere the Financial Stability Report reveals the Reserve Bank has done a U-turn and decided it will consult on the development of risk management guidance for cyber-risk next year having said two years ago it was taking a hands-off approach to cyber-security.

Then there's a reminder of the upcoming review of the 2010 Insurance (Prudential Supervision) Act, with the Reserve Bank to also "consider the case for a requirement for insurers to maintain additional solvency buffers in New Zealand." There's no specific mention in the report of now defunct insurer CBL. The Reserve Bank's nose was left bloodied when its cautious approach to the oversight of CBL was criticised in a report commissioned by the Reserve Bank itself and released in July. In the press conference CBL was merely mentioned - by Bascand - in passing.

There's also the "anticipated enactment" of the Financial Market Infrastructures Bill. This, in combination with a review of supervision resources, will see a new approach to the supervision of financial market infrastructures such as payment and settlement systems by the Reserve Bank and FMA.

We're also due to get a round of decisions in the Government's ongoing Reserve Bank of New Zealand Act review before Christmas with a range of issues on the agenda including; the introduction of deposit insurance, the Reserve Bank’s regulatory tools and powers, how the Reserve Bank should supervise and enforce regulations including whether it has appropriate enforcement tools, the role of the Reserve Bank in macro-prudential policy including the potential addition to its toolkit of a debt-to-income restriction tool, the features that NZ’s bank crisis management regime should have, plus a range of operational matters including how the Reserve Bank should be funded and resourced.

The resourcing issue got some airtime in Orr's media conference with the reiteration that the Reserve Bank wants to bolster its 38-strong supervision team. This has been a theme for a while now and will be a key feature of the Reserve Bank's new five-year funding agreement to be put in place with Finance Minister Grant Robertson. The current five-year funding agreement runs until June 30, 2020.

Don't forget the bank capital review...

Then there's the generous sprinkling of comments throughout the Financial Stability Report on the Reserve Bank's biggest ever review of bank regulatory capital requirements. Started in 2017, the final decisions are due out on December 5. Anyone hoping for or expecting major changes to the regulator's proposed increases to bank capital requirements won't get their hopes up if they read the Financial Stability Report.

Here's a flavour of what's said about the capital review. Under the headline "higher bank capital will improve long-term resilience."

"Capital is the equity funding that is provided by bank shareholders. Strong capital positions are important, as it provides a buffer for banks to absorb unexpected losses without threatening their ongoing viability. Currently banks hold sufficient capital to withstand a range of economic risks. However, their viability may be threatened if very severe events were to occur. Bank failures can cause very large economic and social costs, and to improve resilience we have proposed increasing capital requirements for banks. Under the proposed changes, we believe banks would be able to withstand the kind of event that occurs about once every 200 years."

On top of all this the Reserve Bank notes it has been conducting a thematic review of its liquidity policy since July, which includes the core funding ratio, with a report due out by June 2020 and findings to feed into a policy review to follow. The regulator is also working to implement its climate change strategy, and Orr says in light of the Westpac anti-money laundering revelations in Australia, the Reserve Bank has asked NZ banks to provide additional assurance that they're above board.

Combined, all of this paints a picture of a central bank and prudential regulator evolving in a changing world following an unfavourable international review. What this appears to mean for the regulated is that their regulator will be sticking its nose into their business more often and in more ways than in the past.

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Why creat an institution if does not want it to be active and play its part.

RBNZ in absence of DTI and having realized that housing serpant has started to raise its head Again should be proactive as they have been and come hard with capital control.


House prices are so out of control its not funny, and the main benefactors have been overseas banks who have been extracting/exporting profits of $5 billion and more per annum. This has been aid and abated by a mix of incompetent yes minister political appointments, and ex MP's who have no understanding on the conflict of interest; accepting appointments from those they aid and abated during their time in governance. And there's no coincidence some also accept 'Sir' & 'Dame' status, as its a get out of jail free card.

All this new compliance and rules could have been implemented long ago, and I find this disingenuous of the IMF and like to point out now when the system has been obviously corrupted for some time. The only conclusion you can draw from this is the IMF (based in the US) is hardly independent of the banksters; which through the Federal Reserve dictate the rules.

To save NZ inc from bankruptcy, the only solution is for the government to reduce the amount of profits exported from this country. This stands are approximately $20 billion, and while overseas profits imported to NZ inc is approximately $10 billion, this still leaves an annualized deficit of $10 billion. A good chunk of this $20 billion comes from cartel practices, where government regulation is needs to reduce this deficit. A good start is the banking sector, which represents 25% of this deficit which is delivered through profits which represent an 18% return on equity; more than double what it should be.

If you are wondering what effect this $10 billion annualized investment deficit is having in NZ inc, its more state asset sales, increased debt and reduced public services.

When National, who ruled NZ for 9 years said that HOUSING CRISIS IS A GOOD CRISIS sums up their thinking and attitute and also whom they represented (Foreigners and their Rich friends in NZ).

Labour realized that itis a crisis and introduced FBB (Intially when just got in office) but later realized that the only real (feel good ) economy is housing ecenomy (May be National was right about the crisis)so backed of starting with CGT (CGT : any unbiase will say is must but....again who is taken the decession, people and their friends who will be adversely impacted if introduced - JA failed miserable on this front as now even she belongs to the elite class, who will be impacted if introduced).

Media too is full of people with vested interet supported / paid by strong lobby group and for that reason need a very strong leader (Not Politican) to whitstand and do what is just and right from average kiwi (Example : when OCR was left unchanged many in media and so called experts went after RBNZ that it is bad for FHB but reality is that is good for FHB but bad for speculators and people with vested interest).

Let it be clear ANYTHING THAT LEADS TO PRICE RISE AGAIN AT THIS STAGE IS BAD FOR FHB AND ANYTHING AND EVERTHING THAT LEADS TO PRICE FALL OR STABILITY IS GOOD FOR FHB. As simple as that for all those who are actually worried about FHB (Hope it is not not hard to understand as is not a rocket science).

For this reason as was reading a comment that Status quo of current lot of pilitcans should end to give rise of new politicans like Trump- may be correct as current lot of politicans instead of serving the people have started to rule the people and that has to change to save next generation which will be in debt forever and when interest rate rises (Anytime in future) will have more burst - harming finiancial and social fabric of the society.


Was there any mention of a whip being used

So, the sleeping tiger is waking up ? The sheep better behave, aye. The wolves too, beware.

High time that someone takes proactive action.

Will they, will know next week what and when they announce Capital control - will it be cosmetic or real with intend.

Slightly off topic but it is difficult for RBNZ to fix a lot of fiscal policy with monetary policy. Read immigration, covenants for new houses (specifically cost) and to a lesser extent the RMA, in that order. A stronger monitoring/compliance regime is good.

Correct - RBNZ cannot do what our government should be doing but everyone know how and what poilticans are. Do they care - may be will care if able to get vote - VOTE BANK POLITICS.

In this scenarion RBNZ can atleast thighten debt to minimize if not able to stop - bubble that has been creating in passive asset/housing market and therby - may be controlling housing ponzi. With foreign money ban and check on money laundering, it is hard on NZ wages to create the type of havoc that speculators created - Everyone knows for fact and can check with any RE Agent that Chinese were mainly reponsible for the same be it in NZ or Australia or Canada - even so called experts and media people knows besides government but vested interest prevents everyone from highlighting it or trying to stop.

Luckily Labour wanted votes and knew about it (though may not accept it now that foreigners were responsible) and bought FBB in the intial year of winning otherwise if given an options, now would have backed out like they did to CGT (If someone wants to flip can find heaps of reasons specially politicians to flip - hard to trust). WP talks so much about immigration but once in power gets amnesia about the same - watch come next election year and how he starts ...).

Ha quote of the week "WP talks so much about immigration but once in power gets amnesia"

Money laundering... "Reserve Bank has asked NZ banks to provide additional assurance that they're above board". I wonder if any bankers will start hanging themselves like is happening in Europe at the moment

If the regulations are in place, they are of no use unless they are enforced.

Regulators need to enforce the rules.

Look at what happened in the US when the rules were in place but the regulators did not enforce the rules with respect to the GSE's.

From the FCIC report (which applies equally in NZ)

"the U.S. financial sector is now more concentrated than ever in the hands of a few very large, systemically significant institutions. This concentration places greater responsibility on regulators for effective oversight of these institutions."

Sniffing out nose is one things, ability to do something about it is another matter. It's clear that in absence of finding out the way.. we can observe that the Will to do it has been largely curbed by vested interest. The vested has created as much as possible by more and more publican safety net. - If today renters hope for DTI in, by tomorrow as home loan borrower expect DTI is out of discussion.