In New Zealand, some 95 percent of banking assets are foreign owned, and 85 percent are held by four Australian banks alone. Those foreign banks have their “home” regulators, making the Reserve Bank of New Zealand their “host” regulator, which creates interesting challenges for us.
New Zealand’s financial ecosystem has been remarkably robust over recent decades, but it is not immune to threats. The dominance of banks in our financial system, and their concentrated foreign ownership, is real.
It is the role of the Reserve Bank to plan for the worst while at the same time enabling banks to get on with business-as-usual activities. Three key considerations come to bear when banks are registered here: they have operations in New Zealand; foreign-owned banks have foreign regulators; and we need to regulate them in a manner that is both sound and efficient.
Operating in New Zealand
Banks operating in New Zealand must abide by our laws, which are often different from the laws in their own home nations. For example, we need systemically important banks (i.e., banks with net New Zealand liabilities over $15 million) to be locally incorporated and to have local directors, who are bound by domestic laws and must attest to their banks being sound. These directors should be close to decision-making at their banks and liable for the decisions.
New Zealand also has a unique set of investor, consumer, tax and prudential laws by which banks abide. As such, we share our bank insights, when relevant, with the other New Zealand regulators—such as the Financial Markets Authority and the Commerce Commission—to best ensure that all bases are covered.
Also, for foreign-owned banks, the risks in New Zealand are different from those in their home countries. For this reason, all banks are required to be well capitalised to meet unexpected New Zealand outcomes. The level of capital we require a bank to hold will differ from its home country, because its home country differs.
As a regulator, we cannot own the risks that banks face, but we do our best to ensure banks operate transparently in New Zealand, with disclosures that enable their customers, competitors and all regulators—home and host—to look into key operating measures for banks.
Our most innovative step in transparency was the recent launch of our Bank Financial Strength Dashboard, a user-friendly, interactive, online tool that enables bank customers and investors to monitor the financial health of banks. The aim is to improve disclosures and thereby enhance the potential for market discipline.
Foreign-owned banks have home regulators
Banking challenges are similar globally, and there are global guidelines and practices for regulators, which form the basis of our requirements. We respect and work with home regulators and global guidelines, and we do our best to dovetail with their insights and work priorities. If we didn’t, we would not be efficient, and we would miss valuable lessons and information.
However, we operate in New Zealand, and just like anywhere else in the world, we have additional host requirements that supplement the regulations of banks’ home countries. These additional host requirements include our director attestation regime, specific New Zealand legal requirements, capital and other prudential requirements tailored to New Zealand risk, and our transparency rules. The sum of the parts should add up to more than the whole if we work well. When we review policies, we start with the global and Australian rules, and then ask whether there are good reasons why we should differ from those rules.
Of course, how well we replicate international standards—and by extension other nation’s regulatory activities—is subject to international scrutiny. Particularly significant is the most recent Financial Sector Assessment Programme (FSAP) review of the New Zealand financial system published by the International Monetary Fund (IMF) in May 2017.
Replicating for its own sake may not be the best fit for New Zealand circumstances. We prefer to understand and assess what home regulators have done, repeat where specifically necessary for New Zealand conditions and supplement with relevant New Zealand requirements. So endorsement from the IMF for “replication” is not as good as endorsement for “supplementing” when it comes to home-host arrangements. New Zealand received considerable endorsement for supplementing in the most recent IMF assessment. We deliberately drew a line through some of the replication, where international approaches were not a good fit for New Zealand.
Importantly, no matter how good the cooperation is between home and host regulators in normal times, a significant fissure is likely between home and host regulators when an important bank fails. Each country needs to be able to manage the impact on its own banking and financial system and minimise the risk of its whole system collapsing.
We don’t expect any foreign government to commit its current or future taxpayers to bailing out depositors or shareholders in New Zealand. This is why we insist on adequate capital and pre-positioned crisis-management capability, so that banks operating in New Zealand can continue to operate in the system, and let the public get on with their business.
Our Open Bank Resolution crisis-management approach is supported by other important prudential policies, such as requiring a bank to have “standalone” capability in New Zealand for basic banking services in the event of a crisis affecting either its New Zealand operations or parent company’s operations in its home country.
Sound and efficient regulation
The other important consideration for us is the need to regulate in a manner that is both sound (safe) and efficient (dynamic and competitive).
Our challenge is to balance and explain how we give weight to the efficiency side of the equation. And we need to be equitable across all banks, not just those banks from other jurisdictions. Our challenge is to ensure that each bank we regulate is treated fairly based on its specific activities and risk characteristics—to ensure New Zealanders continue to benefit from a global-class banking system. We are fortunate to have a sound and broadly efficient banking system.
Recently there have been some complaints from bankers about three issues: New Zealand-specific capital, the role of attestation requirements and the need to prove their ability to resolve a bank failure inside the legal and fiscal bounds of New Zealand. These are all part of doing business here in New Zealand and reflect New Zealand’s unusual banking-sector conditions. We make no apologies for using our regulatory powers to supplement the requirements imposed by home-country authorities. Banking is a profitable business, and our goal is for consumers to be well served, taxpayers’ money preserved, and our financial systems kept sound and efficient.
Banks need to acknowledge that they are operating in New Zealand—and the responsibilities this implies—and recognise the home-host regulator relationship, giving each appropriate respect. They also need to be confident that they are willing to compete in both a sound and efficient manner for the long-term. This means investing in the people, systems and capabilities needed for a sustainable New Zealand bank business.
Addressing the challenges outlined in this article moves the Reserve Bank of New Zealand towards our goal of being the best central bank in the world. We won’t always agree with the entities that we regulate, but we will be clear and consistent on our position, engage in an open and responsive manner, and balance soundness and efficiency considerations. After all, we must enable a sound system that people can trust.
Ultimately, the effectiveness of all of our efforts rests very much on the conduct and culture of the banks that operate in New Zealand.