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New Zealand not quite in-line with Basel

Monday 14 August 2017

Regulators around the world are looking for ways to protect themselves against the next global financial crisis.

“The IMF recommends that the Reserve Bank take on significantly more resources in order to: more proactively engage with the banks; issue more comprehensive rules and guidance on key prudential matters; and more frequently verify and enforce compliance,” Grant Spencer, the Reserve Bank of New Zealand (RBNZ) Deputy Governor, said at the New Zealand Debt Capital Markets Summit in Auckland.

In a recent report by the International Monetary Fund (IMF), it was suggested that the RBNZ’s regulations are not fully in-line with the Basel III core principles.

However, Spencer suggested that while New Zealand has inculcated broad components of the Basel III, there were some components better-suited to the US and Europe.

“This raises the question of how closely we need to follow international standards in order to realise the undoubted benefits of international recognition,” Spencer said.

The IMF suggested that more assurance of compliance, with more ‘on-site verification and validation’.

While he agrees the IMF recommendations would mean a departure from the current ‘three pillars’ system being used in New Zealand, Spencer notes RBNZ’s preference is to improve the supervisory model through simpler regulations, more resourcing, and simpler approval processes.

“In the aftermath of the GFC from 2010 onwards, we saw a step up in banking regulation globally, epitomised by the G20-sponsored Basel III reforms, Financial Stability Board initiatives, and the Dodd-Frank Act in the USA. The reforms sought to reduce risk-taking by banks, increase capital and liquidity buffers, and improve resolution regimes so that government bail-outs could be more avoidable in the future,” he explained.

This strengthening was necessary for the New Zealand banking system because of how integrated it is with international markets. In short, New Zealand needs to be strong if it wants to continue ‘intermediating’ with international markets.

“We might shape the New Zealand framework going forward. Two particular catalysts in this regard are the recent IMF Financial Sector Assessment Program (FSAP) report, and our recently initiated review of bank capital adequacy.”

There are motivations for following the Basel components in the shape of the four Australian-owned banks that are trying to keep their regulatory compliance in-line with the Australian Prudential Regulatory Authority’s (APRA) requirements.

Spencer said that the RBNZ will continue to work with APRA, but with the awareness of the differences in circumstances and different regulatory approaches.

“We will continue to place emphasis on getting the right incentives in place for prudent institutional governance, supported by effective market discipline that increasingly makes use of technology advances. The greater use of thematic and external reviews will enhance our approach to supervision, while maintaining an appropriate balance between the three pillars of the prudential framework.”