Banking safeguards sought

By Richard Braddell

WELLINGTON - Reserve Bank proposals that would force New Zealand branches of foreign banks to incorporate locally could also be targeted at discouraging subsidiaries of Australian banks from turning local operations into branches.

WestpacTrust and AMP Banking, which swings into action as a branch of its Australian parent later this year, would be caught by the Reserve Bank's proposals, aimed at preventing systemic risk, or the risk that a bank collapse could undermine the banking system.

But the Reserve Bank's proposals are also sending a message in a world where the owners of banks such the BNZ and ANZ are globalising business operations and centralising in Australia.

Under proposed bank registration changes, New Zealand branches of foreign banks would have to incorporate locally if their New Zealand activities were large enough that their soundness was important to the financial system as a whole.

Alternatively, they would have to incorporate locally if they had a significant level of retail deposits and were branches of banks with headquarters in countries where low levels of public financial disclosure were required or if depositors in the parent country were given priority in the event of a crisis.

Both Australia and the US have preferential depositor provisions in their banking laws which require depositors in those countries to be paid out ahead of those in their New Zealand operations.

What constitutes significant deposits could be rubbery and would probably lie between $50 million and $500 million, although just where the line was drawn was arbitrary, said the Reserve Bank's deputy governor, Dr Roderick Carr.

But in spite of about $600 million in local deposits, the New Zealand branch of the international banking giant HSBC might not be caught by the requirements because Hong Kong has strict public disclosure requirements.

While Hong Kong also has preferential depositor rules, those are applied uniformly around the world and relate to the size of deposits and aim to protect small depositors wherever they are.

Dr Carr said the Reserve Bank had no mandate to protect depositors and its only concern was the stability of the banking system.

The Reserve Bank's proposals were first mooted earlier this year and the banks have until the end of the month to respond to them.

Dr Carr said that if the proposals were adopted, they were likely to come into effect later this year or early next.

However, he said, implementation would not happen within "weeks or months" but in the foreseeable future, with plenty of leeway for the banks affected to adjust.