Banks avoid costly lending standards

By RICHARD BRADDELL

New international banking standards that might have meant higher interest rates for New Zealand borrowers have been abandoned.

The global prudential standards body - the so-called Basel Committee - had proposed 25 core principles for effective banking supervision, the thrust of which would have been far from New Zealand's supervisory regime, which depends on regular public financial disclosures by local banks.

Had the proposals been adopted, international banks lending to New Zealand banks would have been forced to apply more stringent risk criteria, meaning higher loan charges passed on to borrowers.



But the chief manager of the Reserve Bank's banking system department, Peter Ledingham, said he had just been to a meeting of supervisors in Basel and the suggestion had disappeared.

New Zealand's concerns about the Basel proposals were outlined in a briefing paper to visiting OECD officials in July, which were released to the Herald under the Official Information Act.

The notes said borrowing in New Zealand might have become more expensive than in a country which did not have such a sound banking system.



The paper also addressed the issue of how the Reserve Bank would act in the event of the failure of a large bank.

While the bank's policy is to let shareholders and creditors bear the losses, it believes it would be untenable to let a large bank collapse outright because of the impact on the economy.

One solution under investigation would be putting a troubled bank under statutory management and freezing a portion of its liabilities.

The effective recapitalisation would enable it to reopen within days, allowing it to provide core banking services.

But the approach would be difficult to implement in the case of a bank which operates as a branch of a foreign bank, because disputes about whether the parent or the branch owned the assets would be likely.

Mr Ledingham said the Reserve Bank's work on possibly forcing branch banks to incorporate in New Zealand was proceeding, with the final position being put to the banks.