RBNZ considering IMF recommendations

Deputy Reserve Bank Governor Grant Spencer. Photo / Jason Oxenham

The Reserve Bank of has begun a process to review the relevant findings and recommendations from an International Monetary Fund review and is initially focused on whether greater alignment with international orthodoxy might contribute to the central bank's objective to promote a sound and efficient financial system.

Earlier this year the International Monetary Fund carried out a comprehensive review of New Zealand's financial system against international standards, with a particular focus on the quality of financial sector regulation. The results were released in early May and included more than 100 recommendations, most of which were directed at the central bank given its range of financial system responsibilities.

"There are a number of recommendations that, if adopted, may support financial system outcomes and the statutory purpose of the Reserve Bank," the central bank said in a bulletin published Thursday.

The assessment of the regulatory and supervision framework for New Zealand's registered banks was based on international standards developed by the Basel Committee on Banking Supervision. There are 29 core principles. According to the IMF review, the central bank was "materially non-compliant" in 13 of 29. The result was closely aligned with the central bank's own assessment, it said.

"The Reserve Bank recognises that, despite a rebalancing toward more regulation post-GFC, New Zealand's banking system remains unusual given the emphasis that is placed on self and market discipline, and its relatively low-intensity supervisory approach," it said.

It underscored, however, "the Reserve Bank is aiming for a regime that is 'fit for New Zealand,'" it said. As a result, it is not likely that any changes that may stem from the IMF's review result in full compliance.

Regarding the banking supervision assessment, recommendations included conducting on-site inspections and developing processes to ensure first-hand verification of prudential returns, more regulatory guidelines to support self-discipline and to help with verifying or validating director attestations, shifting enforcement to preventative actions and delineating more clearly the roles and responsibilities of the central bank and Treasury so as to maintain the operational independence of the Reserve Bank.

The central bank said it will be paying "particular attention" to the way in which responsibility is placed on senior management and board directors of the bank to ensure they appropriately oversee and manage risks facing their institutions.

Regarding the insurance supervision assessment, the main recommendations are to increase the central bank's powers for setting standards and administrative sanctions, enhance requirements tied to governance, review the stance on policyholder protection, clarify day-to-day cooperation with Treasury on supervisory matters to "reduce the risk of encroachments on Reserve Bank operating independence," to enhance collaboration and cooperation with Australian authorities and to place greater focus on the regulation of insurance intermediaries and market conduct by the FMA.

In response, the central bank said it is considering findings on enhanced disclosure from insurances, the expansion of powers to develop standards for corporate governance, risk management and internal controls, among other things.

Regarding macro-prudential policy, the IMF found that the Reserve Bank's framework provides a strong basis for a willingness on to act and also the prerequisites necessary for an ability to act. However, it has recommended improvements in the framework. It said that arrangments for amending the memorandum of understanding should be more transparent. It recommends the central bank include a debt-to-income ratio should current housing imbalances persist, something the central bank is currently consulting on.

Overall, the central bank noted that many of the recommendations dovetail with ongoing policy and supervisory initiatives. it will continue to actively consider various recommendations and will report quarterly to the Council of Financial Regulators and the minister of finance on progress, it said.