Reserve Bank to get wider powers

The Cabinet has given an initial green light for the Reserve Bank to supervise non-bank deposit-taking financial institutions - such as building societies, credit unions, insurance companies and some finance companies.

Last month, the Cabinet's economic development committee, including Finance Minister Michael Cullen and Commerce Minister Lianne Dalziel, agreed in principle for the Reserve Bank to assume responsibility for prudential regulation of non-bank deposit-taking institutions (NBDTI).

The Reserve Bank is already the prudential regulator for banks.

Prudential regulation and supervision is intended to ensure firms manage risks to their financial soundness appropriately.

Some prudential regulation of building societies, friendly societies, credit unions and insurance companies is undertaken by the Ministry of Economic Development.

But the ministry's ongoing Review of Financial Products and Providers found that prudential requirements for NBDTIs were not adequate.

"Additional prudential regulation is likely to be required to underpin confidence in, and the soundness of, non-bank financial institutions, and provide enhanced consumer protection," the review found.

"It is expected that these measures will facilitate a more sound and efficient financial system, which will in turn contribute to economic growth."

The review found there were strong arguments in favour of consolidating prudential regulation within one body, including the development of a cohesive approach and economies of scale and synergies because of the similarities in skills and knowledge required for regulation of different financial institutions.

Ministry of Economic Development officials were to report back on detailed arrangements for the new prudential regulation regime, including financial and legislative requirements by November this year.

Ministers would then have the opportunity to confirm the Reserve Bank as the prudential regulator.

The bank said on its website it was "comfortable" with the decision.

Massey University head of banking studies David Tripe said NBDTIs were "a bit of a regulatory black hole".

"Having somebody take some responsibility in that area is hardly a bad thing."

But the news rekindled some long-standing issues about what exactly the role of the Reserve Bank as a prudential supervisor was, Tripe said.

"The question arises whether it's got any responsibility if things go wrong.

"One of the things that sets apart the New Zealand prudential regulatory regime is that it's carefully set up so the Reserve Bank tries to make clear it doesn't take responsibility in case of any bail-out.

"That may be more challenging to maintain if one starts having these non-bank financial institutions which may not be as well managed in prudential terms as the banks are.

"It does raise some serious issues as to exactly what the prudential supervision is going to comprise.

"If it doesn't involve insurance [on deposits] and we know it doesn't, how much change is actually going to be involved?

"And if there is any change does that mean that the taxpayer winds up having to potentially dip their hands into their pockets to cover the cost of these sort of institutions?"