Secure tax base essential: report

Assurances that New Zealand's tax base will not be eroded should be a minimum requirement before teaming up with Australia on banking regulation, officials say.

Finance Minister Michael Cullen has said a joint transtasman banking regulator is not "off the table" as the two Governments move towards a single economic market.

A report prepared for Cullen by Reserve Bank, Treasury and Ministry of Economic Development officials ahead of last month's meeting with Australian Treasurer Peter Costello, sets out tax as a cornerstone issue.

Elements of the banking supervision regime such as local incorporation and outsourcing restrictions help "anchor" banking business to New Zealand, the report says.

Without these the New Zealand tax base could be "eroded".

ANZ National Bank, Westpac, BNZ and ASB, New Zealand's four biggest banks, are all Australian owned. "If a bank were allowed to shift to a branch operation in New Zealand then Australian banks would have greater capacity to structure their business to locate much of what is currently their New Zealand balance sheet and income to Australia," the report says.

Furthermore, Australian companies have an incentive to report income in Australia to take advantage of imputation credits for Australian shareholders that are available for Australian, but not New Zealand, income tax paid.

Other requirements officials want include an equal voice, a high level of operational independence, separate lender of last resort functionality and exemption for smaller retail banks, such as Kiwibank, from Australian incorporation requirements. Australia's offer to extend its depositor preference laws to include New Zealand if a bank was wound up is "insufficient".

This preference regime should be removed, as other important creditors, especially wholesale funders of the NZ banking system, would remain subordinates. These large international lenders could be unwilling to lend money in a crisis or might do so only at "prohibitive" rates.

The officials said meetings with 14 senior New Zealand banking executives showed a lack of commercial demand for a "seamless" transtasman banking market.

The executives view the Australian Prudential Regulation Authority as "too heavy handed" and pointed out New Zealand banks were world leaders in some areas, such as IT, and often ahead of the Australians.