Section 68 of the Reserve Bank of New Zealand Act requires the Bank to exercise its powers under Part V of the Act (including most of its incident response powers) for the purposes of:
(a) promoting the maintenance of a sound and efficient financial system; or
(b) avoiding significant damage to the financial system that could result from the failure of a registered bank
In addition, section 31 of the Act (which falls outside Part V) requires the Bank to act as lender of last resort if it considers that lending is required for the purpose of maintaining the soundness of the financial system.
Finally, the Bank has the responsibility of combating dysfunction in the foreign exchange market through the use of foreign exchange intervention as directed by the Minister of Finance under section 17 of the Act.
The financial system comprises financial institutions, financial markets, and the payment systems which provide the networks that enable transactions to occur. These institutions and processes underpin the functioning of any modern economy – through the role they play in facilitating the allocation of capital, the management of risks, and as well as the exchange of goods and services.
There are many potential incidents that could directly or indirectly impact the financial system in a way that could significantly damage or impede the soundness or efficiency of the financial system, in a way that:
- threatens the system’s ability to perform its core functions to any significant extent;
- could significantly erode public confidence in the system; or
- significantly reduce the system’s resilience.
Such incidents include: a bank financial failure, a technical failure of core payment and settlement systems or communication networks, an infrastructure failure such as a term power failure, or flow-on effects to the financial sector from an incident, such as an earthquake or offshore incidents that impact the global financial markets.
In any of the above incidents, the Bank is charged to use its powers to maintain the soundness of the financial system by using its powers, which include:
- Acting as lender of last resort (section 31)
- Giving directions to banks (section 113)
- Recommending that a bank be placed under statutory management (section 117)
- Crisis foreign exchange intervention (section 17)
The global financial crisis that began in 2007 brought renewed focus on the need to enhance government authorities’ capacity to respond to and resolve bank failures in a manner that safeguards financial stability, limits moral hazard, and makes use of private sector solutions where possible. Lessons from the crisis helped to build momentum within New Zealand on initiatives that were already underway at the time.
One such initiative involves the development of the Open Bank Resolution (OBR) policy. The OBR policy seeks to place the cost of a bank failure primarily on banks’ shareholders and creditors rather than the taxpayer.
Another initiative involves measures to strengthen coordination among members of the Trans-Tasman Council on Banking Supervision (the Council) in order to better manage distress affecting Trans-Tasman banks.
“Business Continuity Management is a holistic management process that identifies potential impacts that threaten an organisation and provides a framework for building resilience and the capability for an effective response that safeguards the interests of its key stakeholders, reputation, branch and value creating activities.” (Source; BCI Good Practice Guidelines)
Business Continuity is an ongoing priority for the Reserve Bank. As New Zealand’s central bank, we must be prepared to cope with any incident - both to assist our people and to ensure that critical Bank functions can continue.
Business Continuity Management has been established within the Bank. The Bank tests its business continuity preparedness on a regular basis.
In order to strengthen business continuity capability the Bank has an ongoing Business Continuity Programme of work.