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Your Bank's Disclosure Statement: What's In It For You?

This pamphlet, prepared by the Reserve Bank of New Zealand, explains the financial disclosure requirements for registered banks and some of the key terms used in banks' disclosure statements.

This pamphlet is also available as a PDF file (131KB).

All banks operating in New Zealand must disclose their financial condition.

All registered banks operating in New Zealand are required by law to publish a quarterly disclosure statement. These disclosure requirements are administered by the Reserve Bank of New Zealand, in its capacity as supervisor of the banking system.

Why should you take an interest in the financial condition of your bank?

It is important to remember that neither the Government nor the Reserve Bank "stands behind" individual banks. The Reserve Bank's role, as supervisor of the banking system, is to ensure that the banking system as a whole remains healthy. The Reserve Bank does not guarantee that a bank will not get into difficulty or fail. And there are no Government or Reserve Bank guarantees of bank deposits. Accordingly, depositors should not rely on the Government or the Reserve Bank to protect them from losses in the event that a bank gets into difficulty.

It is therefore important that bank customers take an interest in the financial condition of their bank. Banks' disclosure statements are intended to assist bank customers to understand more about the financial condition of banks operating in New Zealand.

Why are banks required to publish disclosure statements?

Banks are required to publish disclosure statements for two main reasons:

-to strengthen the incentives for banks to maintain sound banking practices; and

-to assist depositors and other investors to make well informed decisions as to where to put their money.

What is a bank's disclosure statement?

A disclosure statement contains a wide range of financial and other information on a bank and is generally in three main parts:

-a brief Key Information Summary;

-a larger General Disclosure Statement;

-a Supplemental Disclosure Statement.

Key Information Summary. This contains a summary of important financial information relating to a bank and is designed to provide a brief overview of a bank's financial condition.

General Disclosure Statement. This contains a wide range of detailed information, and is aimed at those who wish to obtain comprehensive information on a bank. The General Disclosure Statement at a bank's half year and end of year contains more comprehensive information than in the "off-quarters" (ie the first and third quarters of a bank's financial year).

Supplemental Disclosure Statement. This contains detailed information on matters such as guarantees, conditions of registration and, for banks incorporated overseas, the financial condition of the overseas banking group as a whole (if this information is not disclosed in a bank's General Disclosure Statement). Conditions of registration are the means by which the Reserve Bank applies prudential requirements to banks - such as minimum capital requirements. The Supplemental Disclosure Statement is aimed at those who wish to obtain an in depth understanding of contracts affecting the bank and, where the bank is incorporated overseas, of the financial condition of the overseas group to which the New Zealand bank belongs.

How frequently are disclosure statements published?

Disclosure statements must be published quarterly. For example, a bank with a balance date of 31 March must produce a disclosure statement for the three months to 30 June, the six months to 30 September, the nine months to 31 December and the full year to 31 March.

Disclosure statements for the end of year and half year must be published within three months of these dates. Disclosure statements in respect of the first and third quarters of a bank's financial year must generally be available within two months of the end of those quarters.

Where can you obtain a copy of a bank's disclosure statements?

A bank's Key Information Summary is displayed in, and available (free of charge) from each bank branch or agency. A bank is also required to make available or display a Key Information Summary on its internet web site, if it has one that includes information primarily directed at New Zealand customers, or potential customers.

A bank's General Disclosure Statement and Supplemental Disclosure Statement are available on request, free of charge, from any of its branches or agencies within five working days or immediately if a request is made at a bank's head office.

What kind of information are banks required to disclose?

Each bank's disclosure statement contains a wide range of financial and other information, generally both in relation to the bank itself and its "banking group".

What is a "banking group" and why is it important? A banking group generally comprises the bank and any companies controlled by it. Financial disclosures are required for the banking group because of the potential for difficulties arising in the group to spread to the bank itself. It is therefore important to understand the financial condition of both the bank itself and the banking group of which it is part.

Disclosures by overseas banks operating in New Zealand as branches. A bank which is incorporated overseas and which operates in New Zealand as a branch of the overseas bank (rather than as a separate company) is required to disclose information both for the New Zealand branch and for the overseas bank of which it is part.

Because the New Zealand branch of an overseas bank is inseparable from the bank, depositors and other creditors of the branch in New Zealand are creditors of the overseas bank as a whole. Accordingly, in assessing the financial condition of such a bank, it is generally more relevant to look at the financial condition of the overseas bank. However, it can also be useful to look at the financial information disclosed for the New Zealand branch, given that in some countries laws can mean that foreign creditors (such as depositors in New Zealand) might not be treated the same as creditors in the bank's home country, in a winding up of the bank. In such a case, the financial condition of the New Zealand branch can be relevant.

No information on particular investment products. The disclosure statement does not contain information on the terms and conditions of a bank's deposits and other investment products. This kind of information is contained in other material made available by the bank.

Are banks' disclosure statements audited?

A bank's disclosure statement for the end of year is subject to a full "true and fair" audit. The disclosure statement at the half year is subject to a lower level audit, called a "review". The audit and review must be conducted by a qualified auditor (ie a chartered accountant).

There is no audit requirement for disclosure statements in respect of a bank's "off-quarters" (the first and third quarters of a bank's financial year), although banks can choose to have them audited if they wish to do so.

What type of information is required to be disclosed in a bank's Key Information Summary?

Some of the more important information included in a bank's Key Information Summary is outlined below:

Credit Rating

Each bank is required to have one or more credit ratings applicable to its long term liabilities payable in New Zealand (ie any deposits or other liabilities of the bank with a term of 12 months or more). For each of these ratings the bank must disclose:

-the rating (and any qualifications to it - eg whether the bank's rating is currently being reviewed);

-the name of the "rating agency" (ie the company which gave the rating); and

-any changes made to the rating in the two years preceding the balance date to which the disclosure statement relates.

What is a credit rating? A credit rating is an assessment made by an independent, professional rating agency, of a bank's future ability to repay its debt (such as the money it owes to depositors) and of its general financial soundness. A credit rating provides a useful way of comparing one bank with another, although other factors are also important when comparing different banks (eg the information contained in the Key Information Summary).A bank's General Disclosure Statement must include a description of the rating grades used by each rating agency which has rated the bank. These descriptions explain the meaning of each rating grade, including the grade applicable to the bank in question.

Capital Adequacy

Each bank is required to disclose the capital position of its banking group, in the form of the group's tier one and total capital ratios.

What is capital? In broad terms, capital is a measure of how much a bank's assets exceed the amount of money it owes depositors and other ordinary creditors. It is divided into two categories, called "tier one capital" and "tier two capital". Total capital is the sum of tier one and tier two capital.

Tier one capital. Tier one capital represents the shareholders' funds in the bank - ie their share of the bank's assets after all of the bank's debts have been repaid to creditors. It is an important item of disclosure because it indicates how much money the bank has "of its own" to absorb losses, while still allowing the bank to continue to do business.

Tier two capital. Tier two capital is generally a lower level of capital, and includes a mix of capital items. One of the more important of these is "subordinated debt" (ie money the bank owes to creditors, but which in a winding up can only be repaid after the bank has repaid the money it owes to depositors and other ordinary creditors). This form of capital is useful in protecting depositors and other ordinary creditors from losses in a winding up of a bank.

How is capital measured? Capital is expressed as a percentage of the banking group's total credit exposures - known as a capital ratio. This enables a banking group's capital position to be compared with those of other banking groups. Put simply, credit exposures represent the amount of money which might not be repaid to the banking group if customers of the group get into financial difficulty. It includes all the group's balance sheet assets, as well as its "off-balance sheet" exposures. Off-balance sheet exposures are credit exposures of the banking group which do not appear as assets on the balance sheet. Examples of off-balance sheet exposures include commitments of the bank to lend money to customers, and underwriting facilities.

Credit exposures are measured on a "risk-weighted" basis. The lower the risk of loss, the lower is the risk weighting applied to the credit exposure - and hence, the less capital a bank is required to hold in relation to the credit exposure.

For example, if a bank has invested in a loan secured by a residential mortgage, this exposure is given a weighting of 50% of the actual amount owed. This is because historically the losses that banks have incurred on their portfolio of mortgages have been relatively low. Accordingly, a bank is only required to hold capital against 50% of the value of its holdings of residential mortgages.

On the other hand, a bank's loans to businesses are assigned a higher risk-weighting (ie 100% of the value of the loans), reflecting the greater risk that the bank might not recover all of the money it is owed by businesses. Accordingly, a bank must hold capital against the whole amount of its lending to businesses.

Minimum capital requirements. The Reserve Bank normally requires each banking group to have a capital ratio of at least 8% and a tier one capital ratio of at least 4%. These requirements are imposed on the bank through a condition of registration.

Overseas banks operating in New Zealand as branches (rather than as separate companies) are not required to hold capital in New Zealand. However, the overseas bank is required to comply in its home country with the standard international minimum capital requirements.

Impaired Assets

Every bank is required to disclose the amount of its impaired assets and the level of provisioning against impaired assets (some banks may refer to these provisions as "allowances for impairment loss").

What are impaired assets? Impaired assets are typically loans which are at risk of not being fully repaid to the bank or where interest on the loans may not be fully paid by the borrower. They include bad and "non-performing" loans and other assets where the bank stands to lose some of the value of the asset or interest owed.

Banks must disclose the level of their impaired assets, both as a dollar amount and as a percentage of their total assets.

What is a provision for impaired assets? A bank creates a provision (sometimes called an "allowance for impairment loss") in its financial statements when it believes it is likely to lose money on an asset. The creation of a provision (or allowance for impairment loss) reduces the bank's profit and sets aside some of the bank's resources to absorb the expected loss on its impaired assets.

Why is the disclosure of impaired assets important? Information on impaired assets provides a useful indication of the quality of a bank's assets. This information, together with information on a bank's provisioning, gives an indication of the extent to which a bank's impaired assets have reduced the bank's capital and profitability. The information can also indicate the extent to which impaired assets could reduce a bank's future capital position and profitability.

Exposure Concentration

Banks are required to disclose information on their concentration of lending - ie their large value loans to customers. Each bank is required to disclose the number of customers to which the banking group has lent money where the value of the loan equals or exceeds 10% of the banking group's equity (ie the group's shareholders' funds). This information must be disclosed in 10 percent bands relative to the banking group's equity.

In the Key Information Summary the information must be disclosed on the basis of the peak amount of loans to customers over the most recent financial quarter. Information based on the peak lending to customers is important, given that a bank's lending to a customer can vary over time.

Banks are required to disclose the number of large value loans to customers in two categories of customers: "banks" and "non-banks". A non-bank is any customer other than another bank.

Why is exposure concentration important? This information provides a measure of how well diversified a banking group's lending is. It indicates whether a banking group lends a large proportion of its money to a small number of customers or spreads its lending risk over a large number of customers.

Connected Lending

Every bank is required to disclose the amount it has lent to "connected persons". In the Key Information Summary this information must be disclosed on the basis of the peak lending to connected persons over the most recent financial quarter.

What is a connected person? A connected person is any person or entity which can control or significantly influence a bank either directly or indirectly. An example of a connected person is a controlling shareholder (eg parent company) of a bank.

Limits on connected lending. Because a connected person has the power to direct, coerce, or encourage a bank to lend to it on non-commercial terms or in unfavourable circumstances, to the potential detriment of a bank's depositors, the Reserve Bank imposes limits on the amount that a banking group (of a bank incorporated in New Zealand) may lend to a connected person. These limits vary according to the bank's credit rating and are imposed on the bank through a condition of registration. For example where the bank has a very strong credit rating the limit on exposures to connected persons is 75% of the banking group's equity while a bank with a very low credit rating is subject to a limit on connected exposures of 15% of the banking group's equity.

Banks operating in New Zealand as branches of overseas banks are not subject to a connected exposure limit because they are not required to hold capital in New Zealand. However, the overseas bank as a whole is likely to be subject to appropriate connected lending requirements by the supervisory authority in the bank's home country.

Profitability, Total Assets and Asset Growth

Every bank is required to disclose the banking group's profitability. In a bank's Key Information Summary this is measured by expressing a bank's profit (after tax and extraordinary items) over the last 12 months as a percentage of average total assets.

Banks are also required to disclose the group's total assets and growth in assets.

More information is available in a bank's general disclosure statement

If you want to obtain more information on a bank's financial condition, the bank's General Disclosure Statement provides a wide range of detailed information. This includes:

-the name and a description of the principal business activities of each company in the banking group;

-a description of the rating scale used by each rating agency which has rated the bank;

-information on guarantees of the bank's obligations;

-detailed information on the capital position of the bank itself and its banking group;

-comprehensive information on the balance sheet, profit and loss statement, impaired assets and other financial matters;

-information on the bank's systems for managing its business risks;

-an historical summary of the banking group's financial performance and condition;

-information on the banking group's involvement in unit trust, managed fund and superannuation activities, where applicable;

-information on the banking group's concentration of lending to, and borrowing from, different geographical regions and industries; and

-information on the banking group's exposure to changes in interest rates, foreign exchange rates and share prices.

Important statements included in the bank's General Disclosure Statement

A bank's General Disclosure Statement is required to contain certain statements signed by each director of the bank and, in the case of a bank incorporated overseas, the bank's New Zealand chief executive officer. These include statements:

-as to whether the bank has systems in place to monitor and control adequately the banking group's risks and whether those systems are being properly applied;

-as to whether the bank has complied with its conditions of registration over the period covered by the disclosure statement;

-as to whether the banking group's loans to connected persons are contrary to the interests of the banking group; and

-that the information contained in the disclosure statement is not false or misleading.

These statements are important, because they strengthen the incentives for directors and, where applicable, the New Zealand chief executive officer to oversee, and take ultimate responsibility for, the sound management of their bank.

A bank's disclosure statement must not be false or misleading

By law, a bank's disclosure statement must not be false or misleading. Directors and, in the case of a bank incorporated overseas, the New Zealand chief executive officer face criminal and civil penalties under the Reserve Bank of New Zealand Act if information contained in a disclosure statement is found to be false or misleading. Where the Reserve Bank believes that a disclosure statement is false or misleading, it can require a bank to publish corrections to the disclosure statement or publish a new disclosure statement.

You may wish to seek advice before deciding where to invest your money

Deciding where to invest your money is an important decision. It involves a careful assessment of the risks and returns, and the terms and conditions, of various investment options. The information needed to make this assessment is not always easy to understand.

You may wish to seek professional advice. The information contained in a bank's Key Information Summary and General Disclosure Statement provides a useful indication of a bank's financial condition. However, it does not necessarily present the full picture and needs to be interpreted with care. Therefore, investors might find it helpful to obtain professional advice when deciding where to deposit or invest their money.

Reserve Bank does not give investment advice. The Reserve Bank's role as supervisor of the banking system does not involve the giving of advice to depositors or other investors on the financial condition of any particular bank. Accordingly, if you have a question about a bank's disclosure statement, you should direct the question to that bank or to a professional advisor.

Further enquiries

Enquiries about a particular bank's disclosure statement should be made with that bank.

General enquiries. If you wish to obtain further information on the disclosure requirements for registered banks in general, contact:

The Head of Financial Stability
Financial Stability Department

Reserve Bank of New Zealand

P O Box 2498
Wellington

Telephone (04) 471 3829
Facsimile (04) 472 3262
Email: FSD@rbnz.govt.nz

Alternatively, further information on banking supervision and the bank disclosure arrangements can be obtained from the Reserve Bank Knowledge Centre. The Knowledge Centre is situated in the Reserve Bank's head office at 2 The Terrace, Wellington. Enquiries can be made at the Reserve Bank Knowledge Centre by contacting:

The Manager, Knowledge Centre
Reserve Bank of New Zealand Knowledge Centre
P O Box 2498
Wellington

Telephone (04) 471 3660
Facsimile (04) 473 8554
Email: knowledge@rbnz.govt.nz

In addition, information on banking supervision issues is available on the Reserve Bank's internet home page:

http://www.rbnz.govt.nz