Enhancing trans-Tasman 'home-host' banking supervision
The New Zealand and Australian banking systems are amongst the most closely integrated in the world. The four largest, systemically-important, New Zealand banks are owned by banks based in Australia. These banks' operations comprise a significant part of those Australian banks' global operations.
This high degree of trans-Tasman banking integration creates significant areas of common and overlapping interest between the Reserve Bank and its Australian counterparts. These interests are similar, as both countries seek to have sound and efficient financial systems that contribute fully to the performance of their economies. Moreover, the regulatory approaches in Australia and New Zealand are quite complementary and well-aligned.
However, there could be occasions when national interests could diverge. In particular, if a large bank got into trouble in one country or the other, there might be some differences of view as to how the authorities should respond, and who would be expected to bear the consequences. Failure of any of the systemically-important banks in New Zealand could cause widespread economic and financial damage. For this reason, the Reserve Bank has a particular responsibility not only to help ensure their prudent behaviour and to minimise the risk of failure, but also to ensure that we have effective crisis management capabilities should a failure occur.
Home-host supervision
The Reserve Bank undertakes its banking supervision roles and responsibilities within a framework of home-host supervision, as enshrined in the Basel Concordat, an internationally agreed framework for the supervision by national authorities of multinational banks. The Concordat emphasises the general responsibility of home country authorities to supervise banks' worldwide consolidated activities, as well as the host country responsibility to supervise foreign bank establishments in their territories as individual institutions.
In the case of New Zealand banks that are Australian-owned, APRA is the home supervisor. As such, APRA supervises not only the Australian bank in Australia, but also the global group on a consolidated basis.
The RBNZ is the host supervisor. Our primary responsibility is for the bank in New Zealand, on a stand-alone basis. Hence, we focus on the capital adequacy, risk management, corporate form, governance, and stand-alone operating capability of these banks within New Zealand. We are also interested in the health of foreign parent banks because a parent bank's financial condition can strongly affect the New Zealand bank. The RBNZ is also a home supervisor for the New Zealand owned banks.
Reflecting these overlapping roles and responsibilities, the Reserve Bank has a Memorandum of Understanding with APRA on information sharing between the two institutions (http://www.rbnz.govt.nz/finstab/banking/supervision/0137035.html
Enhancing home-host supervision
The Reserve Bank is currently working to enhance the trans-Tasman home-host relationship in the following areas:
Information sharing: The Reserve Bank is looking at more extensive and regular information sharing with APRA on banks operating in New Zealand that have an Australian parent. Better information sharing facilitates better supervision by ensuring that both regulators are well-informed about events affecting the banks they supervise, and should help avoid duplication in the collection of information by supervisors. The Reserve Bank also plans to explore whether there may be opportunities where the Reserve Bank's proposed use of independent reviews could be usefully coordinated with APRA's own monitoring and surveillance.
Coordinating policy development: The Reserve Bank will continue to seek to avoid unnecessary conflicts in the specification of regulations for Australian-owned New Zealand banks with those issued by APRA for the global banking group. This should help to minimise banks' compliance costs. To this end, the Reserve Bank plans to work where appropriate with APRA on policy development for banks operating in New Zealand, including closer consultation on policy proposals. This does not mean that some rules will not differ from those applied to the parent, as there will be times when - in order to reflect New Zealand circumstances or to best protect New Zealand interests - there will need to be different regulations. However, the aim is that this should be the exception, not the rule. In this context, we are already liaising on how the new Capital Accord (Basel 2) can be most effectively implemented.
Co-ordination in crisis management: Given the close linkages between the New Zealand and Australian banking systems, the Reserve Bank sees coordination with APRA and the Reserve Bank of Australia as an important element in responding effectively to financial distress affecting trans-Tasman banks. Particular issues the RBNZ will be considering, to help enhance crisis management coordination and cooperation with APRA and the RBA, include:
· Establishing clear understandings regarding the roles, responsibilities, and arrangements among New Zealand and Australian government agencies for responding to stress in a bank operating in both New Zealand and Australia.
· Clarifying uncertainties that arise from differences in national banking laws.
· Taking account of the need for trans-Tasman co-ordination in strengthening our own preparedness for responding to a banking crisis.
· Considering the cross-border issues and implications that could arise in relation to our role as lender of last resort to the New Zealand financial system.
The Reserve Bank's role as host supervisor in one of the most open banking systems in the world means coordination and cooperation with foreign regulators is important. In pursuing the matters listed above over the next year, the Reserve Bank will be seeking to develop home-host arrangements for the supervision of Australian-owned banks operating in New Zealand that are fully effective and robust.
