TALKING POINTS FOR MINISTER OF FINANCE'S MEETING WITH AUSTRALIAN TREASURER
17 February 2005
Outsourcing policy and costs
The RBNZ believes that the outsourcing costs will be small and manageable, especially relative to Australian banks annual gross revenue, profits, and the potential costs of a bank failure. The RBNZ estimates that in total the systemically important banks spend no more than 0.6 per cent of one year's annual income as an investment to meet stand-alone requirements (i.e., between $70-$90m).
Even these figures are also likely to be inflated by ANZN amalgamation requirements, improved disaster recovery options across several banks, and the ongoing technology upgrades and business expansion that various banks are considering.
Efficiency impacts of the Bank's outsourcing policy
External consultants used in the Major Financial Institutions (MFI) work found no evidence that further centralisation of IT equipment within trans-Tasman banks has created significant economies of scale or competitive differences. Similarly, they also found no evidence that centralisation reduces the provision costs of local services (this is borne out by similar cost-to-income ratios across banks despite their differing systems configurations).
The opportunity cost for banks of achieving stand alone capability depends on the time undertaken to complete the investment - as well as the capital expended.
Information from the banks and other sources suggest Australian banks are being prompted to overstate the cost and economic impact of the RBNZ outsourcing policy.
It appears best to encourage banks to cooperate with the RBNZ to expedite these policies. The RBNZ expects banks to be broadly compliant by end-2006, with ANZN signed up for end-2005.
Local incorporation is important and necessary
The RBNZ has a policy of local incorporation for systemically important banks, and Westpac has agreed to incorporate this year.
Local incorporation is a necessity for financial soundness and the ability to minimise damage if a bank fails, as it provides:
· Domestic governance and improved market and self-discipline (soundness);
· Local decision making capacity (improving customer service and staff service) (efficiency); and
· Legal certainty for the RBNZ/Government if/when needed in a bank failure (minimise damage).
I am also concerned to preserve the NZ tax base with regard to banking activity, as organisational form has a bearing on this.
Westpac and local incorporation
[......................] Section 105 Reserve Bank of New Zealand Act
I encourage Westpac to cooperate with the RBNZ. The RBNZ will need to consider all systemically important functionality, assets, and liabilities before determining what must be controlled from the locally incorporated - systemically important - entity.
I also encourage earlier news of any significant policy changes that may be relevant to both of us in the banking arena, such as the change made in the Australian tax law that removed Westpac's capital gains obligations. NZ officials were not informed of this.
Deposit insurance and ADP
I understand you are considering deposit insurance for Australia. Whether or not it replaces or augments ADP, it will still be important for New Zealand to require organisational form restrictions and outsourcing capabilities - along with a host of other failure management options.
The NZ position on ADP has long been that it causes a problem for New Zealand. We do not see the extension of ADP to include NZ as fully resolving the problem; as such an extension subordinates other important creditors, especially wholesale funders of the NZ banking system.
Basel 2 cooperation
The RBNZ wishes to implement Basel II in a way that dovetails as much as possible with APRA's intended implementation approach, while remaining consistent with its statutory objectives and taking account of the special features of our financial environment.
The RBNZ is actively considering ways that it could meet this objective and to this end a senior staff member was seconded to APRA recently to work on Basel II issues.
There is scope for an integrated approach to Basel II to be taken and there is willingness on both sides to discuss potential solutions. The RBNZ intends to explore further with APRA the possibilities for sharing the supervisory burden, while retaining necessary discretions to satisfy statutory objectives.
Enhanced home-host engagements
Since the trans-Tasman report, there has been some progress in discussions on enhancing the trans-Tasman regulatory cooperation and crisis preparedness.
This progress includes the RBNZ:
· Seconding a senior staff member to APRA to work on Basel II initiatives;
· Considering as a primary goal of its Basel II decision criteria being that of dovetailing with APRA's approach - including harmonising Pillar 2 and 3;
· Reassessing all of its requirements of banks under the Basel Core Principles (BCP) so as to dovetail with APRA requirements where sensible;
· Where gaps exist in the BCPs, establishing a work plan to close these with APRA policies as first choice if feasible;
· Reviewing its Memorandum of Understanding with APRA on information sharing and bank visits, and stepping up the flow of information and relationships;
· Including APRA staff members with them on visits to Australian-owned banks;
· Including APRA in formulating the policy on third-party independent reviews of banks;
· Instigating and sponsoring a work plan with APRA and the RBA on crisis management policy and coordination; and, amongst other things,
· Inviting senior APRA and RBA staff to various workshops and policy discussions, including the Chair of APRA to meet with the Board of the RBNZ.
The RBNZ has experienced some resistance at times as Australian officials await a political steer. I would like to see more cooperation on the enhanced home-host model.
