Related party exposure limits

Background

Sections 157V to 157Y of the Reserve Bank of New Zealand Act 1989 allow for regulations to be made to impose related party exposure restrictions on a deposit taker, otherwise known as non-bank deposit takers (NBDTs).

Related party lending (sometimes referred to as connected exposures) occurs when a financial institution advances funds to an associated organisation. Having a cap on exposure to related parties limits the scope and ability of owners, and their related interests, to extract benefits from the NBDT. This ensures that the minimum capital requirements are not undermined by owners borrowing back their capital investment.

Restrictions on related party exposures

The Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 were gazetted on 24 June 2010 and will come into force on 1 December 2010. These regulations require a limit on aggregate credit exposures of the NBDT, or the borrowing group, to all related parties to be specified in the trust deed. The regulations state that related party exposures should not exceed a maximum limit of 15 percent of capital. The regulations also expand the definition of related parties.

Consultation

In February 2010 the Reserve Bank released a consultation document (PDF 72KB) and exposure draft (PDF 170KB) of the regulations relating to restrictions on related party exposures (as well as capital ratio requirements).

The Reserve Bank initially released a consultation paper (PDF 221KB) on proposed restrictions on related party exposures (and the capital adequacy framework) on 19 December 2008.