Your bank's disclosure statement: what's in it for you?
This page, 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.
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 prudential supervisor of registered banks.
Placing your money with a bank is an investment decision that exposes you to risk, even if that risk is usually relatively low. It is therefore important that you take an interest in the financial condition of your bank and how it manages its risks. Banks' disclosure statements are intended to assist bank customers to understand more about the financial condition of banks operating in New Zealand.
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 on where to put their money.
A bank’s disclosure statement contains a wide range of financial and other information, and is aimed at providing a broad and reasonably up-to-date view of the bank. It includes information on the bank’s conditions of registration, which are the means by which the Reserve Bank applies prudential requirements to banks – such as minimum capital requirements. The disclosure statement at a bank's end of year contains more comprehensive information than in the half-year and "off-quarters" (ie the first and third quarters of a bank's financial year).
Banks that are incorporated overseas and are registered to operate a branch in New Zealand must make the financial statements for their overseas banking activities as a whole, readily available in New Zealand. This is in addition to the disclosure statement covering the operations of their New Zealand branch.
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 must be published within three months of the year-end. Disclosure statements for the half-year must generally be published within two months of that date, but the bank may defer publication by up to a month in certain circumstances. 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.
A bank must make its disclosure statement readily accessible on its website. For locally-incorporated banks, this must be via a link labelled “disclosure statements” from the home page of the website. For overseas banks, the link must be from the main page of any New Zealand section of their website.
If anyone requests a copy of a bank's most recent disclosure statement in person from any of its branches or agencies, the bank must offer to provide printed copies of its most recent full-year disclosure statement, and of any half-year or off-quarter disclosure statements that have been published since the date of the full-year disclosure statement. The bank must dispatch the documents by the end of the second working day following the day the request was made.
The disclosure requirements give banks greater flexibility in how to respond to requests received in other ways, or for requests asking for disclosure statements other than the most recent ones. So, for instance, if someone makes a request by email, the bank might respond by emailing copies of the required disclosure statements. However, the two-day deadline still applies.
In all cases, the bank must provide its disclosure statements free of charge.
Each bank's disclosure statement contains a wide range of financial and other information. In the full-year disclosure statement this is both in relation to the bank itself and its "banking group", whereas in other periods’ disclosure statements this is mainly in relation to the banking group only.
What is a "banking group" and why is it important? A banking group is generally made up of 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 that is incorporated overseas and operates a branch in New Zealand (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 is part of the overseas bank, depositors and other creditors of the branch in New Zealand are creditors of the overseas bank as a whole. Consequently, 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.
A bank's disclosure statement for the end of year is subject to a full 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.
Some of the more important information included in a bank's disclosure statement is outlined below:
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); and
-the name of the "rating agency" (ie the company which gave the rating).
The full-year disclosure statement must also show any changes made to the rating in the previous two years, and descriptions of all the steps in the applicable rating scale.
What is a credit rating? A credit rating is an assessment made by an approved independent 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 to take into account when comparing different banks (eg other information contained in the disclosure statement).
Profitability and Total Assets
A major part of a bank’s disclosure statement is taken up with the bank’s financial statements, prepared in accordance with generally accepted accounting practice. Key components at the front of the financial statements are the income statement and the balance sheet. Among other things, these include figures for post-tax profit for the period, and total assets at the end of the period, along with comparative figures allowing the reader to see how these have changed compared to earlier relevant periods.
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.
Disclosure statements also contain further information on how these ratios are calculated, in comprehensive form at the full-year and half-year, and in summary form in the off-quarters.
What is capital? Like all other businesses, banks hold capital as a buffer against losses. 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 generally has a lower capacity to absorb losses than tier one capital. One of the more important forms of tier two capital 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 “risk weighted exposures”. Risk weighted exposures are a measure of the banking group’s exposure to credit risk, market risk and operational risk. Capital as a percentage of risk weighted exposures is known as the capital ratio. Use of the capital ratio enables a banking group's capital position to be compared with those of other banking groups.
Put simply, credit risk represents the risk that a bank’s borrowers may not meet their repayment obligations. Credit risk arises from 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.
The lower the risk of a borrower not repaying the loan, 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.
Some banks have been accredited by the Reserve Bank to use their own internal models for determining how much capital they should hold against their credit risk exposures. In those cases, the bank does not use the standard set of risk weights stipulated by the Reserve Bank. Instead, the bank groups its exposures according to its own categorisation of how risky they are, and applies its own estimates of suitable risk weights to those different categories of exposures. In some areas, the Reserve Bank has required accredited banks to include specific risk parameters in their models and to make model improvements over time (e.g. in the area of housing credit risk).
Banks also face the risk of loss from other sources such as the day-to-day risks of the banking business like fraud, system failures and human error (operational risk), and the ups and downs of market variables such as exchange rates and interest rates (market risk). As a result, banks are also required to hold capital against these risks.
Minimum capital requirements
As prudential supervisor, the Reserve Bank expects all registered banks to hold capital sufficient to support the risks that arise in their business. In this context, 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.
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 credit 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.
What is a provision for impaired assets? A bank creates a provision (sometimes called an “allowance for credit impairment loss”) in its financial statements when it believes it is likely to lose money on an asset. The creation of a provision 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.
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 5 percent bands relative to the banking group's equity.
This information must be disclosed on the basis both of the position at the balance date, and 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.
As well as large value loans to customers, a bank is also required to disclose the number of large credit exposure concentrations it has to other banks, if any of those banks fall in the lower credit rating categories (BBB+ and below).
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.
Every bank is required to disclose in its full-year disclosure statement the amount it has lent to "connected persons". The bank must show both the amount at the end-year balance date and the peak lending to connected persons over the year.
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. Examples of connected persons include a controlling shareholder (eg parent company) of a bank, or another entity in which the bank’s owner has a substantial interest (eg a sister company).
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. Although the figures are only disclosed once a year, if a bank breached these limits at any point it would have to disclose that fact in its next disclosure statement.
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.
As well as the information highlighted above, a bank's disclosure statement provides a wide range of detailed information, including the following:
-the name and a description of the principal business activities of each company in the banking group;
-information on guarantees of the bank's obligations;
-detailed information on the risk exposures and capital position of the banking group;
-comprehensive information on the balance sheet, profit and loss statement, impaired assets and other financial matters;
-an historical summary of the banking group's financial performance and condition;
-information on the banking group's involvement in insurance business, where applicable;
-where applicable, information on the banking group's concentration of lending to, and borrowing from, different geographical regions and industries;
-information on the directors of the bank and the directors’ statements; and
-information on the conditions of registration of the bank for the applicable period.
Some of this information is only included as a matter of course in the full-year disclosure statement, and is updated in disclosure statements for other periods if there has been a material change in the meantime.
A bank's 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 must state:
-whether the bank has systems in place to monitor and control adequately the banking group's material risks and whether those systems are being properly applied;
-whether the bank has complied with its conditions of registration over the period covered by the disclosure statement;
-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.
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.
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 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.
Enquiries about a particular bank's disclosure statement should be made with that bank.
The Reserve Bank compiles comparative tables summarising key information extracted from all registered banks’ disclosure statements.
General enquiries. Further information on the disclosure requirements for registered banks in general, and on banking supervision, 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
Telephone (04) 471 3660
Facsimile (04) 473 8554
More information on banking supervision.