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.
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 prudential supervisor of registered banks.
Why should you take an interest in the financial condition of your bank?
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. You should also check whether your bank has signed up to the Crown retail deposit guarantee scheme. Banks' disclosure statements are intended to assist bank customers to understand more about the financial condition of banks operating in New Zealand, including any guarantees in place.
The Government has established the retail deposit guarantee scheme as a temporary measure. For the time being, if your bank gets into difficulty and cannot repay money it owes you, the Government will do so – provided that your bank has signed up to the scheme, and provided that your deposits with the bank are eligible for the guarantee. Your bank’s disclosure statement will say whether the bank belongs to the scheme, and if so, will give further information on coverage.
If you have any additional questions about the deposit guarantee scheme, you should address them to the Treasury, who operate the scheme under the Public Finance Act. Information about the scheme is also available on their website, www.treasury.govt.nz.
Until 12 October 2010, the guarantee covers up to $1million per depositor with each participating bank, so your bank’s disclosure statement remains particularly relevant to you if you have more than $1million in any one bank, or if your deposits are not covered by the scheme. From 13 October 2010, the guarantee will cover up to $500,000 per deposit with each participating bank. Your bank will need to apply again to join the extended scheme (even if they are currently in the scheme), as participation is voluntary. All depositors should note that the scheme expires on 31 December 2011.
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 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. 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 General Disclosure Statements at a bank's half year and end of year contain 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 and, for banks incorporated overseas, the financial condition of the overseas banking group as a whole. However, the bank may include some of this information in its General Disclosure Statement rather than publishing a separate Supplemental Disclosure Statement.
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 must be displayed in each bank branch or agency. Branches and agencies must also supply copies on request free of charge.
A bank's General Disclosure Statement and Supplemental Disclosure Statement must be made 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 the bank's head office.
A bank is also required to make its Key Information Summary, General Disclosure Statement and Supplemental Disclosure Statement (if any) readily accessible on its website.
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 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 other 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.
Government guarantees
Each bank is required to state whether or not it has signed up to the New Zealand deposit guarantee scheme. Under this scheme, broadly speaking, the New Zealand government promises to repay individuals and non-financial companies that have deposited money with the bank, if for any reason the bank is unable to do so. Each bank’s guarantee is limited to $1,000,000 per depositor until 12 October 2010. After this date, if the bank re-applies to join the scheme, the amount guaranteed is $500,000 per depositor. The scheme expires on 31 December 2011. The Key Information Summary explains how to obtain further information on the scheme, and on the precise terms of the bank’s membership of the scheme.
Some registered banks, particularly the New Zealand branches of overseas banks, may have a guarantee from an overseas government. The Key Information Summary must also refer to any such guarantees of this sort, and again must tell the reader how to obtain further information.
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? 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 in relation to 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.
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 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.
As well as giving the dollar amounts, banks disclose impaired assets as a percentage of total assets, and provisions as a percentage of 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. 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.
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 or loss after tax over the latest reporting period, and 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, including any guarantees provided by the New Zealand or overseas governments;
-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;
-information on the banking group's concentration of lending to, and borrowing from, different geographical regions and industries; and
-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.
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 material 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 Prudential Supervision
Prudential Supervision
Department
Reserve Bank of New Zealand
P O Box 2498
Wellington
Telephone (04) 471 3829
Facsimile (04) 472 3262
Email: rbnz-info@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.centre@rbnz.govt.nz
More information on banking supervision.
