Reserve Bank of New Zealand Bulletin articles
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December 2010 (Vol. 73, no. 4)
Download the complete issue of the December 2010 Bulletin (PDF 2.9MB)
Articles
Editor’s Note (PDF 150KB)
Regulating non-bank deposit takers (695KB)
The non-bank deposit taking (NBDT) sector comprises building societies, credit unions and finance companies. NBDTs can play an important role in the economy, providing services complementary to those provided by banks. In recent years, many finance companies have failed, resulting in a significant loss of value in the sector. These failures have revealed weaknesses in the operating models of several finance companies, such as high levels of related party exposures and inadequate capitalisation relative to the risks taken. On 1 December 2010, NBDTs became subject to new regulatory requirements relating to capital adequacy, related party exposures, liquidity and governance. This represents a further step in the implementation of a new prudential regulatory regime administered by the Reserve Bank. Regulations setting out credit rating requirements came into force on 1 March 2010 and NBDTs have been required to have a risk management programme since September 2009. The new regulatory regime is aimed at promoting the soundness and efficiency of the financial system by setting minimum prudential standards that NBDTs must meet. The requirements have been modelled on the banking regime, but have been tailored so that they are fit for purpose for the NBDT sector. This article explains the requirements in force on 1 December 2010 and discusses the motivation for these requirements.
Bringing financial stability legislation to the insurance industry - the Insurance (Prudential Supervision) Act 2010 (PDF 1.9MB)
By Richard Dean
Insurers face a number of significant areas of risk in the operation of an insurance business. As well as pure insurance risk, there are credit risk, investment (or market) risk, liquidity risk and operational risks to consider. Financial weakness or failure of an insurer can have significant impacts on large numbers of policyholders of all descriptions. In order to properly protect policyholder interest, it is therefore clear that the financial strength of the insurance industry should be subject to appropriate prudential regulation. Until the enactment of the Insurance (Prudential Supervision) Act 2010 (the Act) in September, there had been no previous comprehensive prudential regulatory regime covering the activities of insurers carrying on insurance business in New Zealand.1 Now the industry is subject to a world-class regulatory model administered by the Reserve Bank. This article explores the reasons behind the introduction of the new legislation, its objectives and the Reserve Bank’s intended approach in achieving these.
Global currency trends through the financial crisis (PDF 2.2MB)
In this article, we examine trends in the global and NZD foreign exchange (FX) markets over the recent financial crisis period from 2007 to 2010, identifying key changes in the nature of FX trading. These trends are examined using the most recent Bank for International Settlements (BIS) triennial survey as well as other data sources and market intelligence. The survey shows that, overall, the volume of global FX turnover has increased over the last three years. Demand for safehaven currencies such as the US dollar and Japanese yen have increased through the crisis. The NZD’s share of global turnover has decreased in an environment of increased risk aversion and volatility, and investor interest in trading the NZD has waned. Demand for carry trades, particularly in NZD, has fallen in an environment of increased volatility.
New Zealand’s imbalances in a cross-country context (PDF 304KB)
New Zealand’s current account deficit is the counterpart of a low rate of national saving relative to domestic investment. Persistent current account deficits have led to the build-up of a large net international investment position (NIIP) financed largely through foreign debt with short maturity. Dependence on foreign capital makes New Zealand vulnerable to changes in the availability and cost of external financing, although New Zealand has not added to this vulnerability by taking on currency risk. Debt maturity has lengthened over the recent past in response to market pressure and the Reserve Bank’s Prudential Liquidity Policy. Apart from New Zealand’s financial vulnerability, high debt levels threaten to weigh on economic growth by raising interest rates and crowding out private investment. A strong fiscal position in the run-up to the global crisis served to allay concerns over New Zealand’s credit worthiness, but the government’s finances have deteriorated in the wake of the crisis. It would therefore be prudent to improve the fiscal position sooner rather than later. Faster fiscal consolidation would also contribute to the required rebalancing of the economy towards higher saving and exports. This article considers New Zealand’s imbalances in a cross-country context in order to highlight sources of vulnerability.
For the Record (PDF 110KB)
Recent discussion papers, news releases and publications from the Reserve Bank of New Zealand
The views expressed are those of individual authors and do not necessarily reflect official positions of the Reserve Bank of New Zealand. Articles published in this Bulletin may not be wholly or substantially reproduced without the permission of the Reserve Bank of New Zealand. Data, brief extracts from articles, and other material appearing in the Bulletin, may be used without restriction provided due acknowledgement is made of the source.
