Prudential Liquidity policy FAQs

 Expand All

The experience of the past two years has highlighted the vulnerability of the New Zealand banking system and economy to a severe global liquidity shock, in the context of high levels of external debt, funded through the banking system at relatively short terms. This risk was brought into particular focus after the failure of Lehman Brothers in September 2008, when short-term international funding markets effectively dried up for an extended period.
Over the medium term, after the two-year transitional period, it is possible that lending rates could be somewhat higher, in the order of 10 – 20 basis points if the current high premium on term rates persists. For any given lending institution, the impact on its lending rates will very much depend on how it sources its funds.
No. The Reserve Bank has been working on this policy development for some time and the policy has been developed from a long term perspective. The new policy was first announced in our Financial Stability Report of May 2008.

New Zealand banks have in recent years had an unusually high proportion of their international debt securities maturing within one year, by comparison with other developed countries. We have set the 75% minimum CFR as a challenging but achievable target for our banks, to ensure a higher proportion of stable funding, and a reduced reliance on short-term offshore funding.

Yes. A number of jurisdictions set ratio requirements for their supervised banks that are similar to the one-week and one-month mismatch ratios. Measures similar to the core funding ratio are also commonly used as supervisory monitoring ratios or form part of the required disclosures by banks.
The new liquidity policy sets what the Reserve Bank judges to be a prudent benchmark. Some banks already meet or exceed this benchmark, and it is possible that others would be aiming to achieve similar long-term funding ratios as financial markets stabilise over the next year or two. The policy signals to banks what the Reserve Bank judges to be best for the stability of New Zealand’s financial system over the longer term. The policy is likely to have more impact in a cyclical upturn, reining back any tendency by the banks to revert to the short term offshore funding markets to support a rapid credit expansion.
The method of calculating the CFR in the consultation paper has changed in the final policy. The new CFR of 75% equates roughly to a CFR of 65% as originally proposed. So this is in fact an easing of the original proposal, which has been made in response to banks’ concerns about the feasibility of meeting the requirements, and also to points they made about maintaining a buffer above the regulatory minimum for their internal management purposes.

The Basel Committee on Banking Supervision published a revised version of its “Principles for Sound Liquidity Risk Management and Supervision” in September 2008, and the Reserve Bank’s liquidity policy is closely aligned with those principles. Those principles do not however specify particular quantitative ratio measures or requirements. The Basel Committee is carrying on further work on liquidity supervision, which we understand is investigating the possibility of introducing such measures at the international level.

The Reserve Bank is not involved in the work of the Basel Committee, which is not expected to produce anything for public consultation for some months. We will review whatever the Basel Committee comes out with, but from the direction their work appears to be going in, we do not expect to make any changes to our policy following the release of the Basel Committee’s new policy.

APRA have an existing liquidity policy in place which they are currently revising. The Reserve Bank of New Zealand and APRA have kept in regular contact in their separate policy developments. The two policies have the same broad aims and the end results are similar, but they are achieved in different ways.
All New Zealand-incorporated banks will be subject to the same requirements, unless there are very strong reasons for varying the minimum ratio requirements. Each bank will be impacted in different ways. For most of the small local banks, we do not expect the minimum ratios to have a significant impact on their current funding arrangements.
Branches will typically be subject to the same standard requirements as locally-incorporated banks on internal liquidity risk management and on reporting to the Reserve Bank. However, the policy builds in flexibility in the treatment of New Zealand branches of overseas banks. The way the minimum ratio requirements may be varied for the branches will depend on a number of factors set out in the policy, including how important they are to the New Zealand financial system. The Reserve Bank will be writing to the branches shortly to initiate discussions about their implementation and compliance path.