Changes to the Reserve Bank’s financial stability legislation

This page contains information on Changes to the Reserve Bank’s financial stability legislation from the November 2021 Financial Stability Report.

In November 2017 the Government announced a review of the Reserve Bank of New Zealand Act 1989. The review has provided an opportunity to modernise the Reserve Bank’s legislation. Phase 1 of the Review introduced the Monetary Policy Committee (MPC) and added maximum sustainable employment as a monetary policy objective. Phase 2 was split into two tranches.

The first tranche considered the Bank’s governance and accountability arrangements, and resulted in the reforms enacted by the Reserve Bank of New Zealand Act 2021. This Box summarises elements of the Act that are most relevant to prudential regulation.2

The second tranche considered significant changes to the frameworks for prudential regulation and supervision of deposit takers and the introduction of deposit insurance. The second tranche of Phase 2 will result in a Deposit Takers Act.

Reserve Bank of New Zealand Act 2021

The Reserve Bank of New Zealand Act 2021 received Royal Assent in August and is expected to come into force in the middle of 2022. The purposes of the Act are to provide for the continuation of the Reserve Bank and to “promote the prosperity and well-being of New Zealanders and contribute to a sustainable and productive economy.”

The Act will replace the existing soundness and efficiency objectives with a single financial stability objective, with efficiency-related considerations included in the decision-making principles in sectoral prudential legislation (figure A.1).3

The financial stability objective encompasses soundness and also covers the need to adjust policy settings to manage the financial cycle, and considers how regulatory settings can affect the wider economy. This objective, in conjunction with the purposes and principles of sectoral prudential legislation, will provide greater clarity about our financial policy goals.

The Act will establish a new governance board for the Reserve Bank with statutory authority over all Bank decisions other than those reserved for the MPC.

The Act also requires the Minister of Finance, after consulting the Bank, to issue a Financial Policy Remit. The Financial Policy Remit provides a mechanism for the Government to communicate its policies and priorities to the Reserve Bank Board.

This will allow the Government to specify areas of Government policy that the Board should have regard to when setting the Reserve Bank’s strategic direction for financial stability. The matters addressed in the Remit will be in addition to any decision-making principles provided for in the sectoral prudential legislation.

Deposit Takers Act

The future Deposit Takers Act will significantly reform the prudential framework for deposit-taking institutions in New Zealand. In April Cabinet agreed on key aspects of the new Act, and an exposure draft is currently being prepared. The description below reflects the decisions taken by Cabinet.

Cabinet agreed that the purpose statement of the Deposit Takers Act will be consistent with the overarching purpose in the Reserve Bank Act of promoting the prosperity and well-being of New Zealanders, and with the financial stability objective. As such, the purpose of the Deposit Takers Act will be to:

  • promote the safety and soundness of deposit takers;
  • promote public confidence in the financial system; and
  • mitigate the adverse effects of risks to the financial system and risks from the financial system that may damage the broader economy.

The Act will also have decision-making principles that will apply to our prudential regulatory functions. The principles will ensure that financial stability decision-making includes efficiency-related considerations, such as the need to consider net benefits in undertaking regulatory actions. For example, the principles will require us to take into account the need to maintain competition in the deposit-taking sector.

Cabinet also agreed that the Deposit Takers Act will merge the prudential regimes for banks and non-bank deposit takers (such as building societies, credit unions, and deposit-taking finance companies) into a single regulatory regime. Under the new regime all deposit takers must be licensed by the Reserve Bank, subject to criteria specified in the Act, and in consultation with the Financial Markets Authority (FMA), which will license the institutions from a market conduct perspective.

The primary regulatory instrument in the new regime will be ‘standards’. Standards are legislative instruments and will replace prudential requirements currently set by conditions of registration for banks and by regulations for non-bank deposit takers. We will also have a broader range of supervision and enforcement tools, including a new power to conduct on-site inspections.

In addition, the Act will strengthen the framework for financial crisis management and resolution of deposit takers in the event of a failure. As part of this framework, Cabinet agreed to introduce a new deposit insurance scheme that will protect up to $100,000 per depositor per institution.

We aim to publish the exposure draft for public submissions later in 2021, with the Bill introduced into Parliament sometime during the second quarter of 2022 and passed in early 2023. Full implementation of the new prudential framework for deposit takers will take several years. The new deposit insurance scheme will be implemented first and should be operational by late 2023. There will be a transitional period during which other parts of the new prudential regime will be introduced, with deposit takers expected to be operating fully under the new regime by the start of 2027.

Figure A.1: Stylised illustration of the Reserve Bank’s hierarchy of objectives and purposes

Footnotes