Effective prudential regulation is a crucial component of a sound and efficient financial system, the Reserve Bank's Head of Prudential Supervision Toby Fiennes said.
In a speech to the Law and Economics Association of New Zealand, Mr Fiennes said the international regulatory framework has developed rapidly over recent years and New Zealand has responded accordingly.
"The global financial crisis has led banking regulators around the world to revisit their whole approach. Here in New Zealand, the finance company failures and the repercussions from the Canterbury earthquakes have underlined the importance of sound regulation that can help prevent failures.
"We have strengthened and built on the key features of our regime, including an early tightening of liquidity standards, reflecting the adverse liquidity shock experienced during the global financial crisis. We have been fast adopters of the tougher Basel III capital standards, with some tailoring to New Zealand conditions. We have also extended our prudential oversight regime to cover insurers and non-bank deposit takers (NBDTs)."
"The New Zealand approach places significant emphasis on self-discipline and with regulatory requirements we have tried to minimise complexity while ensuring strong capital and liquidity buffers," Mr Fiennes said.
"This approach works well for us in New Zealand. We have a relatively simple financial system, for which a straightforward, conservative approach is well-suited."
Mr Fiennes said New Zealand's financial system remains in fundamentally good shape, with the banking sector maintaining high levels of capital and adequate liquidity buffers, the core payments systems generally operating smoothly and the insurance sector positioning itself well for future shocks.
"But New Zealand can't afford to be complacent. We will continue to be vigilant and forward-looking in our supervision with a focus on key risks, key business drivers and board accountability," Mr Fiennes said.
"As well as strengthening the oversight of systemically important payment and settlement systems, the Reserve Bank will also look for opportunities to simplify regulatory regimes and harmonise them across sectors."
Mr Fiennes said legislation does not require the Reserve Bank to protect against every failure – no regulatory regime could realistically achieve this - nor to protect consumers from the direct effects of failure. However, the regulation and supervisory regime does provide significant safeguards to reduce the likelihood and impact of failures.
"Although failures are unlikely, we will remain prepared and will continue to develop our response toolkit, drawing on insights from international experience."
External Communications Adviser
Ph 04 471 3960, 027 485 9474, [email protected]