The Reserve Bank believes that good risk management supports innovation and sustainable growth, so its regulatory regime emphasises risk management rather than risk avoidance.
In a speech today to the NZ Society for Risk Management, Toby Fiennes, Head of Prudential Supervision, said: "When the financial system works well, nobody notices. However, it faces many threats. While it's the responsibility of each financial institution to manage their own risks, households, the government and businesses are also exposed to financial system risks. As guardians of the overall financial system, our focus is to reduce risks that may seriously impair the system and its ability to support the real economy."
He said that in order to capture opportunities and maximise returns in a sustainable manner, it is crucial that risks are taken and that they are mitigated with a well thought-out process. We require strong buffers and good risk management by financial institutions.
"A regulatory regime that seeks to avoid failure at all cost is unlikely to be dynamically efficient. We don't seek to operate a zero-failure regime. . That is part of a healthy dynamic that applies to banks and insurers as much as to any other firms. Seeking to avoid all failures will harm both soundness and efficiency, by increasing moral hazard, and by encouraging an over-cautious approach to risk and making it very costly for institutions and their customers to do business," Mr Fiennes said.
Prudential supervision is a dynamic process. Given rapid changes in the global economy and in financial markets, our goal is to build the right buffers so that the system is suitably resilient to the next shock and contagion is avoided while having rules that are as nonintrusive as possible.
Read the speech: The risk management quest: a Reserve Bank approach
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Angus Barclay, External Communications
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