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Briefing to the Incoming Minister 2002

Reserve Bank of New Zealand

Summary of key issues

This paper summarises the role and functions of the Reserve Bank and identifies a range of policy issues likely to be of interest to the Government and other parties. The key issues are highlighted in this Executive Summary

Policy Targets Agreement

Before a new Governor is appointed, the Treasurer must agree a new Policy Targets Agreement (PTA) with that person. A PTA is negotiated between the Treasurer and the Governor-designate for the term of the new Governor. This paper outlines some of the considerations the parties may wish to take into account in framing the new PTA.

Financial system stability

The Reserve Bank has an important role to play in promoting a sound and efficient financial system. It does so in a number of ways, including the registration and supervision of banks, maintaining the capacity to respond to bank distress and failure events, and facilitating a robust payment system.

The paper identifies some banking supervision issues that will occupy the Bank’s attention in the next year or two. These include the need for the Bank to decide the nature of the changes it may wish to introduce to the capital adequacy requirements applied to banks in light of proposed changes to the international capital standard. We will also develop the policy requiring some banks to incorporate locally rather than operate as branches of foreign banks. And we plan to further advance the policy issues relating to the options for responding to bank distress and failure events. These are matters that will be taken forward in consultation with the banking industry and other interested parties.

Financial sector integration with Australia

The Bank is also likely to become more involved in discussions with Australian financial sector regulatory agencies on issues relating to the progressive integration of the Australian and New Zealand financial sectors and the implications for the countries’ respective regulatory frameworks. Substantive progress may depend on the broader question of the future evolution of the Closer Economic Relationship between Australia and New Zealand, which is ultimately a matter for the Australian and New Zealand governments to determine.

External assessment of the financial system

New Zealand is scheduled to undergo a financial sector assessment by the International Monetary Fund in 2003. As is the case with most countries undergoing such assessments, it is likely that the assessment will reveal some areas of non-compliance with international standards and codes in the areas of financial sector regulation and supervision. In some cases, non-compliance reflects the fact that New Zealand’s approach to promoting financial stability differs from that reflected in international standards and codes, but where our arrangements nonetheless produce sound outcomes. In other cases, the assessment may identify or highlight deficiencies and gaps in financial sector regulation, although in many cases these have already been identified by officials and are on the agenda for policy reform.

Proposed amendments to Reserve Bank of New Zealand Act

A Bill has been introduced to Parliament to amend the Reserve Bank Act. The proposed amendments relate to:

  • The Bank’s governance arrangements. The legislation will remove the Governor as chair of the Bank’s Board of directors and provide for a non-executive chair. It will also remove the Deputy Governor from the Board and require the Board to issue an annual report on its assessment of the Bank’s and Governor’s performance.
  • The Bill will clarify and strengthen some of the Bank’s powers in relation to the use of the word “bank” and in relation to bank registration and supervision. It also formalises the Bank’s powers to obtain information on the payment system.

Overseas Investment Commission

The Bank provides staff and resources to the Overseas Investment Commission (OIC) Secretariat and the Governor is an ex officio member of the OIC. It is only for historical reasons that the OIC is associated with the Bank. There is now no congruence between the responsibilities of the Bank and those of the OIC; the OIC’s role does not fit with the Bank’s core functions. Accordingly, we propose to initiate discussions with the Government with a view to fully separating the OIC from the Reserve Bank.