Our 2020 funding agreement

2020–2025 funding agreement

Between

The Minister of Finance

And

The Governor of the Reserve Bank of New Zealand

1. This Agreement is between the Minister of Finance and the Governor of the Reserve Bank pursuant to section 159 of the Reserve Bank of New Zealand Act 1989 (“the Act”) and supersedes the Agreement signed on 26 May 2015.
2. The Agreement takes effect from the date that it is ratified by Parliament.

It is agreed that

1. The amount of the Bank’s income to be applied in meeting the operating expenses incurred< in carrying out the functions and exercising the powers specified in section 159(1) of the Act, excluding the direct net currency issue expenses incurred in carrying out the functions and powers specified in section 25 and section 26 of the Act is the sum of:
   • $111,700,000 for the year commencing 1 July 2020
   • $109,900,000 for the year commencing 1 July 2021
   • $120,200,000 for the year commencing 1 July 2022
   • $115,400,000 for the year commencing 1 July 2023
   • $118,300,000 for the year commencing 1 July 2024
2. The amount of the Bank’s income to be applied in meeting the direct net currency issue expenses incurred in carrying out the functions and exercising the powers in section 25 and 26 of the Act is:
   • $11,100,000 for the year commencing 1 July 2020
   • $12,500,000 for the year commencing 1 July 2021
   • $12,500,000 for the year commencing 1 July 2022
   • $13,500,000 for the year commencing 1 July 2023
   • $14,500,000 for the year commencing 1 July 2024
3. For the purposes of this agreement, as provided for in section 2 of the Act, it is agreed that “operating expenses” exclude expenses, costs or losses, if any, from or on these activities:
   1. the Reserve Bank Staff Superannuation and Provident Fund (actuarial losses and actuarial gains);
   2. litigation expenses;
   3. property management expenses;
   4. Security Custodian expenses;
   5. bank and broking fees; and
   6. provision of ESAS and NZClear services.
4. Pursuant to section 159 (1)(f) of the Act, operating expenses incurred under this agreement shall include:
   1. net operating expenses incurred in dealing in foreign exchange; and
   2. net operating expenses incurred by the Bank in connection with its functions and powers under the Insurance (Prudential Supervision) Act 2010.
5. Pursuant to section 160 (c) and (d) of the Act, this agreement does not provide for the following potentially material expenses:
   1. operating expenses or other costs that may have been incurred or might be incurred in future by the Bank in response to the COVID-19 Pandemic for which further agreement might be needed in future to give effective oversight of the Bank’s operating costs (in addition to any indemnity protection that the Bank may already have obtained for that type of cost and expense); and
   2. upgraded physical property and system assets to provide optimal cash storage and distribution.
6. Pursuant to section 160 (c) of the Act, the Bank shall notify the Minister of Finance if and when the Bank considers that this agreement should be varied because of an anticipated material increase in the total of the Bank’s operating expenses over the full five year term of this agreement (the Full Term Operating Expenses). Pursuant to section 161 of the Act, no such variation will be effective unless and until it is ratified by a resolution of the House of Representatives.
7. Pursuant to section 160 (d) of the Act, the Bank shall include explanations in its annual report of:
   1. the reasons for any material overspend of operating expenses in the year of the report;
   2. the likely impact of that overspend on the Full Term Operating Expenses; and
   3. if appropriate, what additional steps the Bank proposes to take so that the Full Term Operating Expenses are not materially exceeded.

Hon Grant Robertson
Minister of Finance

Adrian Orr
Governor of the Reserve Bank

16 June 2020

Funding proposal – Introduction

The Reserve Bank of New Zealand is a full service central bank here to serve all New Zealanders. Our purpose is to promote a sound and dynamic monetary and financial system. Our vision is ‘A Great Team, Best Central Bank’.

Over the past decade short-term thinking and a lack of consideration for future generations have affected the financial services industry and the wider environment in which we operate. Poor decision-making and inappropriate incentives across the sector have created a culture that has all too often resulted in poor consumer and market outcomes. Globally, to restore trust and confidence in the financial services industry following the Global Financial Crisis, government and societal expectations of central banks have increased.

An effective central bank is vital to the economy. The political and financial costs of an economic crisis could be significant, if we fail to proactively invest in the system. Increased investment will enable us to operate as a world-class central bank now and in the future, as well as continuing to generate significant revenue for the Crown. A driving principle will be taking a kaitiakitanga approach where we play a durable guardianship role, as steward and protector of the financial system for future generations.

To fulfil this essential role, we need resourcing and investment that not only allows us to keep up with change and best practice, but also to set the standard internationally.

This document sets out how we are going to drive change through increased funding in our people, assets and operations.

Our approach will allow us to:

• respond to areas of underinvestment
• respond to the challenges we face in the current environment and enable us to operate to the extent of our legislative mandate
• establish the long-term operating model to promote the wellbeing of all New Zealanders.