Promoting financial stability in New Zealand

Release date
22 March 2006

The financial system is critical to the future growth of the New Zealand economy, Reserve Bank Deputy Governor Adrian Orr said today.

In a speech to the Institution of Professional Engineers New Zealand, Mr Orr outlined the Reserve Bank's view on the preconditions for financial stability and highlighted some of the activities the Reserve Bank is undertaking to promote financial system stability.

"The financial system comprises financial markets, institutions, and payments and settlement systems. Each of these elements is critical infrastructure for the sound and efficient functioning of the economy," Mr Orr said. "However, it is not your typical infrastructure. Not only is it made up of bricks and mortar, electric wires, and communications services, it also comprises information, laws and practices, and agreed behaviours and expectations. If any of these factors become impaired, then the financial system and economic activity will be impaired very quickly."

"We consider that the preconditions for financial stability are met when all financial system risks are adequately identified, allocated, priced and managed," Mr Orr said. "With these preconditions, the financial system as a whole is likely to be efficient and resilient to a wide range of economic and financial shocks."

However, Mr Orr said that in making assessments of financial stability, there is no single, well-defined quantitative measure such as inflation targeting. Instead, the Bank draws on a variety of information, practices, and on-going research to assess financial soundness and efficiency. Much of this is reported on in our twice-yearly Financial Stability Report.

Mr Orr commented that the Bank is currently working on several aspects to promote financial stability and efficiency. These include, for example, implementing a local incorporation and an outsourcing policy for registered banks; working with wider government and industry on preparedness for a possible influenza pandemic; and working toward implementing a new capital adequacy framework (Basel II) for banks, so they can absorb unexpected losses.

"The Bank is also engaged in a wider government review of the regulatory arrangements in the non-bank financial sector, including a review of prudential regulation," Mr Orr said. "This is a growing part of the financial system and includes deposit-taking institutions such as building societies, credit unions, some finance companies and other financial service providers such as insurance and superannuation providers. This work is being undertaken in the context of a decision by Government in December last year, that some non-bank institutions should be subject to a higher level of prudential supervision and that, in principle, the Reserve Bank should be the prudential regulator."

Mr Orr concluded that the Reserve Bank continues to work closely with foreign bank regulators and central banks, especially its counterparts in Australia. Both countries' financial systems are important to one another, and hence cooperation and coordination is essential. This working together will be facilitated by the proposed changes to both Australian and New Zealand legislation recently announced by the Minister of Finance and the Australian Treasurer. These proposed changes, amongst other things, will require each country, where reasonably possible, to avoid actions that would be detrimental to financial stability in the other.

For further information contact
Anthea Black
External Communications Adviser
Ph 04 471 3767, 021 222 5225, anthea.black@rbnz.govt.nz