Liquidity is the amount of money that is readily available to a business. This includes cash and assets that can be quickly sold at a reliable price. Liquidity risk crystallises when a business is unable to meet its financial obligations as they fall due, this might lead to loss of confidence in a business, and in severe cases, default. Retail banks play a crucial role in the financial system, taking in deposits, facilitating payments and lending to individuals and businesses. The majority of deposits are short-term, while a large proportion of lending is in long-term residential mortgages which can extend out to 30 years. This leaves banks vulnerable to liquidity risk which needs to be managed.
Following the Global Financial Crisis, the Reserve Bank drafted the ‘Liquidity Policy’ (BS13) and ’Liquidity Policy Annex: Liquid Assets’ (BS13A) in recognition that bank liquidity is essential to the smooth functioning of the financial system and to mitigate the risk of future liquidity problems disrupting the financial system. This was consulted on in 2009 and introduced on 1 April 2010.
Kiwibank Limited's (Kiwibank) Condition of Registration 13 requires Kiwibank to calculate the one-week mismatch ratio, the one-month mismatch ratio and the one-year core funding ratio in accordance with the methodology prescribed in BS13 and BS13A most recently issued in May 2021.
The Reserve Bank's Liquidity Thematic Review, published in 2021, internal reviews performed by Kiwibank of its compliance with BS13, and an independent review of Kiwibank’s compliance with its liquidity conditions of registration (Condition of Registration 13 and 14) identified a series of quantitative areas of non-compliance where Kiwibank was not calculating the ratios in accordance with BS13, breaching its Conditions of Registration.
The Reserve Bank has assessed the findings of non-compliance with BS13 against the materiality factors outlined in the Guidance on reporting by banks of breaches of regulatory requirements, published in January 2021 and decided that they do not individually constitute a material breach of Kiwibank’s Condition of Registration 13.
Guidance on reporting by banks of breaches of regulatory requirements (PDF 778KB)
While some of the individual areas of non-compliance resulted in adverse movements in the ratios, the individual and collective impact on the ratios was not significant considering the headroom over Kiwibank’s internal limits and minimum regulatory ratios.
However, when assessing breaches for materiality the Reserve Bank undertakes a holistic assessment of the findings and has concluded that the number of instances of non-compliance with BS13 do collectively constitute a material breach of Condition of Registration 13. The Reserve Bank considers that the multiple breaches of Condition of Registration 13 raise prudential concerns and are part of a recurring pattern of breaches in relation to a matter that is of the same nature.
Kiwibank first reported non-compliance with its conditions of registration in respect of errors in its calculations of the regulatory liquidity ratios required under Condition of Registration 13 in its June 2019 Disclosure Statements.
As at 31 December 2021 Kiwibank is compliant with the Reserve Bank’s liquidity metric requirements. Kiwibank’s liquidity position can be viewed on the Bank Financial Strength Dashboard.