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Registered Bank Category Period of breach Date registered bank became aware Status
Southland Building Society Condition of Registration – Liquidity January 2021 – August 2021 October 2021 Closed

One of a bank’s core functions is ‘liquidity transformation’: transforming short-term liabilities (e.g. ‘on call’ deposits, commercial papers) into long-term assets for the bank (e.g. 30 year residential mortgages). This creates a specific liquidity risk that banks must manage: the risk that a bank does not hold enough assets that can be quickly converted into cash at a reliable price (‘liquid assets’) to meet its short-term liabilities.

To help mitigate this risk, registered banks in New Zealand are required to fund a minimum proportion of their lending with long-term, ‘stable’ funding with residual time to maturity greater than one year. This long-term funding is measured as the ‘core funding ratio’ (CFR) and imposed via banks’ conditions of registration. Banks’ conditions of registration require them to calculate their CFR in accordance with the methodology prescribed in Banking Standard 13 ‘Liquidity Policy’ (BS13).

Paragraph 39 of BS13 specifies the formula for calculating a bank’s CFR. It requires that only funding with a residual maturity longer than one year qualifies as core funding (with some exceptions).

From January 2021 until August 2021, Southland Building Society (SBS Bank) incorrectly classified funding drawn via a warehouse facility as core funding. This resulted in SBS Bank overstating its CFR for five out of eight months between January 2021 and August 2021.

The root cause of the non-compliance was SBS Bank’s failure to maintain appropriate controls to monitor changes to the terms of its warehouse facilities. This resulted in SBS Bank failing to identify a change to the amortisation period of one of its warehouse facilities so that it no longer qualified as core funding from 1 January 2021.

The maximum overstatement occurred in August 2021 when SBS Bank’s CFR was overstated by 3.49%. At all times SBS Bank’s CFR comfortably exceeded the regulatory minimum at the time (then 50%), by a minimum of 43.4%, or by an average of 45.4%, over the eight month period. Since 1 January 2022 the CFR requirement has increased from 50% to 75%.

SBS Bank has restated its CFR for January 2021 until August 2021. The restated CFRs are now reflected in the Bank Financial Strength Dashboard.

Bank Financial Strength Dashboard

As at 31 December 2021 SBS is compliant with the Reserve Bank’s liquidity metric requirements. SBS’s overall liquidity position can also be viewed on the Bank Financial Strength Dashboard.