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Prudential requirements for non-bank deposit takers
We regulate non-bank deposit takers (NBDTs) in New Zealand to promote the maintenance of a sound and efficient financial system, and to avoid significant damage to the financial system that could result from the failure of an NBDT. This page provides information on the regulatory requirements for NBDTs.
Licensed NBDTs are required to comply with prudential requirements outlined in the Non-bank Deposit Takers Act 2013 (the NBDT Act) and associated regulations, which are:
the Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010
- the Deposit Takers (Liquidity Requirements) Regulations 2010.
The specific requirements that apply to NBDTs are listed below.
Trustees also have obligations under the NBDT Act. These include ensuring certain prudential content is included in licensed NBDTs’ trust deeds.
Trustees must report to us any non-compliance with the NBDT Act and regulations by the licensed NBDT. Trustees are licensed by the Financial Markets Authority under the Financial Markets Supervisors Act 2011.
Current prudential requirements
The prudential requirements can be categorised into the following six areas:
- credit ratings
- risk management
- related party exposure limits
See below for more detail on each of these six requirements.
Some licensed NBDTs may be exempted from particular prudential requirements. Under Section 70 of the NBDT Act, we can exempt a licensed NBDT, class of NBDTs or trustee from compliance with any provision of the NBDT Act or regulations.
Sections 23–24 of the NBDT Act require licensed NBDTs to have a credit rating from an approved rating agency and provide for regulations to specify the type of credit rating required.
About credit ratings
Credit ratings provide a simple way to inform the public of a licensed NBDT's risk profile and facilitate comparison of risks across the sector. The requirement is intended to strengthen the incentives for NBDTs to develop and maintain sound governance and risk management practices.
You are required to have a local currency (New Zealand dollar), long-term issuer rating, given by one of the following approved rating agencies:
- Equifax Australasia Credit Ratings Pty Limited (formerly known as Corporate Scorecard Pty Limited (CSC));
- Fitch Ratings;
- Moody's Investors Service; or
- Standard and Poor's Ratings Services.
This list of agencies has been in force since 1 March 2010.
Guidelines for approval of credit rating agencies
We have developed guidelines for credit rating agencies who wish to apply for approval for the NBDT sector.
Sections 25–26 of the NBDT Act set out governance requirements for licensed NBDTs that are companies, building societies or overseas companies.
If you are an NBDT that is a company, building society or overseas company, you must include at least two independent directors and the chairperson must not be one of your employees or an employee of a related party.
Independent directors add an independent element on the board, free from the interests of shareholders and other related parties.
If you are a subsidiary of another person, you are prohibited from including provisions in your constitution that would allow directors to act otherwise than in your best interests.
Risk management requirements are set out in Sections 27–29 of the NBDT Act.
You are required to have a risk management programme that outlines how you identify and manage your credit, liquidity, market and operational risks.
Your programme should be appropriate to your size, funding structure, market sector, business strategy, and relationship with your borrowing group. It must be sufficiently documented and include a process for it to be reviewed regularly.
You need to submit your risk programme to your trustee, who must approve it after ensuring it meets the requirements as set out in Section 28 of the NBDT Act. Under Section 29, your trustee can require you to have your risk programme reviewed, although we expect trustees would rarely need to exercise this power.
Download the risk management programme guidelines (PDF 129 KB)
Section 33 of the NBDT Act requires licensed NBDTs and trustees to comply with any requirement of the Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 (the 'Capital Regulations').
Capital represents the financial commitment of the owners to a business. It is absorbs unexpected and unplanned losses that a NBDT may be exposed to. As a consequence, NBDTs that hold higher amounts of capital tend to be more robust than those with lesser amounts.
Capital mainly consists of shareholders' equity and retained earnings. Minimum capital ratio requirements aim to ensure NBDTs maintain a minimum ratio of capital relative to their credit, operational and market risk.
How to calculate capital
The Capital Regulations provides that capital must be calculated as gross capital less deductions. Gross capital includes ordinary shares, retained earnings, certain types of reserves and preference shares, and minority interests (shareholdings). Various items must be deducted from gross capital, such as shareholdings and subordinated loans to related parties, future tax benefits and other relevant deductions as set out in clause 10(3) of the Capital Regulations.
How to calculate capital ratio
The Capital Regulations also outline how to calculate a capital ratio. You must calculate an aggregated risk-weighted amount for credit risk, and an amount for market and operational risk. The capital ratio is the amount of your capital as a ratio of the sum of the amount of aggregated credit, operational and market risk.
You must follow the rules in the Capital Regulations when calculating the ratio, including using the risk weights provided for particular types of assets.
You must include in your trust deed a minimum capital ratio (the level of capital in relation to your—or your borrowing group's—credit exposures and other risks) that you must maintain. This ratio must be at least 8% if you have a credit rating from an approved credit rating agency.
If you do not have a credit rating from an approved rating agency, the minimum capital ratio specified in your trust deed must be at least 10%, or 12% under the Non-bank Deposit Takers (Credit Ratings Minimum Threshold) Exemption Notice 2016.
Related party exposure limits
Section 36 of the NBDT Act provides that regulations may be made imposing a requirement on trustees and licensed NBDTs to ensure their trust deeds include a maximum limit on exposures to related parties.
About related party lending
Related party lending (sometimes referred to as connected exposures) refers to a licensed NBDT advancing funds to a person who is associated in some way with the NBDT. Such a person may be a director or senior officer of the licensed NBDT or any of its guaranteeing subsidiaries, those persons’ relatives, as well as certain shareholders and other persons with influence. Section 6 of the NBDT Act has the full definition of related party.
Having a limit on exposure to related parties reduces the ability for such related parties to extract benefits from the NBDT at the NBDT’s or its depositors’ expense. For example, it ensures the minimum capital requirements are not undermined by owners borrowing back their capital investment.
The Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 require a limit on your aggregate credit exposures (or the exposures of your borrowing group) to all related parties to be specified in your trust deed. These regulations state that related party exposures should not exceed a maximum limit of 15% of capital.
Sections 39–41 of the NBDT Act allow for regulations to be made to impose liquidity requirements in the trust deeds of licensed NBDTs.
Liquidity is the ability of a solvent entity to meet financial obligations as they come due. For NBDTs, this means ensuring there is enough cash or access to cash (for example through the sale of liquid assets).
Liquidity provisions are generally aimed at ensuring that NBDTs maintain prudent levels of liquidity so they can withstand a plausible range of shocks.
Under the Deposit Takers (Liquidity Requirements) Regulations 2010, the NBDT and its trustee must ensure the trust deed includes one or more quantitative liquidity requirements that are appropriate to the characteristics of their business. These liquidity requirements must also take into account their liquidity and the liquidity of any borrowing group.
We have published guidelines to help develop quantitative liquidity requirements that are appropriate for your business. The guidelines are non-binding and provide examples.
Suitability assessment of certain directors and senior officers
You must let us know when one of your directors or senior officers (or a person who is proposed to be appointed as a director or senior officer) raises a 'suitability concern'.
We will then carry out a suitability assessment of that person. The person must cease to act in the role (or not be appointed to the role) if we decline to issue a notice of non-objection in respect of the person.
Changes of ownership
You must apply to us for approval for a transaction that will result in a person having:
- the direct or indirect ability to appoint 25% or more of your governing body; or
- a qualifying interest in 20% or more of the voting securities your business has issued.
A transaction having this effect can only proceed with our approval. We must also approve if a person proposes to increase their influence above their currently permitted level.
Use the following form if you wish to apply for a change of ownership under Section 43 of the NBDT Act.
Download the Application for change of ownership (PDF 144 KB)