The Reserve Bank’s new liquidity policy for banks
A strong liquidity profile is important for all companies. This is particularly true for banks, given the maturity transformation role that is inherent to much of their business. The maintenance of a sound and efficient financial system requires banks to hold a liquidity profile that is robust to funding shocks. The New Zealand banking system is very concentrated, and unusually reliant on short-term offshore funding by comparison with other developed countries. This makes its institutions, and the system as a whole, particularly vulnerable to liquidity shocks. The Reserve Bank has been working to develop new prudential requirements designed to strengthen the liquidity of the New Zealand financial system. In this article, we explore the nature of liquidity risks inherent within the system and explain in detail the new requirements for registered banks. In doing so, we note that the new requirements come at a time when global regulators are looking to strengthen liquidity requirements in light of the recent financial crisis. The Reserve Bank considers that its new framework provides a solid foundation for enhancing liquidity in the New Zealand financial system, which can be further developed as necessary in the coming years.