## cr17120 ## Source details **Canonical URL:** [cr17120](https://www.imf.org/-/media/files/publications/cr/2017/cr17120.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17120.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17120.pdf.json) --- ### Summary assessment: supervisory approach and effectiveness - Supervisory approach: three pillars — market discipline (public disclosure), self-discipline (directors’ attestations), and regulatory discipline (simple and conservative framework, off-site monitoring, disciplinary actions). - Market structure: highly concentrated; dominated by four subsidiaries of the four largest Australian banking groups. - Key tension: RBNZ reliance on market and self-discipline and avoidance of detailed on-site inspections conflicts with Basel Core Principles (BCP) expectations for granular guidance and on-site independent verification work. - RBNZ objective: strengthen supervision while retaining current three-pillar approach. ### Recent supervisory developments (since last FSAP) - Adopted the new Basel capital framework. - Issued supervisory guidance and increased regulatory reporting. - 2016: began the final stage of a multi-year upgrade of supervisory non-public statistical and prudential reporting. - Performed off-site thematic reviews (e.g., dairy and real estate). - Implemented PRESS (off-site bank risk and systemic impact ratings). - Implemented AML/CFT supervision with an on-site program (AML/CFT supervision is the only area with an on-site program). ### Key limitations and risks identified - Heavy weighting on market discipline relative to regulatory discipline and intensive supervision. - Absence of independent testing of prudential returns and risk management practices for prudential purposes. - RBNZ avoids detailed on-site inspections (own staff or external experts) to preserve bankers’ incentives. - Potential undermining of market and self-discipline due to limited supervisory verification. - Difficulty developing supervisors’ expertise on bank operations, hampering analysis and policy development. ### Resources and capacity - PSD headcount: "54 in 2015/16." - Number of staff allocated to bank supervision: "10 staff" structured into four “pods.” - Resource conclusions: - Staff highly competent and professional, but insufficient in number for BCP in-substance compliance. - Mere reallocation insufficient; strengthening regulatory discipline requires reassessment of resources and technical capacity. - Minimum supervisory resource needs identified to: - develop an on-site program to test foundation of three-pillar approach; - deepen analysis supporting PRESS ratings; - issue supervisory guidelines that promote preventive actions. - Funding agreement: current funding agreement runs until "June 30, 2020." ### Self-discipline, guidance, and enforcement issues - Directors’ quarterly attestation (required with every financial statement): that "the bank had systems in place to monitor and control adequately the material risks of the banking group, including credit risk, interest risk, currency risk, equity risk, liquidity risk, operational risk, and other business risk, and that those systems are being properly applied." - Limited RBNZ guidance on what constitutes adequate risk management. - Foreign-owned banks likely use home supervisor standards; domestic-owned banks may follow varied sources → uneven playing field. - Enforcement constraints: - Broad enforcement powers exist, but lack of regulatory benchmarks and high legal threshold reduce swiftness. - To issue directions under section 113(1)(e) of the RBNZ Act, consent of the Minister of Finance (MoF) is required. - Enforcement currently reactive (breach-based) rather than preventive. ### Recommended priority actions (key items summarized) - (i) Amend section 78 of the RBNZ Act to make compliance with RBNZ-issued supervisory policy evidence of prudent banking. - (ii) Issue supervisory policy documents as warranted (example: on credit risk). - (iii) Carry out targeted on-site programs (directly or through external experts) to verify regulatory reports, risk management, and quality of credit exposures. - (iv) Enhance proactive cooperation within trans‑Tasman agreements to support cross-border supervisory synergies. - (v) Consider options to facilitate taking enforcement action based on supervisory judgment (e.g., reduce MoF consent requirement). - (vi) Improve analysis to support PRESS ratings by retaining work papers to document determinations on adequacy of risk mitigants. ### Context and scope of assessment - Part of the Financial Sector Assessment Program (FSAP) undertaken by the IMF in 2016. - Visits: Wellington and Auckland (New Zealand); Sydney and Melbourne (Australia). - Assessment against Basel Committee standard issued in 2012 (29 Core Principles). - Scope: RBNZ supervision of registered banks only; other RBNZ-supervised industries not covered in this assessment. --- ### RBNZ mandate, powers, and institutional arrangements - Responsibilities include: - Prudential regulation and supervision of registered banks and insurers; regulation of NBDTs; oversight of the payment system; AML/CFT supervision for banks, NBDTs and life insurers; promoting a sound and efficient financial system; monetary policy, settlement services, issuing currency; supervision of insurers under the Insurance (Prudential Supervision) Act 2010. - Key powers and frameworks: - Acts as lender of last resort and exercises crisis management powers (some jointly with MoF and Governor-General). - 2013: completed legal framework for licensing and regulation of NBDTs. - 2013: introduced macroprudential policy framework under existing objectives/powers. - Introduced minimum core funding ratio (CFR) in 2010. - Under RBNZ Act section 165A, required to report in semi-annual FSR. ### Financial sector structure and key statistics - Banks own "about 77 percent" of total financial assets. - Nonbank lending institutions represent "2 percent" of financial assets. - Foreign funding accounts for "19 percent" of banks’ liabilities. - As of October 2015: - "Over 80 percent" of banks’ liabilities had maturity below one year. - "65 percent" was on demand or with maturity of less than 3 months. - Concentration: - The four large Australian subsidiaries’ share of total banking sector assets was "83 percent" as at June 2016. - The four subsidiaries are significant to parents: about "15 percent" of group earnings and total assets on average. ### Funding and liquidity considerations - Reliance on wholesale and foreign funding: non-NZD funding reduced to below "20 percent" of total liabilities. - Liquidity policy and instruments: - CFR introduced in 2010; prudential liquidity policy introduced in 2010. - Covered bonds may be issued "up to 10 percent" of the banking group’s total assets. - APRA previously allowed contingent funding up to "50 percent" of parent’s Tier 1 capital; APRA tightened related party exposure requirements to "5 percent" of Tier 1 parent capital. - New Zealand banks required to set up contingent funding arrangements secured by instruments exempt from resolution actions in New Zealand. ### Preconditions for effective supervision (A–F) — highlights - A. Sound macro policies: Treasury responsible for fiscal policy; RBNZ responsible for price stability via Policy Targets Agreement. - B. Framework for financial stability policy: RBNZ has independent decision-making for macroprudential policies; MoU May 2013; Macro-Financial Department established 2013. - C. Public infrastructure: New Zealand ranks in the "97–100th percentile" for World Bank governance indicators; strong legal and judicial framework. - D. Crisis management: powers for directions, recommend statutory management, Open Bank Resolution (OBR) in place (technical implementation achieved 2013). - E. Public safety net: RBNZ lender-of-last-resort role; no ex ante depositor insurance; temporary opt-in deposit scheme 2008–2011; government concluded permanent scheme benefits modest given OBR. - F. Effective market discipline: public disclosure necessary but not sufficient; disclosure not widely used at retail level; market discipline effectiveness similar to other advanced economies but limited by public safety nets and maturity mismatches. --- ### Role, mandate, and delivery of regulatory discipline - Regulatory discipline requires: - identification of bank-specific and system-wide vulnerabilities through verification work and forward-looking analysis; - enforcement of legal/regulatory framework; - timely preventive and corrective actions; and - triggering/resolution contribution where established. ### Findings — responsibilities, independence, and cooperation (CPs 1–3, 13) - Statutory objectives: promote maintenance of a sound and efficient financial system or avoid significant damage from registered bank failure. - Operational ambiguities: broad definitions (e.g., "sound and efficient financial system") have facilitated a hands-off supervisory philosophy and limited independent verification. - Resourcing: staff highly qualified but numbers insufficient to conduct effective supervision; urgent need to reassess staffing and budget to enable more intrusive supervision. - Cross-border cooperation: strengthen collaboration with APRA; RBNZ participates as observer in APRA on-site visits; better coordination recommended. ### Methods of ongoing supervision (CPs 8–10, 12) - Supervisory model: three pillars — market, self, regulatory discipline; PRESS produces aggregate numerical ratings from 10 risk areas and systemic impact factor. - On-site interaction: RBNZ does not conduct inspections; interactions via prudential meetings and thematic visits; participation as observer in APRA on-site inspections. - Consolidated supervision: RBNZ supervision based on registered bank’s banking group as defined in conditions of registration (subconsolidated approach); can change if risk profile changes. - Documentation gap: analysis supporting PRESS ratings not well documented and based primarily on banks’ internal risk reporting. ### Corrective and sanctioning powers (CP11) - Broad enforcement powers exist; issuance of directions requires MoF consent (section 113). - Lack of detailed guidance complicates issuance of preventive directions; threshold to issue a direction is high. - Enforcement has been used for disclosure republication, additional conditions, or reporting requirements. ### Corporate governance (CP14) - Companies Act 1993 sets governance duties; BS14 provides prudential guidance including fit-and-proper principles. - Supervisory scope gaps: RBNZ monitoring via off-site reviews not sufficiently detailed to meet BCP; does not comprehensively assess Board engagement, oversight of senior management, remuneration decisions, or Board communication of culture/control environment. ### Prudential requirements, accounting, and disclosure (CPs 15–29) - Risk management requirements: RBNZ does not impose comprehensive requirements on banks to have risk management policies/processes except for capital adequacy and liquidity. - Liquidity policy (BS13): quantitative and qualitative standards; one-year CFR requirement "not less than 75 percent." - Connected party exposures (BS8): - Aggregate limit on all related party exposures: "125 percent" of Tier-one capital. - "15 percent" aggregate limit on nonbank related party exposures by condition of registration. - Policy does not require prior Board approval for related-party transactions/write-offs; definitions do not cover all types required by Principle 20. - Capital framework: - Follows Basel guidance (BS2A and BS2B); four banks accredited to use IRB. - RBNZ has not implemented a leverage ratio at this stage; capital framework under review. --- ### Accounting and auditing framework (CP27) - Financial statements prepared in accordance with NZ IFRSs. - Financial statements audited by qualified external auditor in accordance with ISAs (NZ). - RBNZ relies on external audit process and directors’ attestations for prudential determination of valuation practices. - RBNZ routinely meets external auditors of the 10 largest locally incorporated banks; meetings do not cover valuation practices routinely. ### Assessment methodology and grading categories - Five compliance categories: "compliant," "largely compliant," "materially noncompliant," "noncompliant," and "non-applicable." Definitions preserved as in source. - RBNZ elected to be assessed against both essential and additional criteria; assessment qualitative and not a checklist. --- ### Powers to require information and enforcement (Section 93 and related) - Section 93 enables RBNZ to require any information, data or forecasts from banks for prudential supervision; access to records of registered banks and rest of banking group on a subconsolidated basis. - RBNZ cannot compel oral information from directors/senior staff except in limited investigation circumstances (sections 101 and 102(1)(c)). - Corrective powers summary: - take/require timely corrective action; impose sanctions; revoke license; cooperate for orderly resolution. - Section 74 permits imposing additional conditions of registration. - Section 113: can issue direction to registered bank with MoF consent in specified circumstances. - Failure to comply with RBNZ Act often a criminal offence; financial penalties require court proceedings. - RBNZ commonly uses moral suasion. ### Supervision of parent and affiliated companies (EC7) - Power to require associated persons (including parent) to provide information. - Definition of associated person excludes some sister affiliates; thus activities of such affiliates may not be fully assessed—reflects subconsolidated supervision. ### Independence, governance, accountability, and resourcing (EC1–EC9) - Operational independence and accountability set in Act; funding from own income with a Funding Agreement ratified by Parliament. - Governor appointment/removal: Governor appointed by MoF on RBNZ Board recommendation; five-year term; no term limit. - Internal governance: Governor delegates; internal committees include Banking Steering Group and FSO Committee. - Legal protections: officers/employees indemnified except in bad faith (section 179 / 179A). - Resource constraints: PSD headcount "54"; "10 staff" allocated to bank supervision; acknowledged insufficient for intrusive supervision; PSD training and infrastructure budgets in 2015/16 considered sufficient given current approach. - Recommendations include reassessing resources, aligning Act with IPSA and NBDT Act to remove Minister role in issuing directions, and formalizing Treasury–RBNZ interaction procedures. --- ### Cooperation and information sharing (Principle 3 / trans‑Tasman) - Domestic cooperation: CoFR (RBNZ, FMA, MBIE, Treasury) meets quarterly; Banking Forum subcommittee; MoU with FMA. - Trans‑Tasman cooperation: - Trans-Tasman Council on Banking Supervision (TTBC) and statutory basis in section 68A. - RBNZ participates as observer in APRA on-site inspections; requires NZ subsidiaries to provide to RBNZ all information sent to APRA. - MoU with APRA on Basel II implementation (2005) and 2012 MoU on cooperation. - Crisis cooperation: MoC on Trans-Tasman Bank Distress Management (2010) and simulation exercises (2011); further work ongoing. - Assessment of Principle 3: "Largely compliant." ### Confidentiality powers (Section 105) - Section 105(2): RBNZ may share information with other central banks/authorities, persons with proper interest, or with consent of the person concerned. - RBNZ must satisfy recipient can protect confidentiality (s105(3)) and may specify conditions (s105(5)(b)). - Offence and penalties for misuse under s105(7) and sections 156AA. --- ### Supervisory approach, risk assessment, and crisis resolution (Principles 8–9) - PRESS framework: - Ten risk categories; probability scale 1–5; impact scale 1–5; overall product up to 25 used to determine supervisory response (1–9 business as usual; 10–14 increased surveillance; 15–20 regulatory response; 21–25 crisis management). - PRESS timeframe: forward-looking probability assessments "six months"; full PRESS/frequency: six-month full PRESS for five largest banks; annual full PRESS for next five; annual full PRESS for remaining medium-low banks. - Supervisory techniques: - Mainly off-site; limited on-site testing/verification; on-site activities limited to thematic reviews and prudential meetings. - RBNZ can require s95 reports by qualified experts but s95 rarely used. - Shortcomings cited: - Lack of on-site independent verification, limited documentation of analysis, analysts not required to retain work papers, PRESS reports not routinely communicated to banks. - Assessments: - Principle 8: "Materially Noncompliant." - Principle 9: "Materially Noncompliant." ### Supervisory reporting and verification (Principle 10) - Powers: section 93 and 94 to require information and require audits of requested information. - Prudential reporting: monthly, quarterly, semi-annual, and annual returns; 2016 refinements planned for large exposures, related parties, capital composition, and IRB banks’ parameters. - Key gaps: - RBNZ does not conduct independent verification of prudential returns (EC9). - Current resources insufficient for on-site inspections. - No systematic practice to verify valuation frameworks; relies on external auditors and directors’ attestations. - Assessment: Principle 10 "Materially Noncompliant." - Recommendations: develop strong first-hand independent verification processes and explicit requirement for external experts to report material shortcomings (EC11). --- ### Corrective and sanctioning powers and resolution (Principle 11) - Supervisory tools: formal advice, corrective plans, s74 conditions of registration, s95 reports, s101–s104 investigative powers, directions under s113 (MoF consent), statutory management powers (s117 onward), OBR prepositioning for banks with retail deposits > "$1 billion." - Conditions of registration commonly used for early corrective action. - Constraints: - High threshold for directions and requirement for MoF consent may delay timeliness. - Enforcement historically reactive; proposal to make compliance with BS policy evidence of prudent banking (s78) to facilitate preventive action. - Assessment: Principle 11 "Largely Compliant." --- ### Consolidated supervision (Principle 12) and home‑host cooperation (Principle 13) - Consolidated scope: supervision focuses on banking group as defined in conditions of registration (New Zealand incorporated banks: registered bank and subsidiaries; overseas branch banks: New Zealand business and subsidiaries). - Limitations: subconsolidated approach may exclude some affiliates; RBNZ places significant emphasis on "parent support" in PRESS and coordinates with APRA for Australian parents. - Home-host: strong relationship with APRA; RBNZ participates in APRA supervisory colleges and stress tests; MoU with APRA (May 2012). - Assessment: Principle 12 "Largely compliant"; Principle 13 "Largely compliant." - Recommended preparatory actions: develop consolidated supervision framework, define banking group economically, analyze intra-group transactions, formal policies on foreign operations where host supervision weak. --- ### Corporate governance (Principle 14) and BS14 - BS14 (December 2010) provides corporate governance guidance (Part 3 drawing on Basel 2010 principles). - RBNZ plans to impose additional condition of registration to make non-compliance with BS14 guidance evidence of imprudence under s78. - Gaps: - RBNZ does not comprehensively assess governance structures/processes for appointing directors, Board effectiveness, remuneration oversight, or succession planning. - No mandatory requirement to notify RBNZ of material information affecting fitness and propriety. - Assessment: Principle 14 "Materially Noncompliant." - Suggested actions: expand BS14 to include guidance on risk appetite statements, required Board policies, and codes of conduct; require conditions of registration to enforce governance expectations. --- ### Risk management, capital, credit, provisioning, concentration, related parties, liquidity, operational risk (Principles 15–26) - Principle 15 (Risk management): assessment "Materially Noncompliant." - RBNZ requires directors’ attestations but issues limited specific guidance; ICAAP (BS12) and liquidity (BS13) issued; overall supervision relies on thematic reviews and director attestations. - Principle 16 (Capital adequacy): assessment "Compliant." - Minimums in force since "January 1, 2013": CET1 "4.5 percent"; Tier 1 "6 percent"; total capital "8 percent"; buffer of common equity "2.5 percent." - Four banks accredited IRB; RBNZ keeping leverage ratio under review. - Principle 17 (Credit risk): "Materially Noncompliant." - Thematic reviews performed; no systematic determination that each bank’s credit processes provide comprehensive bank-wide view. - Principle 18 (Problem assets/provisions): "Materially Noncompliant." - IFRS framework used; RBNZ does not set explicit supervisory rules for classification/forbearance/cured loans or systematically test provisioning frameworks. - Principle 19 (Concentration and large exposures): "Materially Noncompliant." - No regulatory limits on single counterparty exposures; planned quarterly large exposures reporting under pilot as at March 2016. - Principle 20 (Related parties): "Materially Noncompliant." - BS8 limits: aggregate gross related party exposures "125 percent" of Tier 1; aggregate nonbank related party exposures "15 percent" of Tier 1. - No requirement for Board prior approval of related-party transactions/write-offs; definitions incomplete. - Principle 21 (Country/transfer risk): "Compliant." - Cross-border exposures limited and concentrated (Australia); monitoring judged adequate given current scale. - Principle 22 (Market risk): "Largely Compliant." - Principle 23 (IRRBB): "Materially Noncompliant." - No explicit IRRBB framework distinct from market risk; RBNZ does not mandate IRRBB measurement reporting. - Principle 24 (Liquidity risk): "Compliant." - BS13 metrics: one-week mismatch ratio "not less than zero percent" daily; one-month mismatch ratio "not less than zero percent" daily; one-year CFR "not less than 75 percent" daily. - Principle 25 (Operational risk): "Materially Noncompliant." - Outsourcing policy (BS11) applies for banks with net external liabilities > "$10 billion"; otherwise supervisory scrutiny limited. - Principle 26 (Internal control and audit): "Materially Noncompliant." - RBNZ relies on Boards and external/internal audits; lacks systematic independent verification. --- ### Financial reporting, audit, and disclosure (Principles 27–28) - Principle 27 (Audit): "Largely compliant." - FMCA sections require audits in accordance with ISAs (NZ); FMA oversees audit quality reviews; RBNZ meets annually with external auditors of 10 largest banks. - RBNZ relies on external auditors for valuation assessments and does not have power to obtain auditors’ working papers directly. - Principle 28 (Disclosure and transparency): "Compliant." - Quarterly disclosure statements required for all registered banks; OiCs supplement IFRS requirements; RBNZ proposals for a quarterly Dashboard under Regulatory Stocktake. - Timeliness: full-year disclosures within "three months"; half-year within "two months"; quarter disclosures generally within "two months." - RBNZ publishes aggregate and bank-specific statistical reports; semi-annual Financial Stability Report. --- ### AML/CFT supervision (Principle 29) - AML/CFT Act in force "June 30, 2013." - RBNZ statutory powers under AML/CFT Act (sections 132 and 139) include access to records, on-site inspections (section 133), guidance, and disclosure to government agencies (including NZ Police and FIU). - RBNZ AML/CFT supervisory practice: - Conducted "31 on-site inspections" of the "25 registered banks" since June 30, 2013. - Higher-risk banks receive on-site visits every year or 18 months. - RBNZ AML/CFT team capacity: should be able to visit at least "20 entities per year." - AML/CFT guidelines published/updated (BS5; updated "27 June 2016"). - CDD, correspondent banking, whistleblower protections, audits, and cooperation mechanisms described in report. - Assessment: Principle 29 "Compliant." - Noted next FATF assessment referenced as "2019." --- ### Key cross-cutting recommendations (selected) - Reassess resources and long-term funding flexibility to enable more intrusive supervision including on-site programs. - Issue enforceable supervisory policy documents and benchmarks (e.g., risk management, credit classification, provisioning, related-party transactions). - Develop on-site inspection program (directly or via external experts) targeted by risk and systemic importance. - Improve verification of prudential returns (independent testing of earnings and credit asset quality). - Make compliance with BS policy documents evidence of prudent banking (s78) and consider removing Ministerial consent for issuing directions under s113(1)(e). - Strengthen PRESS analysis documentation and retain work papers. - Expand cooperation with APRA on cross-border supervision, crisis management, outsourcing/separation planning, and stress-testing. *cr17120 - INTRODUCTION, cr17120.pdf, International Monetary Fund* ### INTRODUCTION __________________________________________________________________________________ 7 ### INTRODUCTION ### Summary Assessment: supervisory approach and effectiveness - The supervisory approach of the Reserve Bank of New Zealand (RBNZ) reflects the characteristics of the local banking industry and the authorities’ goal to limit moral hazard by relying on market discipline and not offering deposit insurance. - Banks offer traditional products, in a highly concentrated market, dominated by four subsidiaries of the four largest Australian banking groups. - The RBNZ approach relies on three pillars: market discipline, based on public disclosure; self-discipline, based on bank directors’ attestations of public information; and regulatory discipline, based on a simple and conservative regulatory framework, off-site monitoring, and disciplinary actions. - The RBNZ also relies on synergies with the Australian Prudential Regulation Authority (APRA) home-country supervision of Australian banks’ operations in New Zealand. - In practice, the RBNZ approach is in conflict with the Basel Core Principles for Effective Supervision (BCP) requirements, which expect granular regulatory guidance and on-site independent verification work by the supervisor. - The RBNZ aims to strengthen supervision while retaining its current approach. ### Recent supervisory developments (since last FSAP) - The RBNZ has increased attention to strengthening regulatory discipline: - Adopted the new Basel capital framework. - Issued supervisory guidance and increased regulatory reporting. - In 2016, began the final stage of a multi-year upgrade of its supervisory non-public statistical and prudential reporting from banks. - Performed off-site thematic reviews to profile banks’ risk management in areas of concern, such as dairy and real estate. - Implemented an off-site process (PRESS) that rates banks based on their risk profile and their systemic impact. - Implemented an AML/CFT supervision process; AML/CFT supervision is the only area with an on-site program. ### Key limitations and risks identified - The effectiveness of the current approach is limited by the heavy weight placed by RBNZ on market discipline compared to regulatory discipline, and to intensive supervision in particular. - A defining feature of RBNZ’s approach is the absence of independent testing of prudential returns and risk management practices for prudential purposes. - The RBNZ avoids detailed on-site inspections, either by its own staff or external experts, concerned that this would weaken bankers’ incentives to ensure robust controls. - The RBNZ needs to re-evaluate whether the lack of a more intensive approach, including an increased on-site program, may undermine market and self-discipline. - The current approach makes it difficult for supervisors to develop expertise on bank operations, hampering the effectiveness of their analysis and policy development. ### Resources and capacity - The assessors were very impressed with the quality and competence of the RBNZ staff; however, insufficient resources are a serious impediment to achieve compliance in-substance with the BCP. - RBNZ staff’s competence and professionalism is recognized by the banking industry and facilitated this assessment; however, staff operate under resource constraints and a mere reallocation would not be enough, even if the current low-intensity approach is retained. - Strengthening the regulatory discipline pillar will require a reassessment of resources and technical capacity. - To continue enhancing the supervisory process, an increase in staffing is required to at least enable the RBNZ to: - develop an on-site program that tests the foundation of the three pillar approach; - deepen the analysis that supports the PRESS ratings; and - issue supervisory guidelines that promote preventive actions. - The remaining recommendations in Table 3 should be considered when reassessing supervisory resources reflecting a balance between risk and efficiency costs. ### Self-discipline, guidance, and enforcement issues - The self-discipline pillar relies on directors’ attestations that the bank has adequate risk management systems in place. - The RBNZ has issued limited guidance as to what constitutes adequate risk management. - The vacuum created by the RBNZ not stating its expectations on adequate risk management is likely filled by foreign banks basing their attestations on home-country supervisors’ standards. - For domestic-owned banks, it is likely that each may be following standards adopted from different sources. - Not issuing standards may result in an uneven playing field as some banks may be following stricter standards than others, thus diminishing the value of disclosures as directors are attesting to different standards. - An effective self-discipline regime needs to be supported by a well-developed regulatory framework and swift enforcement when banks violate the rules. - The RBNZ has broad enforcement powers, but the lack of regulatory benchmarks and the high legal threshold for issuing directions make swift enforcement less likely. - To issue directions under section 113(1)(e) of the RBNZ Act when a bank is conducting business in a non-prudent manner the consent of the Minister of Finance (MoF) is required. - Demonstrating imprudent behavior (for example, inadequate risk management or insufficiently developed risk appetite statements) is made difficult by the lack of supervisory standards. - As a result, RBNZ’s enforcement is currently based primarily on breaches that have already occurred and is not preventive. ### Recommended priority actions (key items summarized) - Recommended actions in this report seek to improve compliance with the BCP, and enhance the effectiveness of the RBNZ three-pillar approach. Key recommended actions include: - (i) amending section 78 of the RBNZ Act to make compliance with RBNZ-issued supervisory policy evidence of prudent banking; - (ii) issuing supervisory policy documents as warranted (for example on credit risk); - (iii) carrying out targeted on-site programs (directly or through external experts) to verify regulatory reports, risk management, and the quality of credit exposures; - (iv) enhancing proactive cooperation within the trans-Tasman agreements to support cross-border synergies in supervision; - (v) considering options to facilitate the taking of enforcement action based on supervisory judgment; and - (vi) improving analysis to support PRESS ratings by retaining work papers to document determinations on adequacy of risk mitigants. ### Context of the assessment and scope - The assessment is part of the Financial Sector Assessment Program (FSAP) undertaken by the International Monetary Fund (IMF) in 2016. - The assessment team visited Wellington and Auckland in New Zealand, as well as Sydney and Melbourne in Australia. - The assessment is based on the regulatory and supervisory framework in place at the time of this visit. - The current assessment was against the standard issued by the Basel Committee on Banking Supervision (BCBS) in 2012. - The purpose of the exercise was to assess the effectiveness of New Zealand’s banking supervisory systems and practices against the 29 Principles; the Core Principles are neutral with regard to different approaches to supervision, so long as the overriding goals set by each Principle are achieved. - The scope of the assessment is RBNZ supervision of the registered banks; other financial industries supervised by the RBNZ are not covered in this assessment. The assessment is not intended to represent an analysis of the state of the banking sector, the macroprudential policy framework, or crisis management framework, which are addressed in dedicated technical notes of this FSAP. ### Additional observations - Since the last FSAP and the GFC, RBNZ has: - issued Banking Supervision (BS) policy documents stating supervisory expectations for a number of risks; - adopted Basel III capital standards subject to certain qualifications; - employed theme days and thematic reviews for horizontal reviews of emerging risks; - implemented the off-site analytical process (PRESS) producing risk ratings for the banks; - effectively implemented RBNZ’s supervisory responsibilities under the AML/CFT Act. - The assessment took into account the unique characteristics of the New Zealand banking industry: a highly concentrated market dominated by large Australian subsidiaries, enhanced cooperation arrangements with APRA, one large state-owned bank, and many small banks (foreign and domestic-owned). - While the New Zealand banking sector was relatively unscathed during the global financial crisis (GFC), several factors not necessarily related to bank supervision contributed to the maintenance of financial stability, including simple banking business models, parent bank support, and effective home-country supervision. Unexpected funding-liquidity risks were contained by unprecedented emergency liquidity facilities and support provided by the RBNZ. *cr17120 - INTRODUCTION, cr17120.pdf, International Monetary Fund* ### 17. The RBNZ is responsible for the prudential regulation and supervision of registered ### 17. The RBNZ is responsible for the prudential regulation and supervision of registered ### RBNZ mandate, powers, and institutional arrangements - Responsibilities: - Prudential regulation and supervision of registered banks and insurers. - Regulation of NBDTs. - Oversight of the payment system (and settlement systems jointly with the FMA). - AML/CFT supervision for banks, NBDTs and life insurers. - Promoting the maintenance of a sound and efficient financial system under the RBNZ Act. - Formulating monetary policy, providing settlement services and issuing currency. - Supervision of insurers under the Insurance (Prudential Supervision) Act 2010. - Key powers and frameworks: - Acts as lender of last resort and exercises crisis management powers; some crisis management powers and the power to make regulations are exercised together with the MoF and the Governor-General acting on recommendation from the RBNZ. - In 2013, completed the legal framework for licensing and regulation of NBDT institutions (deposit-taking finance companies, building societies, and credit unions). - In 2013, introduced a framework for macroprudential policy vis-à-vis the banking sector under its existing objectives and powers. - Introduced the minimum core funding ratio (CFR) in 2010 to mitigate rollover liquidity risk. - Under RBNZ Act section 165A, required to report in the semi-annual FSR on soundness and efficiency of the financial system and RBNZ policies and activities. ### Structure and key features of the financial sector - Composition and trends: - Banks own about 77 percent of total financial assets. - Nonbank lending institutions represent 2 percent of financial assets. - Managed funds are growing (no numeric value provided). - Past stress episodes: - The GFC had a mild negative impact on the banking sector. - A significant number of finance companies experienced difficulties over 2006–2010 and were put into receivership; failures were mainly caused by problems with asset quality, connected lending, and credit management. - Banking sector characteristics and vulnerabilities: - Focus on lending to the domestic private sector. - Highly concentrated and dominated by four Australian subsidiaries. - Sector appears sound: well capitalized, sufficient liquid assets, high asset quality, and profitability stable over the last 10 years. - Foreign funding still accounts for 19 percent of banks’ liabilities. - As of October 2015: - Over 80 percent of banks’ liabilities (including deposits and minus equity) had a maturity of below one year. - 65 percent was on demand or with maturity of less than 3 months. - Concentration: the four large Australian subsidiaries’ share of total banking sector assets was 83 percent as at June 2016. - The four subsidiaries are significant to their parents: about 15 percent of group earnings and total assets on average. - The “Big Four” have increased their profitability indicators over recent years. ### Funding and liquidity considerations - Reliance on wholesale and foreign funding: - Financial sector relatively dependent on wholesale funding, including foreign currency funding sourced offshore. - Banks have reduced non-NZD funding to below 20 percent of total liabilities. - New Zealand banks seeking offshore funding use mostly the primary market; funding liquidity on global markets is relatively more important than market liquidity. - Heightened volatility in global financial markets may contribute to a pick-up in wholesale funding spreads, raising banks’ funding cost. - Liquidity policy and instruments: - Minimum core funding ratio (CFR) introduced in 2010. - Prudential liquidity policy introduced in 2010 to encourage banks to self-insure against funding-liquidity risks. - Covered bonds introduced (may be issued up to 10 percent of the banking group’s total assets) to manage and diversify funding liquidity; banks started issuing covered bonds in 2010. - Australian parents previously could provide contingent funding under APRA’s APS 222 up to 50 percent of the parent’s Tier 1 capital; APRA has tightened related party exposure requirements, requiring reduction of non-equity exposures to 5 percent of Tier 1 parent capital. - New Zealand banks required to set up contingent funding arrangements secured by instruments exempt from resolution actions in New Zealand. ### Preconditions for effective banking supervision (A–F) - A. Sound and Sustainable Macroeconomic Policies: - New Zealand is a small open economy underpinned by strong policy frameworks and open-market policies. - Treasury is responsible for fiscal policy, including reducing total debt to prudent levels and publishing: - A short-term Budget Policy Statement each year. - A longer-term Fiscal Strategy Report each year. - A Statement of the Long Term Fiscal Position at least every 4 years (covers a 40-year horizon). - RBNZ responsible for price stability as defined by the Policy Targets Agreement; operational independence through the Official Cash Rate. - RBNZ Act enables the Governor-General, on advice of the MoF, to direct the RBNZ to adopt other monetary objectives for up to 12 months (excluding price stability). - B. Framework for Financial Stability Policy Formulation: - RBNZ has independent decision-making power for macroprudential policies under the RBNZ Act. - MoU signed in May 2013 outlines governance arrangements for macroprudential tools; RBNZ must keep MoF and Treasury regularly informed and consult when macroprudential intervention is being considered. - Macro-Financial Committee (MFC) established during 2008–09 crisis. - In 2013, Macro-Financial Department (MFD) established with teams for financial system monitoring, risk assessment, and macroprudential policy development/implementation. - New Zealand Council of Financial Regulators (CoFR) comprises RBNZ, FMA, MBIE, and Treasury; meets quarterly; alternately chaired by the RBNZ Governor and CEO of FMA. - CoFR subcommittee—Banking Forum—discusses regulatory matters for registered banks and includes other agencies such as Inland Revenue Department and Ministry of Justice. - C. A Well-Developed Public Infrastructure: - New Zealand ranks in the 97–100th percentile of all countries for the World Bank key governance indicators. - Strengths include: - Adaptable and responsive legislature for law reform. - Quality laws for business organization, insolvency, property registration and transfer, and consumer protection. - Independent judiciary of high standing. - Institutions for market conduct and competition law enforcement (FMA and Commerce Commission). - Strong independent professions and adherence to international professional standards (IFRS, actuarial standards). - Support for freedom of contract, property rights, individual rights, and protection from arbitrary government action. - Well-developed corporate and commercial law. - D. Framework for Crisis Management, Recovery, and Resolution: - Prudential regime provides triggers under which RBNZ may apply failure resolution or crisis management powers. - RBNZ can issue a direction to a bank (following MoF consent) to address prudential breaches. - RBNZ may recommend statutory management to the MoF where a bank’s affairs are prejudicial to financial system soundness. - Open Bank Resolution (OBR): - Option between liquidation and bail-out; under OBR a failing bank is closed overnight, placed into statutory management, and reopened with a proportion of creditor funds frozen to cover anticipated losses after shareholders’ interests are extinguished. - Government guarantee covers all current and future liabilities of the bank, except frozen liabilities. - Technical implementation achieved in 2013; banks have pre-positioned IT and systems to freeze portions of transaction accounts and reopen on the following business day. - E. Public Safety Net: - RBNZ has a statutory lender-of-last-resort role and may lend to individual banks (section 5 of the RBNZ Act). - No ex ante depositor protection scheme (insurance) in New Zealand; policy intent is to reduce moral hazard and implicit government guarantees. - Temporary opt-in retail deposit scheme introduced in 2008 for registered banks and NBDTs; initially two years and extended until December 2011. - Government concluded at the scheme’s conclusion that a permanent scheme would have modest benefits, outweighed by costs given institutional settings (notably OBR); government plans to reconsider merits of explicit depositor protection (in conjunction with crisis governance) in due course. - F. Effective Market Discipline: - Regulatory and commercial environment supports market discipline: - Shareholders listed on the Register of Companies. - Frameworks for mergers, takeovers, and acquisitions protect shareholder interests. - Corporate governance arrangements set out in the Companies Act 1993 (board responsibilities, shareholder rights, solvency test, meetings). - Companies must disclose number of staff paid over NZD 100,000 p.a. in bands of NZD 10,000 in annual reports. - RBNZ committed to bank disclosure and there are no restrictions on moving deposits between banks. - Public disclosure is a necessary but not sufficient condition for effective market discipline; anecdotal evidence suggests disclosure statements are not widely used at the retail level. - Effectiveness of market discipline in New Zealand is similar to other advanced economies; public safety nets and large maturity mismatches limit pure market-discipline outcomes, necessitating effective regulatory discipline. *International Monetary Fund — Selected excerpts from the New Zealand financial sector assessment chapter.* ### 36. The RBNZ is committed to provide regulatory discipline as part of its three-pillar ### 36. The RBNZ is committed to provide regulatory discipline as part of its three-pillar ### Role, mandate, and delivery of regulatory discipline - RBNZ purpose: deliver the public service of “regulatory discipline” to promote a sound and efficient financial system and avoid significant damage to the financial system that could result from the failure of a financial institution under its supervision. - Effective regulatory discipline requires: - identification of bank-specific and system-wide vulnerabilities through verification work and forward-looking analysis; - enforcement of the legal and regulatory framework; - timely preventive and corrective actions; - triggering the resolution process and contribution to it where so established. ### MAIN FINDINGS — A. Responsibilities, Objectives, Powers, Independence, and Cooperation (CPs 1–3, and 13) - Statutory objectives: “promoting the maintenance of a sound and efficient financial system; or avoiding significant damage to the financial system that could result from the failure of a registered bank.” - Operational ambiguities: - Broad definitions of “sound and efficient financial system,” “significant damage,” and emphasis on “systemic implications” have allowed a hands-off supervisory philosophy that departs from conventional, more resource-intensive supervisory practices. - Current approach has limited appetite for independent verification of supervisory returns and first-hand knowledge of individual bank soundness and risk management. - RBNZ is defining its risk appetite framework to translate statutory objectives into practical outcomes and to clarify supervisory conduct. - Resourcing: - RBNZ staff are highly qualified, but numbers are clearly insufficient to conduct effective supervision, even if on-site work were conducted by external experts under RBNZ prudential mandates and guidance. - Insufficient resources impede a more intrusive supervisory approach, early crisis preparedness, and thematic or system-wide analysis. - Coordination with government and other agencies: - While legal provisions and a 2012 MoU define coordination with the government and Treasury, practical boundaries may be unclear; the Treasury’s adviser role to the Minister creates ambiguities requiring clarification. - Authorities may consider aligning the RBNZ Act with the Insurance (Prudential Supervision) Act (IPSA) and NBDT Act by removing the role of the Minister in issuing directions (see CP11). - Lack of clarity has mostly manifested in deficiencies in effective coordination on policy advice, and could delay prudential regulations or invite undue government interference if RBNZ technical expertise is not recognized. - Cross-border cooperation: - Strengthening collaboration with APRA can leverage home-country supervision synergies. - The Trans-Tasman relationship is underpinned by legislation, bilateral MoUs, and the Trans-Tasman Banking Council (TTBC). - RBNZ could seek proactive engagement during APRA on-site visits to gain knowledge and confidence in APRA supervisory techniques. - Better coordination prepares supervisors for effective action in times of stress. ### MAIN FINDINGS — B. Methods of Ongoing Supervision (CPs 8–10, and 12) - System structure influences supervisory approach: - Largest four banks are subsidiaries of Australian banks; parents derive significant investment and earnings from the subsidiaries. - APRA maintains robust consolidated supervision of these subsidiaries, enabling RBNZ to rely on home-country monitoring and adopt higher risk tolerance. - Three-pillar supervisory model: market, self, and regulatory discipline. - Market discipline: public disclosure and publication of financial information. - Self-discipline: corporate governance and director attestation that risk management systems “are in place to monitor and control adequately all material risks of the banking group.” - Regulatory discipline: supervisory rules/guidelines in capital (Basel II and III), liquidity, outsourcing, related party lending, and corporate governance; PRESS off-site financial analysis system implemented. - Non-intrusive supervisory philosophy: - Guidelines avoid hard limits and prescriptiveness; detailed on-site inspections are not conducted. - Reliance on banks’ management and directors to design risk management systems, with off-site reviews and prudential meetings forming the primary supervisory interaction. - Guidance gaps and reliance on home-country standards: - RBNZ guidance does not sufficiently communicate expectations for management systems to monitor and control material risks, leading to differing benchmarks for directors’ attestations. - Foreign-owned banks likely follow home supervisor standards; locally-owned banks may rely on varied sources—testing attestations through bank-specific reviews is required. - On-site interaction and verification: - RBNZ does not conduct inspections; on-site interaction is via prudential meetings, primarily with the 10 largest banks. - Thematic visits review systemic issues but do not include direct access to bank records; reviews rely on information requests and questionnaires. - RBNZ participates as an observer during APRA on-site inspections. - Lack of first-hand independent verification prevents thorough understanding of banks. - PRESS (Proportionate Risk Evaluation Surveillance System): - PRESS incorporates 10 risk areas and a systemic impact factor to produce an aggregate numerical rating. - Macroeconomic factors and stress testing results add forward-looking elements, but ratings are primarily results-oriented. - Analysis supporting ratings is not well documented and is based primarily on banks’ internal risk reporting. - Consolidated supervision: - RBNZ does not conduct effective consolidated supervision; supervision is based on the registered bank’s banking group as defined in conditions of registration, allowing subconsolidated supervision. - New Zealand banking groups are generally simple and have no material foreign operations; four more complex groups are Australian and supervised by APRA. - Consolidated supervision attention focuses on “parent support” as a PRESS risk factor and communication with RBNZ insurance supervisory function and FMA. - RBNZ can change its approach to consolidated supervision if banking groups’ risk profiles change. - Ownership, licensing, and structure: - Registration by RBNZ constitutes a bank; since 2013, all NBDTs are licensed by RBNZ and supervised by private sector trustees per RBNZ sectoral regulations. - Transfer of significant ownership is infrequent; ownership is concentrated and major acquisitions were not significant at assessment time. ### MAIN FINDINGS — C. Corrective and Sanctioning Powers of Supervisors (CP11) - Enforcement powers: - RBNZ has broad powers to impose corrective actions or sanctions, but issuance of directions requires the prior consent of the MoF (section 113 of the RBNZ Act). - Directions can require banks to take corrective action, remove/replace directors, auditors, or management, and cease unsafe business activity. - Directions may be imposed to correct violations or address actions not considered prudent by RBNZ. - Enforcement powers have been used to require disclosure re-publication, impose additional conditions of registration, or require additional reporting. - Guidance and thresholds: - RBNZ has issued limited guidance defining unsound or imprudent banking activities; lack of detailed regulatory framework complicates issuance of preventive directions. - Directions may be issued when business is prejudicial to system soundness or not being conducted prudently; threshold to issue a direction is high. - The requirement of Ministerial consent for bank-specific directions (section 113(1)(e)) may impose burdens and reduce timeliness of enforcement. - Enforcement process implications: - Largely untested enforcement process may lead to reactive corrective action. - Use of supervisory judgment is enhanced by enforceable guidelines on risk management processes. ### MAIN FINDINGS — D. Corporate Governance (CP14) - Legal and supervisory framework: - Companies Act of 1993 establishes corporate governance requirements; RBNZ’s Document BS14 provides additional prudential guidance. - BS14 incorporates fit-and-proper principles from the Basel Committee’s 2010 paper and addresses Board composition and inclusion of independent directors. - Only areas directly linked to conditions of registration are enforceable. - Supervisory scope gaps: - RBNZ monitors compliance through off-site reviews, but scope is not detailed enough to meet BCP standard. - Supervisory activities do not include assessing Board engagement and oversight of senior management, governance structures, management selection, remuneration decisions, or Board communication of corporate culture and control environment. ### MAIN FINDINGS — E. Prudential Requirements, Regulatory Framework, Accounting, and Disclosure (CPs 15–29) - Risk management requirements: - RBNZ does not impose direct, comprehensive requirements on banks to have risk management policies and processes, except in capital adequacy and liquidity. - Directors’ attestation required with every financial statement: “the bank had systems in place to monitor and control adequately the material risks of the banking group, including credit risk, interest risk, currency risk, equity risk, liquidity risk, operational risk, and other business risk, and that those systems are being properly applied.” - Accuracy of disclosure is tested off-site through report analysis and on-site interviews with bank management. - Liquidity policy (BS13): - Requires compliance with quantitative and qualitative standards, including one-week and one-month percentages of liquidity outflow to total funding and a one-year CFR required to be not less than 75 percent. - Results of liquidity requirements yield broadly similar results as application of Basel III. - Connected (Related) Party Exposures Policy (Document BS8): - Establishes requirements including limits and market terms for related party transactions. - Aggregate limit on all related party exposures: 125 percent of Tier-one capital. - 15 percent aggregate limit on nonbank related party exposures, by condition of registration. - Aggregate limit on net exposures (under robust bilateral netting agreements) set according to bank’s rating, with a maximum of 75 percent of Tier 1 capital. - Policy does not require prior Board approval for related-party transactions and write-offs; definitions do not cover all types of related party required by Principle 20. - Compliance is monitored off-site, but information aggregation is not adequate to monitor related party lending risk. - Capital framework: - RBNZ follows Basel guidance for capital adequacy to the extent appropriate for New Zealand (BS2 A and B). - Implemented Basel II Internal Models Based Approach (BS2B: four banks accredited to use the IRB approach) and Standardized approaches (BS2A). - RBNZ takes a simple and conservative approach to capital adequacy. - Main conceptual divergence: leverage ratio has not been considered at this stage and is kept under review. - Other departures (Pillar 2, Pillar 3, SIFI surcharges) reflect regulatory policy decisions tailored to national circumstances. - The capital framework is currently under review. *cr17120 - 36. The RBNZ is committed to provide regulatory discipline as part of its three-pillar* ### 58. New Zealand’s legal framework ensures that the financial statements of every bank ### 58. New Zealand’s legal framework ensures that the financial statements of every bank ### Accounting and auditing framework - Financial statements of every bank are prepared in accordance with New Zealand equivalents to internationally recognized accounting standards (NZ IFRSs). - Financial statements are audited by a qualified external auditor in accordance with auditing standards applicable in New Zealand that are equivalent to internationally recognized auditing standards (ISAs). - The RBNZ relies on the external auditing process and director attestations to determine for prudential reasons whether banks use valuation practices consistent with IFRSs. - The RBNZ routinely meets with the external auditor of the 10 largest locally incorporated banks. These meetings do not cover valuation practices, which are specifically trusted to external auditors. Other areas of supervisory responsibility delegated to external auditors are normally not covered in these meetings either. - Reference to IFRS country profile noted as footnote 18 in the source. ### Assessment methodology and grading categories - Five compliance categories used: compliant, largely compliant, materially noncompliant, noncompliant, and non-applicable. - Definitions preserved exactly as in the source: - "Compliant" — all the essential and additional criteria are met without any significant deficiencies, including instances where the principle has been achieved by other means. - "Largely compliant" — only minor shortcomings observed that do not raise concerns about the authority’s ability and clear intent to achieve full compliance within a prescribed period; can be used when the system does not meet all essential criteria but overall effectiveness is sufficiently good and no material risks are left unaddressed. - "Materially noncompliant" — severe shortcomings despite formal rules and procedures, with evidence that supervision has clearly been ineffective or shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance. - "Noncompliant" — not substantially implemented; several essential criteria are not complied with, or supervision is manifestly ineffective. - "Non-applicable" — criteria would not relate to the country’s circumstances. - The RBNZ elected to be assessed and graded against both essential and additional criteria; assessment is qualitative and not a checklist—emphasis should be on accompanying commentary rather than the grade count. ### Institutional responsibilities, coordination, and governance - The RBNZ is the single prudential regulator in New Zealand, as established by the RBNZ Act; section 1A establishes RBNZ responsibility for "promoting the maintenance of a sound and efficient financial system." Specific objectives and functions are defined in Part 5 of the Act. - Treasury provides advice to the MoF on effects of prudential regulation and supervision where these impact the wider economy or fiscal budget; Treasury roles defined through the 2007 Review of Financial Products and Providers Cabinet paper and the 2012 MoU between the RBNZ and Treasury. The MoU and 2007 Cabinet paper have not been made public and are not included in legislation. - The 2012 MoU has potential to produce areas of ambiguity (as discussed in CP2 and CP3 in the source). - Where RBNZ is the independent decision-maker, Treasury’s role is advisory on broader government objectives to inform the Minister’s views and potential use of Minister’s powers under the RBNZ Act. Where the MoF has a decision-making role, most actions (such as statutory management) must be triggered by the RBNZ. - The FMA supervises market conduct of banks for certain purposes (disclosure for offers of "complex" financial products to retail investors; licensing for providing certain types of financial services). No legislative framework exists to avoid regulatory and supervisory gaps between RBNZ and FMA; however, the two agencies have a published MoU. - The Council of Financial Regulators (CoFR) meets quarterly, attended by senior representatives of the RBNZ, FMA, Treasury, and MBIE. CoFR is for information sharing and has no decision-making powers. The Banking Forum is a CoFR subcommittee; Ministry of Justice and Inland Revenue Department (IRD) are associated members. ### RBNZ objectives, operational clarity, and supervisory strategy - RBNZ objectives under Part 5 include “to promote the maintenance of a sound and efficient financial system, or avoiding significant damage to the financial system that could result from the failure of a registered bank.” There are no operational definitions of "efficient financial system" or "significant damage to the financial system." - In practice there is some lack of operational clarity, though RBNZ aims at conventional supervisory outcomes (identification of bank-specific and system-wide vulnerabilities; escalation to supervisory decision-making bodies; enforcement; timely preventive and corrective actions; contributing to resolution processes). - The Prudential Supervision Department (PSD) has initiated work on a risk appetite framework to focus prudential supervisory activities across banking, insurance, NBDTs, and FMIs. The risk appetite framework will: - Translate RBNZ’s supervisory philosophy into practical supervisory behaviors and outcomes. - Clarify how PSD conducts supervision in practice. - Be an extension of RBNZ’s Enterprise Risk Management framework. - Inform supervisory strategy and illustrate degrees of tolerance/intolerance for each key risk in terms of external institutional/system outcomes and internal supervisory behaviors. - Help refresh RBNZ’s approach to enforcement; an enforcement strategy is intended to be produced by the end of the year (as stated in the source). - Macroprudential policy objective: to increase resilience of the domestic financial system and counter instability arising from credit, asset price, or liquidity shocks. Macroprudential policy is implemented through the same legal framework as prudential policy (Part 5 of the RBNZ Act); individual banks’ compliance with macroprudential requirements is monitored by prudential supervisors. Macroprudential requirements generally overlay existing prudential requirements. - RBNZ’s broader functions (monetary policy, market operations, lender of last resort, issuing currency) do not seem to conflict with prudential objectives. ### Powers to set and enforce prudential standards - The RBNZ Act provides two main mechanisms to set minimum prudential standards: - Conditions of registration, imposed under section 74 of the RBNZ Act. - Orders-in-Council (OiCs) made under section 81 of the RBNZ Act for requirements to publicly disclose financial information. - These mechanisms apply equally to registered bank subsidiaries and branches of overseas entities. - The RBNZ has power to impose, vary, add to, or substitute a bank’s conditions of registration; these conditions operate as binding regulatory requirements and can be modified as indicated in the RBNZ Act. Procedural requirement: RBNZ consults with the affected bank (section 74(3)). No government approvals or consent are needed to set conditions of registration. RBNZ must have regard to feedback from consultation. - Section 81: Governor-General may, by an OiC made on the advice of the Minister given in accordance with a recommendation of the RBNZ, prescribe information or data that must be published by all banks, or any class of banks. ### Review and updating of banking laws and prudential standards - RBNZ policy to periodically review prudential requirements to ensure relevance and effectiveness to changing industry practice. - No formal structured process for reviewing entire stock of prudential regulations; RBNZ typically reviews larger policies every 5–10 years and minor policies on an ad hoc, "as required" basis. - At time of assessment, RBNZ was reviewing capital and liquidity requirements, outsourcing policy, and implementing changes to banks’ public disclosure requirements. - RBNZ completed a stocktake of prudential requirements for banks and NBDTs to identify improvements in efficiency, clarity, and consistency. This stocktake led to several strands of work to implement identified improvements (source references an RBNZ regulatory stocktake URL in the original text). *Source: cr17120 - 58.* ### Section 93 of the RBNZ Act 1989, on the supply of information by registered banks for ### Section 93 of the RBNZ Act 1989, on the supply of information by registered banks for purposes of prudential supervision ### Powers to require information (Section 93) - Section 93 enables the RBNZ to require individual banks or classes of banks to provide any information, data or forecasts to review compliance with internal rules and limits as well as external laws and regulations. - This power provides the RBNZ with the ability to fully access the records of registered banks in New Zealand and the rest of their banking group on a subconsolidated basis (whether based in New Zealand or in another jurisdiction). - There is no difference in the RBNZ’s powers or approach in respect of a foreign bank incorporated in New Zealand. - The RBNZ does not have the power to compel bank directors or senior staff to orally provide information, except in limited circumstances relating to an investigation into the affairs of a bank (sections 101 and 102(1)(c)). - As a matter of supervisory practice the RBNZ expects access to a registered bank’s Board and management. - The absence of a power to compel oral information also reflects that the RBNZ does not carry out on-site inspections. ### Corrective actions, sanctions and crisis powers (EC6) - When the supervisor judges a bank is not complying with laws or is engaging in unsafe or unsound practices, the supervisor has the power to: - (a) take (and/or require a bank to take) timely corrective action; - (b) impose a range of sanctions; - (c) revoke the bank’s license; and - (d) cooperate and collaborate with relevant authorities to achieve an orderly resolution of the bank, including triggering resolution where appropriate. - The RBNZ Act empowers the RBNZ to impose additional conditions of registration on banks (section 74). - The RBNZ can issue, with the consent of the MoF, a direction to a registered bank in specified circumstances (generally serious circumstances relating to the position of the bank) (section 113). - Failure to comply with requirements of the RBNZ Act is, in most cases, a criminal offence, with penalties depending on the nature of the requirement breached (see section 156AA, section 156AB, and section 156AC). - Financial penalties can only be imposed by taking criminal proceedings in the courts. - The Minister may, by notice in writing to the RBNZ given in accordance with a recommendation of the RBNZ, direct the RBNZ to cancel the registration of a bank in specified circumstances (section 77). - The RBNZ usually uses moral suasion to induce corrective action. - In the event of a bank failure or potential default, and in certain other circumstances set out in section 118, the RBNZ has the power to recommend that the bank be placed into statutory management under section 117; placement is by an OiC made by the Governor-General on the advice of the MoF given in accordance with this recommendation. - In resolution, the RBNZ expects to cooperate and collaborate with relevant agencies, including the Treasury and APRA where failures relate to banks operating in Australia and New Zealand. - Section 68A sets out a high level framework for cooperation with Australian authorities, including an obligation to consult with them and take into account their advice to the extent practicable. ### Supervision of parent and affiliated companies (EC7) - The RBNZ has the power to require any associated person of a registered bank (including its parent company) to provide information, data, or forecasts relating to that associated person. - The definition of associated person in section 2(2) does not cover affiliates that are sister companies of the parent or the bank itself; consequently, activities of those affiliates may not be fully assessed for their impact on the safety and soundness of the bank. - This limitation reflects the RBNZ’s sub-consolidated approach to supervision discussed in CP12. ### Assessment of supervisory framework and operational issues (Principles 1 and 2) - Assessment of Principle 1: Largely Compliant. - Comments and observations: - RBNZ responsibilities as banking supervisor are defined in the RBNZ Act; roles of the FMA and Treasury are also defined and CoFR mechanisms exist to identify regulatory gaps. - Concern that responsibilities regarding banking supervision are not clearly defined at an operational level and understood by all authorities, potentially affecting RBNZ operational independence and hindering effective domestic cooperation (implications for EC1 and CP2/CP3). - The RBNZ’s primary statutory objective is broadly in line with CP1 EC2 but contains operational ambiguities: statutory objectives include “promoting the maintenance of a sound and efficient financial system; or avoiding significant damage to the financial system that could result from the failure of a registered bank.” - Broad definitions (e.g., “sound and efficient financial system,” “significant damage”) have coincided with a hands-off supervisory philosophy that departs from more resource-intensive supervisory practices (e.g., no routine independent verification of supervisory returns or weight on first-hand knowledge of individual banks’ soundness). - The RBNZ is encouraged to revisit its supervisory approach and rebalance the three fundamental pillars; RBNZ is currently defining its risk appetite framework to translate supervisory objectives into practical outcomes. - The sub-consolidated approach and limitations in the definition of associated person mean some affiliates’ activities cannot be fully assessed (EC7). ### Independence, governance, accountability and resourcing (EC1–EC9) - EC1 - RBNZ operational independence, accountability and governance framework described in the Act and internal committees. - No perception of government or industry interference at time of assessment. - RBNZ is funded from its own income; MoF and Governor agree a Funding Agreement for five years that specifies the amount of RBNZ income available for operating expenses (section 159). - The current funding agreement runs until June 30, 2020. - Funding agreements and variations must be ratified by Parliament. - MoF consent is required for the use of certain powers (e.g., power to direct banks and certain aspects of statutory management). - MoF’s role in crisis management decisions is under discussion. - Two accountability mechanisms enhancing MoF influence (without compelling actions): - Annual letter of expectations (set up in 2010) to inform the RBNZ’s Statement of Intent. - Section 68B (inserted in 2008) to require the RBNZ to have regard to government policies relating to its functions in certain areas; no directions have been issued under section 68B since 2008. - EC2 (appointment and removal) - Governor is Head of Supervision and Chief Executive (section 40); holds total authority. - Up to two Deputy Governors (section 43); Board (section 52) has no executive authority but keeps performance and resource use under review (section 53). - Governor appointed by the MoF on recommendation of the RBNZ Board (section 40(1)); appointment discussed at Cabinet. - Governors appointed for five year terms; no term limit (section 42(1)). - Deputy Governors appointed by the RBNZ Board on recommendation of the Governor for five year terms; no term limit (sections 43(1) and 44(1)). - Non-executive Board members appointed by the MoF for terms of up to five years (sections 54(1)(a) and 55(1)); no term limit. - Removal provisions: - Disqualification circumstances set out in section 46 (Governor/Deputy) and section 58 (non-executive director). - Governor may be removed under section 49 by an OiC made by the Governor-General on advice of the MoF where specified circumstances arise (examples listed in source). - Deputy Governor removal under section 50; non-executive director removal under section 59, both by OiC on advice of the MoF. - OiC instrument is automatically publicly available; no removals have occurred under these provisions. - No legislative requirement to disclose reasons for removal, but in practice public statement would be necessary if exercised. - EC3 (publication of objectives and accountability) - RBNZ publishes objectives and is accountable through Statement of Intent, Annual Report, Financial Stability Report, and regulatory impact assessments. - RBNZ Act requires: Statement of Intent each year (section 162A); Annual Report (section 163); Financial Stability Report twice a year (section 165A). - The Statement of Intent must include impacts, outcomes or objectives sought and how the RBNZ intends to perform functions to achieve them; draft provided to MoF not later than 30 days before financial year start. - Final Statement of Intent stands referred to Parliament and becomes publicly available. - Annual Report assesses performance against Statement of Intent. - FSR reports on matters associated with statutory prudential purposes. - MoF may appoint a person to assess RBNZ performance and present a report to the MoF, which then stands referred to Parliament (section 167). - Regulatory impact assessments required under section 162AB except for minor or technical policies. - Section 75 requires the RBNZ to publish principles on which it acts in determining bank registration and conditions; these are reflected in the Statement of Principles (BS1). - EC4 (internal governance and decision-making) - The Governor delegates decisions to Deputy Governor and Head of Financial Stability; Head of PSD; Senior Manager Supervision; delegation depends on matter significance. - Most significant matters (e.g., register new bank or enforcement action) taken to the level of Governors; less significant matters handled at lower levels (e.g., requiring additional supervisory information taken by Senior Manager Supervision). - Two internal committees meet on average every two weeks: Banking Steering Group (BSG) and Financial System Oversight (FSO) Committee. - FSO comprises Governor, both Deputy Governors, Assistant Governor, Head of PSD, Senior Manager Supervision, Head of MFD, Head of Financial Markets, General Counsel, all Managers within PSD, and one Senior Adviser. - Where material supervisory decisions are made without formal discussion at BSG or FSO, decision-makers usually inform committee members as part of information sharing. - Decision-making structure and statutory provisions plus conflict of interest policy are relied upon to address actual or potential conflicts. - EC5 (staff professionalism and conflict rules) - RBNZ has Code of Conduct, conflict of interest policy, and disclosure of information policy for all staff. - Breaches of conflict of interest policy can trigger disciplinary action. - These documents are not publicly available (conflict of interest policy likely to be published soon). - EC6 (resources and financing) - RBNZ acknowledges current staffing and budget would be insufficient for an intrusive supervisory approach with on-site supervision; given low-intensity approach, RBNZ considered budget sufficient when discussing the five-year funding agreement with MoF. - Headcount of the PSD was 54 in 2015/16. - There are 10 staff allocated to the supervision of banks structured into four “pods.” - Each pod is comprised of a senior supervisor and 1–3 more junior staff, and is responsible for one of the four largest banks (i.e., ANZ, BNZ, ASB, and Westpac) and a number of smaller banks. - RBNZ maintains a formal remuneration policy and carries out an annual review of remuneration pay ranges. - PSD does not formally outsource supervisory functions but had a professional services budget in 2015/16 considered sufficient. - RBNZ Act provides for delegation to external experts in specific areas: independent reports under section 95; entry and search under section 99(2)(b) and appointment of an investigator under section 101; appointment of a statutory manager under section 117. Except for persons appointed under section 95, appointments are subject to confidentiality in section 105. - In 2015/16 PSD had a training budget considered sufficient; on an FTE basis training budget roughly equivalent to broad public sector benchmarks and exceeds private sector benchmarks. - In 2015/16 PSD had an infrastructure budget (workstation and network costs) considered sufficient. - In 2015/16 PSD had a travel budget (including overseas travel) considered sufficient for domestic and international interactions. - EC7 (annual resource planning and skills) - PSD addresses emerging skills gaps by training and by using resources from other parts of PSD or the wider Reserve Bank (e.g., Operational Policy team support for data collection and reporting templates). - RBNZ acknowledges scope for greater formality around annual supervisory planning and filling identified gaps. - EC8 (risk-based allocation of resources) - Banking Oversight follows “PRESS analysis” (discussed in CP8) to determine bank risk profiles and influence supervisory programs and resource allocation. - Findings calibrate additional oversight for five systemically important banks. - PRESS findings inform thematic work (examples: residential property review in 2013; focus on watch-list classification and provisioning practices in 2015/16 due to rural borrowers’ income impact from lower dairy prices). - RBNZ considers mitigating factors such as simple local bank business models and trans-Tasman coordination with APRA. - EC9 (legal protection for supervisors and staff) - RBNZ Act provides that officers, employees, and directors are not liable for actions or omissions in the exercise or performance in good faith of their functions, powers and duties under the Act. - They (and the RBNZ itself) are indemnified by the government for any liability arising out of the exercise (or failure to exercise) a power under the Act unless they acted (or failed to act) in bad faith. - The indemnity expressly extends to the cost of defending legal proceedings. *Source: cr17120 - Section 93 of the RBNZ Act 1989, on the supply of information by registered banks for purposes of prudential supervision (IMF staff content provided).* ### Section 179 of the RBNZ Act provides that a number of persons (including officers, ### cr17120 - Section 179 of the RBNZ Act provides that a number of persons (including officers, ### Legal protections and indemnities - Section 179 of the RBNZ Act: a number of persons (including officers, employees and directors of the RBNZ, although not the RBNZ itself) shall not be liable for an act done or omitted to be done in the exercise or performance in good faith of their functions, powers, or duties under the Act (which includes functions, powers, and duties relating to the regulation and supervision of registered banks). - Section 179A: the Crown indemnifies listed persons for any liability that arises from the exercise or purported exercise of, or omission to exercise, any power conferred by the RBNZ Act unless it is shown that the exercise or purported exercise of, or omission to exercise, the power was in bad faith. - Listed persons covered by section 179A include: - (i) every officer or employee of the RBNZ; - (ii) every director of the RBNZ; and - (iii) the RBNZ itself. ### Assessment of Principle 2 — operational independence, resources, and governance - Overall assessment: Materially non-compliant. - Principal deficiency: the number of staff and size of the budget allocated to the regulation and supervision of banks is the critical deficiency (EC6) to comply with this Principle and to develop an effective supervisory approach. - Findings: - The RBNZ has noted that the current focus on public disclosure and bank directors’ attestation arguably reduces the need for more resource-intensive supervisory activities. - There is an urgent need to reassess the adequacy of resources to ensure the effectiveness of banking supervision, even if the current low-intensity supervisory approach were maintained. - The operational independence, accountability, and governance of the RBNZ are prescribed in legislation; governance is elaborated through terms of reference for internal committees. - The RBNZ Board monitors, on the MoF’s behalf, the performance of the Governor, who has full authority and responsibility for all the RBNZ’s statutory objectives, including prudential supervision. - The MoF has recently released publicly a letter of expectations to provide advice on the RBNZ’s performance against its main statutory objectives, including the maintenance of a sound and efficient financial system, and the regulatory policy processes (EC2). - The powers of the government to influence operational decisions of the RBNZ are circumscribed so they cannot be used to require specific decisions be made or outcomes achieved. - The RBNZ and its staff have credibility and act with professionalism and integrity. - The role of the Minister in issuing directions remains a point for alignment: authorities may wish to align the RBNZ Act with the Insurance (Prudential Supervision) Act (IPSA) and the NBDT Act by removing the role of the Minister in issuing directions (as discussed in CP11). - The RBNZ Act provides powers to operate at arm’s length from the government and MoF, subject to statutory checks and balances. - A 2012 MoU signed with the Treasury creates ambiguities in the role of the RBNZ and Treasury; lack of clarity has mostly manifested in coordination of policy advice but could lead to undue government interference in prudential responsibilities (EC1). - Recommendations / actions suggested: - Reassess resources allocated to banking regulation and supervision; consider flexibility in long-term funding agreements between the MoF and the Governor, such as a routine process for annual reviews and updates. - Align the RBNZ Act with IPSA and the NBDT Act by removing the Minister’s role in issuing directions where appropriate. - Clearly delineate roles and responsibilities of the Treasury as adviser to the MoF vis-à-vis the RBNZ’s statutory objectives in banking supervision to ensure control functions and checks-and-balances do not unduly interfere in supervisory operations. - Establish and formalize arrangements and procedures for interaction between the Treasury and RBNZ; consider a narrow understanding of sections in the RBNZ Act where the Minister may intervene (e.g., section 68B) and the current MoU. ### Principle 3 — cooperation and collaboration (overview) - Principle 3: Laws, regulations, or other arrangements provide a framework for cooperation and collaboration with relevant domestic authorities and foreign supervisors. These arrangements reflect the need to protect confidential information. ### EC1 — domestic cooperation, information sharing, and collaboration - Description and findings: - The RBNZ operates as an integrated prudential supervisor, resolution authority, macroprudential authority and central bank, facilitating timely sharing of information and collaboration across its statutory functions. - Formal domestic arrangements include: - CoFR (established 2011): comprises the RBNZ, FMA, Treasury, and MBIE; a forum to share information, not a decision-making body; members retain ultimate responsibility for their mandates; alternately chaired by the RBNZ Governor and CEO of FMA. - Banking Forum: a CoFR sub-committee for updating regulatory initiatives and identifying gaps/overlaps; discusses instruments such as the Forward Calendar listing current and upcoming regulatory initiatives and expected industry engagement. - MoU with FMA (2011): on information sharing, mutual assistance and coordination; collaboration and data-sharing on managed fund industry data; coordination on entities at the regulatory perimeter; agreement on exercising joint powers under Part 5C of the RBNZ Act. - Macroprudential policy MoU with the Treasury (May 2013): formalized macroprudential policy as a policy area, recognizing the RBNZ as primary decision-maker on developing and implementing macroprudential policy. - MoU on information exchange and collaboration between the RBNZ and Treasury: coordinate matters relating to financial stability and advice to the MoF in periods of actual or potential financial distress. - After the finance companies sector crisis (final fiscal cost approximately NZ$2bn), the Treasury increased interest in prudential policymaking, particularly crisis management with potential fiscal ramifications. - The Treasury and RBNZ have overlapping advisory roles on prudential policies and providing advice to the Minister where fiscal contingencies may arise; this has created grey areas similar to those related to section 68B that could affect financial stability outcomes. - Recommendation: - Procedural clarity, transparency, and traceability of coordination processes are important to strengthen RBNZ operational independence. ### EC2 — cooperation with relevant foreign supervisors - Description and findings: - Trans-Tasman arrangements: - Trans-Tasman Council on Banking Supervision (TTBC) established following Ministers’ agreement in 2005 to promote a joint approach to trans-Tasman banking supervision and crisis management preparedness; jointly chaired by the Australian and New Zealand Treasuries; members include APRA, RBA, ASIC, RBNZ, and FMA. - TTBC tasks include enhancing cooperation, promoting crisis response preparedness, and guiding policy advice under principles of policy harmonization, mutual recognition and trans-Tasman coordination. - Key legislative outcome: recommendations embodied in section 68A of the RBNZ Act, requiring the RBNZ, when performing prudential functions under the RBNZ Act or IPSA, to support Australian authorities in meeting their statutory responsibilities and, to the extent reasonably practicable, avoid actions likely to have a detrimental effect on financial stability in Australia; equivalent Australian legislation was passed. - Under section 98A of the RBNZ Act, subject to RBNZ authorization, home country supervisors have access to information and may conduct inspections of banks represented in New Zealand subject to confidentiality requirements; RBNZ requires New Zealand subsidiary banks to provide to the RBNZ all information sent to APRA. - 2005 MoU with APRA on Basel II implementation; close cooperation on Basel III policy, particularly alignment of non-viability loss absorbency requirements; 2012 MoU concerning cooperation in banking and insurance supervision. - Informal bilateral relationships with APRA: RBNZ participates as observer in APRA on-site inspections of Australian-owned banks in New Zealand and in APRA supervisory colleges; cooperation on crisis management scenarios and coordinated stress testing; RBNZ engages APRA when regulatory initiatives affect NZ subsidiaries of Australian banks (e.g., OBR policy development). - Statutory management: if a trans-Tasman bank is placed under “statutory management,” actions of the appointed statutory manager must be notified to relevant Australian authorities if likely to have a detrimental effect on Australian financial system stability (section 121A of the Act); matching obligations exist under section 14DA of the Australian Banking Act 1959 for administrators of Australian parent banks and APRA. - Other foreign arrangements: - MoU with the U.K. Prudential Regulation Authority (formerly FSA) for sharing supervisory information to assist supervision of organizations operating in both New Zealand and the U.K. - Participation in the General Supervisory College on Rabobank (Netherlands) and meetings hosted by De Nederlandsche Bank in 2011 and 2013; RBNZ requested outcomes from the 2015 supervisory college meeting from the ECB lead supervisor. - Membership of EMEAP (Executives' Meeting of East Asia-Pacific Central Banks): under the agreed framework for crisis management and resolution, RBNZ will share information and alert foreign supervisory authorities where bank failure in New Zealand could have adverse consequences in an EMEAP jurisdiction or the region; the procedure for alerting other EMEAP authorities is not intended to be applied mechanistically and discretion is expected. - The RBNZ recognizes the need to advance arrangements with China and India. ### EC3 — confidentiality safeguards for information sharing - Description and findings (beginning of EC3 is in the source; continuation not provided in the supplied content). *Source: IMF staff report excerpt contained in the supplied content unit.* ### Section 105(2) of the RBNZ Act, on confidentiality of information, empowers the RBNZ to ### Section 105(2) of the RBNZ Act, on confidentiality of information, empowers the RBNZ to ### Confidentiality powers and legal provisions (Section 105) - Section 105(2) empowers the RBNZ to share information: - with other central banks/authorities that exercise similar functions; - to any person whom the RBNZ is satisfied has a proper interest in receiving the information; - or with the consent of the person to whom the information relates. - There is a confidentiality provision for protection of information supplied to the RBNZ for purposes of the exercise of its bank registration, supervision, and crisis management powers. - The RBNZ must be satisfied that the recipient is able to protect the confidentiality of the information shared (s105(3)). - The RBNZ may specify conditions in sharing said information (s105(5)(b)). - Penalties and offences: - Under section 105(7) it is an offence for any officer or employee of the RBNZ or a person appointed to obtain information on behalf of the RBNZ or for a member of an Advisory Committee of a bank that is in statutory management to contravene the confidentiality provision in the Act. - Penalties for misuse of confidential information are set in sections 105 and 156AA. ### EC4 — Handling of confidential information received from other supervisors - Core expectations (EC4): - The supervisor receiving confidential information from other supervisors uses the confidential information for bank-specific or system-wide supervisory purposes only. - The supervisor does not disclose confidential information received to third parties without the permission of the supervisor providing the information. - The supervisor is able to deny any demand (other than a court order or mandate from a legislative body) for confidential information in its possession. - If legally compelled to disclose confidential information received from another supervisor, the supervisor promptly notifies the originating supervisor, indicating what information it is compelled to release and the circumstances surrounding the release. - Where consent to passing on confidential information is not given, the supervisor uses all reasonable means to resist such a demand or protect the confidentiality of the information. - Safeguards instituted: - Authority to request information is subject to the review/approval of the Head of Prudential Supervision or the appointed principal contact person specified in the bilateral MoUs. - The RBNZ’s code of conduct requires all staff to be cautious about disclosing information; failure to meet the standards could result in dismissal. - Under paragraph 13 and 14 of the MoU with APRA: - When an authority is legally compelled to disclose information in accordance with the MoU to a third party, the authority is expected to promptly notify the other authority indicating what information it is compelled to release and the circumstances surrounding the release. - The authorities expect each other, if requested to do so, to use their best endeavors to preserve the confidentiality of the information to the extent permitted by law. - When an authority wishes to disclose information received under the MoU to a third party but is not compelled to do so, the authority is expected to notify the other authority and shall consider imposing conditions such as ensuring that the information be kept confidential and not be further released without the relevant authority’s consent. - The MoU with U.K. FSA, today PRA, provides, under paragraph 5, that the party receiving a request from third parties for any confidential supervisory information, shall notify the providing party prior to releasing such information, and shall solicit the latter’s views as to the propriety of providing such information to the third party. ### EC5 — Support for resolution authorities, recovery and resolution planning - Institutional roles and legal powers: - The RBNZ and Treasury have roles within resolution and would expect to coordinate advice in times of distress. - Practical arrangements are at an early stage of development. - OBR is one tool in the toolkit—not tested as yet—and powers relevant to resolution are spread through the RBNZ Act and the Public Finance Act 1989. - The RBNZ Act gives the RBNZ the ability to provide directions (s113), recommend statutory management (s117), and direct the statutory manager where necessary. - The Public Finance Act provides the authority for the MoF (on behalf of the Crown) to give a guarantee if this is in the public interest (s65ZD), and allows the Minister to extend a guarantee on whatever terms they may decide. - Memorandum of Understanding (MoU) with Treasury: - The MoU with the Treasury provides that the RBNZ and Treasury have a joint lead given the regime’s reliance on powers within the respective Acts. - In the event of financial distress, the RBNZ will inform the Treasury and the Minister of any risk to financial institutions that may require the Minister exercising any of their powers under the Act. - In practice, one agency or the other would act as the lead authority, in close collaboration with the other on particular matters depending on the tool used: - Powers such as the ability to give directions and to recommend statutory management are exercised by the RBNZ under the Act. - The MoU provides that “in anticipation of and following any government intervention in the financial system the Treasury will lead on operational matters arising from financial distress where these have fiscal implications.” - The government is currently considering how the agencies would coordinate within OBR in light of the fiscal risks associated with the Crown guarantee. - Operational arrangements and preparedness: - The Treasury has not been involved in resolution and recovery planning with respect to individual New Zealand banks, but is discussing the development of OBR with the RBNZ. - The Treasury is working with the Australian Treasury to explore opportunities for joint resolution. The RBNZ and other TTBC agencies are contributing to this work. - Recovery and resolution plans (RRPs): - The RBNZ’s supervisory and regulatory work does not include requirements for banks to submit institution-specific recovery and resolution plans. - The RBNZ is maintaining a watching brief on the implications for the four Australian-owned registered bank groups of APRA’s living will proposals for their parent banks. - The RBNZ has developed policies to promote effective failure resolution like local incorporation, outsourcing and bank capital policy, e.g., in regard to the issuance of bail-in instruments. - The OBR functionality has been pre-positioned in banks with retail deposits over $1 billion. - Annual testing of this functionality is required under banks’ conditions of registration. - Work continues on the OBR staff manual covering the processes that the RBNZ and other agencies are expected to undertake when confronted with a failure and OBR is applied. - The outsourcing policy is currently under review: - The revised policy, as proposed, will encourage banks to complete separation planning to ensure that banks can be separated from their parent banks and stabilized within OBR without severe adverse consequences to the financial system. - Prior to public consultation, the RBNZ shared its outsourcing policy consultation documents with Treasury and the MoF for comments. - The Treasury indicated strong support for separation planning and considered it an essential component of the resolution of a major bank. - The review follows a stocktake undertaken by the RBNZ in 2014 on banks’ outsourcing arrangements; the stocktake found that banks had inconsistently interpreted and applied the existing policy. - Payments systems: - The RBNZ has supported Payment NZ, banks and payment switches to agree on a set of ‘failure to settle’ rules consistent with the RBNZ’s policy goals. - Trans-Tasman cooperation: - Following the GFC in 2008, the TTBC member agencies stepped up discussions on crisis coordination. - A publicly available memorandum of cooperation (MoC) was signed in 2010 followed by a trans-Tasman crisis simulation exercise. - In 2011, TTBC carried out a crisis simulation exercise to test elements of the MoC. - The outcome of the crisis exercise formed the basis for the future work program of the Council. - Another crisis simulation exercise is expected to be run in September/October 2017. - The two Treasuries have been leading the work in the TTBC in studying the advantages and disadvantages of a joint resolution strategy and contagion risks from the failure of a trans-Tasman bank. - The OBR mechanism is an example of a multiple point of entry approach in resolution, should resolution at the parent bank or group level (i.e., single point of entry approach) fail. ### Assessment of Principle 3 (Cooperation and information sharing) - Assessment: Largely compliant - Comments and findings: - Domestically, the RBNZ is the prudential supervisor, macroprudential authority and resolution authority, which facilitates sharing information across these different functions. - Assessments of the banking sector will be shared with the MoF, Treasury, and other relevant authorities for managing a financial crisis. - Under the Act, the RBNZ and MoF are authorized to deal with bank failure and resolution having regard to financial stability objectives. The MoF also takes into account the fiscal implications of various resolution options and considers the impact of regulatory policy on the Crown’s balance sheet. - However, the RBNZ and Treasury have both advisory roles and responsibilities within resolution and prudential policy-making that have the potential to hinder effective collaboration (see EC1 and EC5). - Sound practical arrangements for cooperation and collaboration are in place, but the respective roles of the RBNZ and Treasury have to be clarified further. - With regards to foreign supervisors (particularly APRA), the RBNZ maintains excellent relationships and communication with the Australian authorities. - The framework for cross-border collaboration between Australia and New Zealand is now rooted in relevant legislation in both countries to ensure authorities support each other in performing their regulatory responsibilities. - At an operational level, the TTBC was set up to provide a road-map for trans-Tasman cooperation and distress management with cross border implications. - Given the unique interdependence between the RBNZ and APRA, enhanced collaborative work between the two supervisors to fulfill their own statutory objectives is expected in EC2 and EC5. - Recommendations to address deficiencies in CP2 and CP13, as they relate to cooperation and collaboration with national and trans-Tasman authorities, address also deficiencies to achieve compliance with CP3. ### Principle 4 — Permissible activities (summary and essential criteria) - Principle statement: The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined and the use of the word “bank” in names is controlled. - EC1 — Definition of “bank”: - The term “bank” is legally defined and reserved to those financial institutions licensed or registered as a “bank” by the RBNZ. - Historically in New Zealand, what constitutes a “bank” was defined by whether the institution is registered as a “bank” by the RBNZ rather than by the business carried on; until 2014, “nonbank deposit takers”: finance companies, building societies, and credit unions could take public deposits without being licensed and under a very lenient or non-existent regulatory environment. - EC2 — Permissible activities: - Section 73 (1) of the RBNZ Act establishes that the RBNZ “shall not register any person as a registered bank unless it is satisfied that the business carried on...consists of the borrowing and lending of money, or the provision of other financial services, or both.” - Through conditions of registration, the RBNZ limits non-financial activities and insurance business to immaterial amounts (in the case of insurance business explicitly not greater than 1 percent of the registered bank’s consolidated assets). - The RBNZ, in its Statement of Principles (BS1), comments what business an applicant for bank registration may, and may not, undertake. - EC3 — Use of the word “bank”: - Registered banks are the only type of financial institution that are permitted to call themselves banks, including derivatives of that word, as part of their name (and the RBNZ itself). *Source: cr17120 - Section 105(2) of the RBNZ Act, on confidentiality of information, empowers the RBNZ to* ### Part 4 of the RBNZ Act 1989 restricts the use of the words “bank,” “banker,” and ### Part 4 of the RBNZ Act 1989 restricts the use of the words “bank,” “banker,” and “banking” in a name or title to banks registered under Part 5 of the Act. ### Legal restriction on use of the word “bank” and public cautions - By law, the words “bank,” “banker,” and “banking” in a name or title are restricted to banks registered under Part 5 of the RBNZ Act 1989. - The RBNZ maintains on its website a list of notices and cautions of institutions that use the word “bank” but are not registered as banks (see RBNZ website entry referenced in the source). - Specified persons (i.e., financial institutions that are not registered banks, such as NBDTs) may not use a restricted word in any advertisement unless that advertisement contains a statement that the specified person is not a registered bank (see sections 64, 66B, and the RBNZ website). ### Deposit-taking reserved and NBDT sector (EC4) - The taking of deposits from the public is reserved for institutions that are licensed and subject to supervision as banks. - By law, the taking of deposits is limited to registered banks, and licensed NBDTs (see the RBNZ Act—section 64, and NBDT Act 2013—sections 2, 5, 11). - Timeline and regime: - The RBNZ took on responsibility for regulating the NBDT sector in 2008 with an amendment to the RBNZ Act. - A licensing regime was introduced with the passage of the NBDT Act in 2013 (the new Act also carved out the relevant sections of the RBNZ Act that pertained to NBDTs). - From 2014 NBDTs (finance companies that raise funds from the public, most building societies, and credit unions) must be licensed in order to carry on NBDT business in New Zealand. - Supervision and scale: - NBDTs are regulated by the RBNZ and supervised by their private sector trustee companies. - In terms of total deposits, the NBDT sector is less than 1 percent of the size of the bank sector at the time of the assessment. - Failures in this sector have\had an estimated fiscal cost of approximately NZ$2 billion. - Offshore-only New Zealand incorporated entities: - A caution issued by the RBNZ on March 28, 2011, indicates a number of New Zealand incorporated entities provide financial services solely outside of New Zealand, usually operating over the internet with no (or limited) physical presence in New Zealand. - These New Zealand incorporated entities that provide financial services only outside New Zealand do not have to be licensed in New Zealand and are not supervised by the RBNZ, FMA, or any other New Zealand regulatory authority. ### Publication of licensed banks (EC5) - The RBNZ must publish a register of registered banks, including branches of overseas incorporated (foreign) banks (see the RBNZ Act – section 69). - The RBNZ publishes an informative list of registered banks on its website (reference cited in source). - Assessment of Principle 4: Largely compliant. ### Comments on the definition and scope of “bank” - The term “bank” is legally reserved to those financial entities that are registered by the RBNZ. - Registration by the RBNZ is what constitutes a bank, and not what business an entity carries on. - Registration clarified following RBNZ assumption of NBDT licensing and regulation; supervision of NBDTs is entrusted to private sector trustee companies. - A registered bank must be carrying on the business of borrowing and lending money or providing other financial services (or both). - Activities of registered banks: - The activities a registered bank may undertake are restricted through the conditions of registration imposed on banks. - The taking of deposits is restricted to registered banks (and licensed NBDTs). - Insurance activities and nonfinancial activities carried on by registered banks are limited to non-material amounts. - Identified need: - The authorities need to assess the risks posed by companies registering in New Zealand and offering bank-like or other financial services solely outside New Zealand (see EC4). ### Principle 5 — Licensing criteria and assessment (overview and EC-by-EC findings) - Principle 5 summary: The licensing authority has the power to set criteria and reject applications that do not meet criteria. The licensing process includes assessment of ownership structure and governance, fitness and propriety of Board members and senior management, strategic and operating plan, internal controls, risk management, projected financial condition (including capital base). Where the proposed owner or parent is a foreign bank, the prior consent of its home supervisor is obtained. - EC1: Authority responsible for granting and withdrawing a banking license - The RBNZ Act empowers the RBNZ as both the licensing authority and the supervisor of registered banks (section 67). - The RBNZ Act empowers the RBNZ to recommend to the MoF that a bank’s registration be cancelled if specific circumstances arise (section 77). - The Act allows the RBNZ to impose conditions of registration on licensed banks (section 74). - In practice all banks are given conditions of registration at the time of registration. The standard conditions are set out in the Statement of Principles (BS1–Appendix 1), and individual conditions can also be imposed where appropriate. These conditions have the legal status of regulatory requirements. - EC2: Power to set licensing criteria and reject applications - The RBNZ Act sets out the criteria the RBNZ must use when assessing a registration application (sections 73 and 78). - The Act requires that the manner in which these criteria are applied by the RBNZ must be published in a statement of principles (section 75). The principles are contained in the policy document Statement of Principles (BS1). - The RBNZ publishes a list and description of information that must be provided by an applicant (Application for status as a registered bank: Material to be provided to the RBNZ (BS3)). - The RBNZ may reject any application that does not fulfil legislative criteria; shell banks will not be registered. - Registration process is highly demanding; in recent years only a small number of foreign banks with no systemic importance have been registered, as well as several former NBDTs considered fit. - The RBNZ may recommend revocation of registration if it was granted on materially false or misleading information (section 77(1)). This scenario has not yet taken place. - EC3: Consistency between licensing criteria and ongoing supervision - The RBNZ’s Statement of Principles sets out how the RBNZ supervises registered banks. - The RBNZ’s supervision methodology is consistent with the registration criteria and practice set out in the RBNZ Act and the Statement of Principles. - The RBNZ can use legislative disciplinary powers when a registered bank fails to maintain compliance with licensing criteria. - EC4: Assessment of legal, managerial, operational, and ownership structures - The RBNZ Act requires regard to incorporation and ownership structure, size and nature of the applicant’s business, and ability to carry on business in a prudent manner (section 73(2)). - Applies at both solo and consolidated levels. The Statement of Principles (sections C(II)-C(IV)) outlines implementation. - In assessing ownership structure, the RBNZ examines owners’ incentives to monitor the proposed bank, degree of separation between the Board and owners. - In assessing size and nature of business and prudence, the RBNZ reviews: adequacy of capital for proposed business, loan concentrations and risk exposures, separation from owners’ other interests, internal controls and accounting systems, risk management systems and policies, and outsourcing arrangements. - Any characteristics likely to hinder effective supervision must be addressed before registration. - The RBNZ launched a consultation process that ended in August 2016 on its approach to registration of foreign-owned banks with a small, non-systemic, locally incorporated presence; the consultation proposes assessing whether these banks may be permitted to ‘dual-register,’ operating a local branch alongside a subsidiary. - EC5: Suitability of major shareholders and ultimate beneficial owners - The RBNZ Act requires consideration of the standing of the owners of the applicant in the financial market (section 73(2), including point (f)). - This requirement is interpreted as covering identity and nature of owners, including UBOs and others exerting significant influence. - The Statement of Principles states the RBNZ will consider impediments to raising further capital arising from identity and nature of owners. - EC6: Minimum initial capital amount - Standard conditions of registration imposed on every newly registered bank require that the bank must have a minimum capital amount of NZ$30 million (see Statement of Principles (BS1) – Appendix 1). - EC7: Fit-and-proper assessment of Board and senior management - The RBNZ Act requires assessment of suitability of directors and senior managers of applicants (section 73). - The Handbook Document Review of Suitability of Bank Directors and Senior Managers (BS10) publicly sets supervisory expectations, including criteria: - (i) skills and experience in relevant financial operations commensurate with intended activities of the bank; and - (ii) no record of criminal activities or adverse regulatory judgements that make a person unfit to hold important positions in a bank. - The RBNZ uses a template form for this assessment; practice was illustrated with a recent example. - EC8: Review of strategic and operating plans, governance, risk management, internal controls, outsourcing oversight - Section 78(1) of the RBNZ Act requires the RBNZ to consider an applicant’s internal controls and accounting systems or proposed systems; risk management systems and policies or proposed systems and policies; and arrangements for business or functions to be carried on by any person other than the applicant or the registered bank. - Internal controls related to the detection and prevention of criminal activities are not explicitly included in the Act; current supervisory practice is discussed in CP29 (reference in source). - Registration applicants must supply proposed strategic and operating plans (see Application for status as a registered bank: Material to be provided to the RBNZ (BS3)), which are reviewed for appropriateness given size and nature of proposed activities. - EC9: Review of pro forma financial statements and projections - Registration applicants are required to provide pro-forma financial statements and 3-year financial projections of the proposed bank. - The RBNZ assesses these to determine whether they are realistic and whether the proposed bank will have sufficient financial and other resources to carry out its strategic plan. - The RBNZ Act, section 73(2), requires regard to standing of the owner in financial markets; financial information on shareholders is required and assessed (BS3; Statement of Principles – section C(I)). - EC10: Host–home supervisor cooperation for foreign banks - The RBNZ always seeks the views of the home supervisor, confirming the home supervisor is aware of the application and has no objection, before granting a registration. - When an applicant is an overseas bank or a subsidiary of an overseas bank, the licensing criteria in sections 73A and 73B require the RBNZ to have regard to the licensing and supervision of the overseas bank. - Global consolidated supervision is expected to be applied by the home supervisor. - Standard conditions of registration applied to branches of overseas banks require that the parent bank complies with capital adequacy requirements as administered by the supervisory authority in the bank’s home jurisdiction (see Statement of Principles (BS1) – section C(VII)). *International Monetary Fund — cr17120 (excerpted content provided in the source PDF)* ### Appendix 1: ### Appendix 1 ### EC11 — Monitoring new entrants - Requirement: The licensing authority or supervisor has policies and processes to monitor the progress of new entrants in meeting their business and strategic goals, and to determine that supervisory requirements outlined in the license approval are being met. - Description and findings: - Following registration, banks immediately become subject to full ongoing supervision, disclosure, and prudential reporting requirements. - Supervision includes monitoring of banks’ performance, and compliance with conditions of registration and all regulatory requirements. - Recent new entrants into the industry have been of no systemic importance, which has simplified the initial monitoring by the RBNZ. - Based on this, there are no policies and processes to monitor the progress of new entrants in meeting their business and strategic goals. - Assessment of Principle 5: Compliant - Comments: - The RBNZ Act identifies the RBNZ as the bank licensing (or “registration”) authority and sets out the criteria the RBNZ must use when determining an application for registration. - The RBNZ has published the principles it uses in applying those criteria. The RBNZ can reject applications for establishments that do not meet the criteria. - Where the proposed owner or parent organization is a foreign bank, the prior consent of its home supervisor is obtained. - The RBNZ has the policy to keep, to a minimum, impediments to the entry of new registered banks in order to encourage competition in the banking system. - In practice, the registration process is highly demanding, and prudential safeguards disincentivize the number of new players. ### Principle 6 — Transfer of significant ownership (Overview) - Principle: The supervisor has the power to review, reject, and impose prudential conditions on any proposals to transfer significant ownership or controlling interests held directly or indirectly in existing banks to other parties. #### EC1 — Definition of “significant ownership” and “controlling interest” - Essential criterion: Laws or regulations contain clear definitions of “significant ownership” and “controlling interest.” - Description and findings: - The RBNZ Act defines the term “significant influence” which covers significant ownership and controlling interest. - Section 2 (1) of the RBNZ Act defines “significant influence” as “the ability to directly or indirectly appoint 25 percent or more of the Board of directors... of the registered bank; or a direct or indirect qualifying interest in 10 percent or more of the voting securities...” - “Qualifying interest” and “voting securities” are separately defined in section 2. #### EC2 — Requirement to obtain supervisory approval or notify changes in ownership - Essential criterion: There are requirements to obtain supervisory approval or provide immediate notification of proposed changes that would result in a change in ownership, including beneficial ownership, or the exercise of voting rights over a particular threshold or change in controlling interest. - Description and findings: - The RBNZ Act—section 77A, on changes of ownership—requires a person to obtain the written consent of the RBNZ if that person wishes to acquire or increase a significant influence. - RBNZ staff provided to the assessors one illustrative example of such a consent. - The RBNZ sets out in a policy document, Application for consent to acquire or increase significant influence over a registered bank: Material to be provided to the RBNZ (BS9), the material that must be provided with an application for consent to acquire or increase a significant influence. #### EC3 — Power to reject or modify proposals for change in significant ownership - Essential criterion: The supervisor has the power to reject any proposal for a change in significant ownership, including beneficial ownership, or controlling interest, or prevent the exercise of voting rights in respect of such investments to ensure that any change in significant ownership meets criteria comparable to those used for licensing banks. If the supervisor determines that the change in significant ownership was based on false information, the supervisor has the power to reject, modify or reverse the change in significant ownership. - Description and findings: - The RBNZ Act allows the RBNZ to reject an application for a change in, or acquisition of, a significant influence, as no such change may occur without the consent of RBNZ. - The RBNZ may vary or revoke any previous consent given (see Section 77A – Change of ownership: (3) The Bank may, at any time, by notice in writing, vary or revoke, (a) a consent given under this section...). - The RBNZ policy document BS9 states that the RBNZ’s assessment of any application to change or acquire a significant influence in respect of a registered bank will be assessed having regard to the matters specified in the RBNZ Act for the purposes of assessing registration applications. - BS9 requires that applications for a change or acquisition of a significant influence be assessed having regard to: - (i) incorporation and ownership structure; - (ii) size of business; - (iii) ability to carry on business in a prudent manner; - (iv) standing of the licensed bank; - (v) suitability of the directors and senior managers; and - (vi) overseas banking laws and regulatory requirements (if appropriate). #### EC4 — Supervisor’s access to information on significant shareholders and beneficial owners - Essential criterion: The supervisor obtains from banks, through periodic reporting or on-site examinations, the names and holdings of all significant shareholders or those that exert controlling influence, including the identities of beneficial owners of shares being held by nominees, custodians and through vehicles that might be used to disguise ownership. - Description and findings: - The ownership of all New Zealand incorporated registered banks is public information. - Ownership information on New Zealand registered companies is included in the Companies Register website maintained by the MBIE (see: https://www.business.govt.nz/companies/). - Currently, ownership structures of New Zealand incorporated banks are simple. - The RBNZ has the power to obtain ownership information under section 93(1)(a) of the RBNZ Act, on the supply of information by registered banks for purposes of prudential supervision. - This power is used at times to obtain more detailed information than that included on the Companies Register; e.g., in the case of publically-listed registered banks. #### EC5 — Power to address unauthorized changes of control - Essential criterion: The supervisor has the power to take appropriate action to modify, reverse or otherwise address a change of control that has taken place without the necessary notification to or approval from the supervisor. - Description and findings: - The RBNZ Act explicitly states that any contract or transfer of ownership made without the written consent of the RBNZ is not invalidated, hence there is no direct power to reverse an acquisition (Section 77B – Effect of section 77A on contracts, etc.: “Nothing in *Source: cr17120 - Appendix 1* ### section 77A invalidates any contract, or transfer of ownership, made without the consent of ### cr17120 - section 77A invalidates any contract, or transfer of ownership, made without the consent of ### Section 77A, consent, and RBNZ remedial powers - Section 77A invalidates any contract, or transfer of ownership, made without the consent of the Bank. - It is an offence by the person acquiring or increasing a significant influence not to comply with section 77A; that person could be prosecuted for non-compliance. - The RBNZ could deal with any negative impacts of an acquisition made without consent by imposing on the bank conditions of registration. - With the MoF’s consent, the RBNZ could give directions to the bank if the criteria set out in section 113 are met. - These powers allow the RBNZ to mitigate or eliminate negative impacts of an acquisition that did not receive previous consent. ### EC6 — notification of material information on major shareholders - Essential requirement: Laws/regulations/supervisor require banks to notify the supervisor as soon as they become aware of any material information which may negatively affect the suitability of a major shareholder or a party that has a controlling interest. - Description and findings: - No such formal mandatory requirement exists. - The RBNZ expects to be notified and understands that banks are aware of this expectation. - Assessment of principle 6: Compliant - Comments: - RBNZ Act defines “significant influence” covering significant ownership and controlling interest and requires RBNZ approval prior to any change of significant influence. - When assessing approval for change of significant influence, RBNZ applies the same criteria as used for registration. - New Zealand law/regulation diverge from EC5 and EC6: it does not provide that unauthorized changes in ownership may be reversed or that banks must notify RBNZ when they become aware of adverse information concerning major shareholders. - In practice, risks of EC5/EC6 events occurring without RBNZ knowledge are not material because: - the number of registered banks is small; - ownership structures are generally simple and publicly disclosed; - it is unlikely a proposed change of ownership or change in owners’ circumstances would be unknown to RBNZ. - RBNZ powers are sufficient to deal with attempts to change ownership without consent; such attempts are discouraged. - These are theoretical scenarios that RBNZ indicates have never happened by the time of assessment. - Transfer of significant ownership happens very infrequently in New Zealand due to ownership concentration in single banking groups and limited number of institutions. - Full compliance with this Principle is based on conditions at assessment time and will need revision in future assessments. ### Principle 7 — Major acquisitions: statutory framework and thresholds - Principle summary: Supervisor can approve/reject and impose prudential conditions on major acquisitions/investments by a bank, against prescribed criteria, including cross-border operations, and assess corporate affiliations/structures for undue risks or supervision hindrance. - EC1 — thresholds and notification: - Standard conditions of registration (status of a regulation) require banks obtain consent for any “qualifying acquisition or business combination,” defined in Significant Acquisitions Policy (BS15) as: - where the consideration is 25 percent or more of the banking group’s Tier 1 capital; or - the value of assets acquired is 25 percent or more of the banking group’s total assets. - Acquisitions between 15 percent and 25 percent of these thresholds must be notified to the RBNZ. - EC2 — criteria to judge proposals: - Significant Acquisitions Policy (BS15) sets criteria to judge proposals (section E), including capital adequacy, risk management, internal controls after acquisition. - RBNZ provided an example notification illustrating staff analysis per BS15. - EC3 — preventing undue risk or hindrance to supervision: - RBNZ can consider criteria that apply to registration decisions (RBNZ Act – sections 73, 73A, 73B, and 78; BS15 – section E). - For cross-border acquisitions, RBNZ can consider host country laws/regulations, disclosure, accounting/auditing standards, and supervision effectiveness. - At assessment time, New Zealand-incorporated banks either are subsidiaries of major international banks or small entities focused on NZ; no NZ-registered bank has cross-border operations (other than wholly-owned funding subsidiaries borrowing in international capital markets). - EC4 — assessing acquiring bank resources: - RBNZ assesses whether acquiring bank has adequate financial, managerial, and organizational resources to handle the acquisition/investment for applications meeting the non-objection threshold. - EC5 — nonbanking activity risks: - Banks are not permitted to have any material non-financial activities (materiality follows general accounting principles). - Statement of Principles (BS1) – Appendix 1: condition of registration includes: “That the banking group does not conduct any nonfinancial activities that in aggregate are material relative to its total activities...”. - Consolidated supervision of financial conglomerates by RBNZ would need strengthening (see CP12), but major acquisition of nonbank financial activities is very limited at assessment time. - AC1 — acquisitions by other entities in the banking group: - Under BS15, standard condition of registration applies to any qualifying acquisition or business combination by a “member of the banking group” (registered bank and its subsidiaries — downward subconsolidation). - This does not include nonbank sister companies (e.g., subsidiaries incorporated in New Zealand of the ultimate holding company). - RBNZ is not aware of significant acquisitions by sister companies since BS15 implementation (December 2011), but notification requirement does not apply to sister companies so this cannot be ascertained. - No applications for non-objection (or notification) from a subsidiary member of a registered bank have been received; if received, BS15 process would apply. - Assessment of Principle 7: Compliant - Comments: - RBNZ can approve and impose prudential conditions on major acquisitions/investments, including cross-border operations, using criteria publically available in the Handbook. - New Zealand banking industry is not active in activities covered by this Principle; legislation and supervisory approach limit such activities. - RBNZ is confident it could reject or impose conditions on major acquisitions exposing banks to undue risks or hindering supervision. - Limitations in RBNZ’s consolidated supervision approach (CP12) affect compliance with AC1, but AC1-type activity is immaterial at assessment time. - Full compliance is based on circumstances at assessment and may need revision if conditions change. ### Principle 8 — Supervisory approach, risk assessment frameworks, and crisis resolution - Principle summary: Supervisor must develop/maintain forward-looking risk assessment of banks/groups, proportionate to systemic importance; identify/assess/address risks system-wide; have early intervention framework; have plans, with other authorities, for orderly resolution. - EC1 — methodology (PRESS): - RBNZ uses PRESS risk-based supervision tool to identify 10 key current and potential areas of risk. - PRESS combines supervisory concerns and mitigants into a net risk probability score using a scale of 1 (low) to 5 (high) probability for each risk category. - Agreed timeframe for forward-looking probability assessments is six months from the date of the report; analysts note medium- to long-term risk factors. - Ten key risk categories grouped into Business and strategic risks; Financial soundness risks; Controls: - Business and strategic risks: Credit risk; Liquidity risk; Operational risk; Market risks; Strategic risks. - Financial soundness risks: Capital position; Profitability; Parent position. - Controls: Internal controls; Corporate governance. - PRESS measures probability and impact (both 1 to 5). Impact assessment includes bank size by market share of assets; large systemically important groups have impact score of 5; small branches/subsidiaries have impact score of 1. - Overall average probability score multiplied by impact score (product max 25) to determine supervisory response: - business as usual: 1 to 9; - increased surveillance: 10 to 14; - regulatory response: 15 to 20; - crisis management: 21 to 25. - PRESS does not have a separate probability component specifically for resolvability; resolvability is broadly incorporated in impact assessment. - OBR Prepositioning Policy applies to all New Zealand incorporated banks with retail deposits of $1 billion or more; compliance issues in OBR prepositioning would be incorporated into PRESS internal controls probability assessment and conditions of registration compliance section. - EC2 — forward-looking supervisory work and periodicity: - PRESS process produces full PRESS and PRESS summary reports with frequencies: - six-month full PRESS and PRESS summary for the five largest (High impact) locally incorporated banks; - annual full PRESS and PRESS summary for the next five largest (medium-impact) locally incorporated banks; - annual full PRESS only for remaining medium-low and low-impact cross-border owned subsidiary and branch banks. - PRESS includes peer review and quarterly supervisor-level sessions for the 10 largest locally incorporated banks; PRESS criteria and impact scale reviewed approximately every two years or earlier if needed. - EC3 — compliance assessment and directors’ attestations: - Directors required to publicly attest in signed disclosure statements every quarter that: - the bank complied with all conditions of registration during the period; - the bank had systems in place to monitor and control adequately the banking group’s material risks (credit, concentration, interest rate, currency, equity, liquidity, operational, other business risks) and those systems were being properly applied. - Directors are personally liable under s89A of the RBNZ Act if a bank publishes a disclosure statement required under s81 that is false or misleading (unless immaterial). - Bank supervision analyst provides a compliance attestation to the supervision team manager following review of quarterly disclosure statements using a Compliance check template form with positive and negative assurance elements. - Prudential reporting (monthly liquidity, LVR, capital adequacy) monitored by analysts and reported in PRESS, MBOR, and prudential supervisor dashboard reports; supervisors also review internal bank reporting to Boards and Board Audit and Risk committees. - EC4 — macroeconomic and cross-sector considerations: - Banking Oversight teams interact daily with Insurance Oversight and other RBNZ departments: Financial Markets Department (FMD); Financial Services Group (FSG); Economics Department; MFD on macroprudential issues; participate in Macro Financial Committee (MFC) and contribute to six-monthly FSR. - A semi-formal ‘supervisory college’ process has commenced for each large banking group to exchange supervisory, policy, and operational information internally. - PSD meets regularly with FMA supervisory/regulatory teams; joint supervisory forum at management level established quarterly; supervisors’ round-table process shares information on retail deposit-taking banks. - Supervisors draw on public information, subscription reports, and rating agency updates. - EC5 — system-wide risk monitoring and MBOR: - Key mechanisms for system-wide build-up of risks: quarterly PRESS reviews; MBOR; monthly Financial Stability page of Balanced Scorecard; MFD-led work feeding into six-monthly FSR. - MBOR reviews prudential statistical and compliance information and emerging risks, reporting developments by bank and sector on: - impaired and past due assets, loan loss provisioning, and bank non-household loan watch lists; - loan portfolio growth; - high loan-to-value ratio (LVR) housing lending; - capital adequacy; - leverage ratio; - capital and senior debt issuance; - liquidity mismatch and CFRs; - new debt issuance costs; - profitability performance measures. - EC6 — resolvability assessment and measures: - RBNZ and Treasury coordinate advice to MoF in times of distress. - RBNZ Act (s113 to s156) provides legislative framework for handling banks in financial stress or failure; summarized in Part O of BS1. - Hierarchy of supervisory responses: - corrective action plans developed where sufficient time exists; corrective action may be enforced by variation or imposition of conditions of registration; - activate s101 to s104 investigative powers if criteria in s113 are met to make recommendation to MoF for consent to issue a direction; direction powers may require actions or removal/appointment of directors under s113B; - recommend MoF advise Governor-General to declare statutory management under a statutory manager where necessary (with regard to s68 and s68A trans-Tasman cooperation obligations); - OBR policy (BS17) prepositioning requirement applies to NZ incorporated banks with total retail deposits in excess of $1 billion: banks required by condition of registration to have an up-to-date implementation plan, a compendium of liabilities agreed with RBNZ, and to test OBR solution effectiveness annually. - Outsourcing policy (BS11) requires locally incorporated registered banks whose net external liabilities (other than to related parties) exceed $10 billion to have legal and practical ability to control and execute core bank business functions carried on by another party in event of stress or failure. - s123 allows statutory manager to incorporate NZ branch operations of cross-border banks to apply full statutory management process. - Other policy initiatives to reinforce resolution: local incorporation policy; domestic payments pipeline initiatives (increase 'settlement before interchange' processed early in banking day; enable same-day cleared payments). - EC7 — framework for handling banks in stress and timeliness concerns: - RBNZ has powers and tools ranging from directions, statutory management, facilitating recapitalization, to liquidation. - Timeliness may be affected by: - monitoring/corrective action mainly based on bank results or breach of requirements; lack of supervisory standards to support supervisory judgment may affect preventive action; - issuance of directions requires MoF consent, which may delay process or discourage use of the tool. - First stage in addressing material financial stress: thorough independent valuation to determine liquidity vs solvency. - Majority shareholders or parent may be approached for additional liquidity/capital or restructuring options (rights offer, sale, management replacement, merger, etc.). - Triggers for statutory management similar to direction basis; statutory management transfers control to statutory manager and suspends creditors’ claims (moratorium). - OBR prepositioning can enable a failed bank to re-open the next business day; under OBR a portion of creditors’ funds are frozen, remaining funds and critical services made available next business day; government provides explicit guarantee on unfrozen portion and guarantees subsequent obligations entered into by statutory manager. - Full assessment and long-term solution likely to take weeks or months; additional frozen funds may be periodically released as losses become clearer. - EC8 — activities outside regulatory perimeter and boundary issues: - PSD is licensing authority and regulator for NBDTs under NBDT Act 2013, and licensing/regulator/supervisor of insurance entities under Insurance (Prudential Supervision) Act 2010. - Information exchanged across PSD teams on boundary issues; RBNZ monitors public sources for potential new NBDTs; liaises with prudential supervisors and FMA regarding deposit-taking entities changing business nature. - RBNZ notifies FMA of entities possibly falling under Financial Markets Conduct Act 2013 or required to register on Financial Service Providers Register. - RBNZ pursues entities breaching Part 4 of RBNZ Act re use of word ‘bank’ and will place public warnings on its website where appropriate. - Assessment of Principle 8: Materially Noncompliant - Comments on gaps and risks: - RBNZ has PRESS off-site framework assisting identification and assessment of risks and establishing supervisory action plans. - RBNZ emphasizes directors’ quarterly attestations, but has issued limited guidance on supervisory expectations for what constitutes an adequate system to monitor and control risk. - Lack of standards may lead directors to attest based on systems that may not meet best practices and may reduce comparability of attestations across banks. - Establishing a supervisory baseline would facilitate corrective action and enhance supervisory comfort. - RBNZ developed high level internal guidance for PRESS analysis listing issues and mitigants; guidance on how to analyze risks or factor mitigants is limited. - Analysts are not required to document in work papers the analysis of the risk or mitigants; operating assumption is that silence implies compliance. - RBNZ has broad corrective powers but most corrective actions are reactive to identified breaches; ability to issue forward-looking directions would be enhanced by enforceable guidelines establishing supervisory expectations for “prudent” banking in support of s78 of RBNZ Act. - Off-site analysis depth/quality control may be variable; information on which analysis is based is not routinely tested on-site. - PRESS reports are not communicated to banks; significant findings are discussed at annual bank visitation. - Overall conclusion: off-site system adequate, but lack of documented analysis, limited on-site verification, and lack of supervisory standards create weaknesses in preventive supervisory capability. ### Principle 9 — Supervisory techniques and tools: mix of on-site and off-site - Principle summary: Supervisor uses appropriate range of techniques/tools and deploys resources proportionately to risk and systemic importance. - EC1 — mix of on-site and off-site: - Supervisory regime relies on three pillars: market discipline, self-discipline, regulatory discipline. - Supervision is mainly off-site with limited on-site testing/verification; testing limited to additional information requests and does not routinely involve review of source documents/files. - RBNZ’s supervisory approach includes regular prudential meetings with senior management, independent directors, and Board chairpersons prioritized by risk and focused on 10 largest banks. - On-site engagement includes thematic reviews and detailed discussions but RBNZ does not conduct on-site inspections to validate risk-management systems and regulatory compliance routinely. - Under s95 RBNZ can require a report by suitably qualified person (auditor/technical expert); s95 option not utilized in past three years but used previously. - RBNZ participates as observer in APRA on-site reviews of four Australian-owned subsidiary banks; APRA conducts reviews roughly every two years, targeted by risk area. - RBNZ adopts risk-based approach to scope/intensity of off-site supervision consistent with PRESS outcomes; highest intensity for five largest banks; progressively less for other categories. - Annual review/update of supervisory focus, risk reporting requirements, and engagement program; thematic review priorities set based on emerging risks. - EC2 — planning and coordination: - Frequency/intensity of off-site engagement, reporting, PRESS assessments, and compliance checks predetermined based on risk assessment. - Supervisory scope/procedures set out in Banking Oversight Procedures Manual; supervisory teams co-located and hold joint meetings; quarterly PRESS discussion and peer review sessions. - On-site activities primarily visits to discuss issues from off-site analysis and do not involve testing/verification; thematic reviews use questionnaires and increased information requests; Theme Days develop baseline across banks. - EC3 — information variety and reliability: - RBNZ obtains a wide range of information: standard confidential monthly returns on capital adequacy, balance sheet, sectoral lending; income statements, asset quality, liquidity; LVR commitments; copies of selected regular Board reports for 10 largest banks; external rating agency reports; structured information for thematic reviews; copies of information requested by foreign supervisors; ad hoc reports. - RBNZ uses quarterly published disclosures, with more detailed semi-annual/annual disclosure requirements; external audit review required for six-month and annual financial statements and specified prudential disclosure information. - Limited geographical diversity of NZ banks means only high-level information collected on business by geography or currency, not fully consistent across banks. - EC4 — tools for assessment and follow-up: - Regularly used tools: financial analysis and reporting; bank strategy review; MBOR; results of bank in-house stress tests and RBNZ-specified stress tests; PRESS risk evaluation incorporating strategy, governance, internal controls, and parent support. - These processes form primary source of supervisory stance and response, alongside compliance events and emerging risks. - EC5 — stress testing and systemic risk identification: - RBNZ develops stress-testing policy, designs scenarios, conducts exercises with banks, and analyses outcomes; stress-testing coordinated between MFD and PSD and monitored by senior-level committees. - Banks required to undertake ICAAP stress-testing and periodic independent review of ICAAP; 2014/15 thematic review of ICAAPs gathered information on techniques used. - 2014 joint APRA/RBNZ stress tests of four Australian-owned subsidiary banks with increased local involvement and board sign-off; RBNZ led New Zealand aspects. - April 2014 separate stress test with five domestic New Zealand-owned banks; 2015 common downturn scenario ICAAP stress test for four major Australian-owned banks; 2015 dairy portfolio stress tests for five largest dairy sector lenders with commentary published March 2016. - RBNZ views stress-testing as important input to bank risk management and identification of system vulnerabilities. - EC6 — internal audit evaluation: - RBNZ does not issue formal guidance/requirements on scope/effectiveness of banks’ internal audit functions. - RBNZ receives and reviews internal audit work programs/plans and progress reports from 10 largest banks and meets annually with internal auditors and external auditors to discuss resourcing, capability, and independence of internal audit function. - Supervisors meet with CEOs and CROs and refer supervisory concerns back to banks when identified. - EC7 — contact with boards and management: - Annual formal engagement plan for NZ incorporated banks’ Boards and senior management communicated before each calendar year. - For five largest NZ incorporated banks: at least two meetings per annum with Board chairperson and separately with CEO; separate meeting with independent directors; joint meetings with CFO and CRO; annual in-depth prudential consultation with CEO and senior management. - For smaller banks, frequency reduced based on risk. Meetings review strategic plans, risk governance, prudential indicators, and inform banks of supervisory issues; follow-up in writing where appropriate. - EC8 — communication of findings: - Routine feedback provided through regular engagement meetings; material or urgent matters handled via teleconference followed by face-to-face meeting and letter. - Feedback on material supervisory reviews and emerging risks provided in writing for individual institutions and in systemic context (examples: housing and rural lending thematic reviews, ICAAP review, outsourcing stocktake, stress-testing exercises, 2015 dairy portfolio stress tests). - EC9 — follow-up and escalation: - RBNZ follows up to ensure effective resolution; Compliance Issues Register records concerns and actions and is closed only when formally confirmed resolved. - Escalation to senior management, Board level, parent bank and parent supervisor as appropriate; follow-up carried out in subsequent engagement meetings; process timely and banks are prompt in responses based on cases reviewed. - EC10 — advance notification of substantive changes: - Banks are expected to inform RBNZ of material events as soon as aware (changes in business, structure, financial condition, breaches). - No mandatory reporting requirement currently exists. - As part of 2015/2016 Regulatory Stocktake, proposals are being consulted on with banks to make immediate reporting of identified regulatory breaches a mandatory requirement. - EC11 — use of independent third parties: - RBNZ can require reports under s95 by suitably qualified experts with terms of reference and bank bears cost; findings may be presented to Board and may be published under s95A at RBNZ discretion. - Initial selection of expert normally made by bank but requires RBNZ approval; use of s95 power is rare. - EC12 — information systems: - RBNZ has secure central Financial Sector Information System (FSIS) database for time series data including monthly prudential returns and quarterly disclosure statements. - Reports include monthly A3 prudential dashboard, A4 summarized version, MBOR, and quarterly comparative prudential tables/graphs for 10 largest locally incorporated banks; each includes ‘traffic light’ indicators to assist identifying areas requiring follow-up. - AC1 — periodic independent review: - RBNZ’s Risk Assessment and Assurance (Internal Audit) performs independent audits of bank supervision function approximately every two years; recommendations discussed with bank supervision management and provided to PSD senior management and Governors; implementation monitored by senior management. - Assessment of Principle 9: Materially Noncompliant - Comments on shortcomings: - RBNZ has broad range of supervisory tools and extensive information gathering, with strong emphasis on market and self-discipline and regular engagement with banks’ Boards and management. - Shortcomings include: - RBNZ does not conduct its own on-site inspections and only occasionally mandates third-party expert reviews; often encourages voluntary reviews without formal legislative compulsion. - No regular supervisory examinations to discuss or provide feedback on; discussions occur but not in context of regular on-site examination reports. - Banks expected but not formally required to notify RBNZ of substantive changes or breaches in a timely manner. - Internal audit reviews of banking oversight do not usually explicitly focus on adequacy/effectiveness of supervisory tools and their use. - On-site activities are limited (no routine credit file review or verification of implementation of Board-adopted policies); off-site analysis documentation and testing is limited; analysts are not required to retain work papers for risk/mitigant analysis. - These factors weaken the foundation for assessing bank risk and the preventive supervisory capability. ### Principle 10 — Supervisory reporting: powers and prudential reporting - Principle summary: Supervisor collects, reviews, analyses prudential reports and statistical returns from banks on both solo and consolidated basis and independently verifies through on-site or external experts. - EC1 — powers to require information: - RBNZ has power under section 93 of RBNZ Act to require registered bank to supply any information, data or forecasts about corporate, financial, prudential matters or other matters relating to business/operation/management. - Under section 94 RBNZ can require information to be audited. - Banking oversight uses this power to request a standard set of confidential monthly prudential returns on capital adequacy, asset quality, liquidity; copies of selected regular Board reports for 10 largest banks; structured information for thematic reviews; copies of information requested by foreign supervisors under section 98A; and ad hoc reports. - Given limited geographical diversity, only high-level information collected on bank business by geography/currency and not reported fully consistently across banks. - Prudential reporting was increased in 2008 post-GFC; a new set of prudential reporting to complement and rationalize current reporting and prepare for “dashboard” public disclosure initiative in 2017 was to be implemented during 2016. *Italic: Extracted and summarized from the specified IMF assessment content.* ### 2017. The prudential information requested in this assessment criteria are all included, ### cr17120 - 2017. The prudential information requested in this assessment criteria are all included, ### EC2 — Reporting instructions and accounting standards - The supervisor provides reporting instructions that clearly describe the accounting standards to be used in preparing supervisory reports. - Such standards are based on accounting principles and rules that are widely accepted internationally. - Information reported in the registered bank disclosure statements is to be reported in accordance with the relevant disclosure OiC for that bank. - New Zealand equivalents of International Accounting Standards (NZIAS) that guide both supervisory reporting and public disclosure are discussed in CP27, and can be considered consistent with international accounting standards for the purpose of this EC. ### EC3 — Valuation methodologies, governance and validation - The supervisor requires banks to have sound governance structures and control processes for methodologies that produce valuations. - The measurement of fair values maximizes the use of relevant and reliable inputs and is consistently applied for risk management and reporting purposes. - The valuation framework and control procedures are subject to adequate independent validation and verification, either internally or by an external expert. - The supervisor assesses whether the valuation used for regulatory purposes is reliable and prudent. - Where the supervisor determines that valuations are not sufficiently prudent, the supervisor requires the bank to make adjustments to its reporting for capital adequacy or regulatory reporting purposes. - Description and findings re EC3: - Bank reporting in published disclosure statements is required to adopt valuation techniques consistent with GAAP. - The RBNZ expects that the penalties for misreporting under section 89A of the RBNZ Act places the right set of incentives on bank directors to carry out effective governance and ensure management have in place effective procedures and controls, including compliance with the NZIAS in respect of valuation and reporting of assets and liabilities. - Fair value is defined in the OiCs to have the same meaning as in NZIAS 32, i.e., "the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction." - Financial reporting information contained in the bank disclosure statements is required to be subject to an external audit review (negative assurance) opinion for the six monthly balance date, and a full external audit opinion on the annual financial reporting information. - External auditors are required to provide a review opinion at the six monthly balance date on defined additional financial and prudential information; and at annual balance date, an opinion whether or not the information is in accordance with the books and records of the banking group in all material respects and is fairly stated in accordance with the relevant schedules of the OiCs. - From time to time, supervisory reviews identify valuation methodology issues (e.g., basis of valuations used for assessing recoverability of stressed or nonperforming loans); RBNZ obtains further information, sets out expectations for corrective action, and may impose specific requirements for changing capital adequacy treatment for affected loans/portfolios or impose a capital overlay requirement. ### EC4 — Frequency and commensurability of reporting and analysis - The supervisor collects and analyses information from banks at a frequency commensurate with the nature of the information requested, and the risk profile and systemic importance of the bank. - Description and findings re EC4: - Annual, semi-annual, quarterly, and monthly prudential reporting requirements vary to some extent consistent with the size and incorporation of registered banks, as proxies to risk profiles and systemic importance. - In practice the four large Australian owned banks are subject to the most intensive information reporting requirements, with the very small New Zealand incorporated and overseas incorporated (branch) banks at the other end of the spectrum. - The RBNZ’s section 93 (private) reporting requirements for copies of key Board, Board Risk and Audit committee, and executive management committee reports of locally incorporated banks is variable according to the level of risk in the respective banks. - Analysis of information comes from PRESS assessments and monthly MBOR summary assessments as discussed in CP8. ### EC5 — Comparable consolidated and entity-level data collection - In order to make meaningful comparisons between banks and banking groups, the supervisor collects data from all banks and all relevant entities covered by consolidated supervision on a comparable basis and related to the same dates (stock data) and periods (flow data). - Description and findings re EC5: - Prudential (stock and flow) data collected from registered banks is primarily reported on a consolidated New Zealand banking group basis at the end of each reporting period (or over each reporting period in the case of flow data). - Quarterly published disclosure statements are reported on the same basis (for March, June, September, and December each year). - The banking group coverage for each registered bank is defined in its conditions of registration, for example: - a) a locally incorporated bank’s banking group is the registered bank (as reporting entity) and all other entities included in the group as defined in section 6(1) of the Financial Markets Conduct Act 2013 for the purposes of Part 7 of that Act. (i.e., the registered bank and all its subsidiaries); - b) an overseas incorporated (branch) bank’s banking group is the New Zealand business of the registered bank and its subsidiaries as required to be reported in group financial statements for the group’s New Zealand business under section 461B(2) of the Financial Markets Conduct Act 2013; (i.e., the group’s New Zealand business as if the members of the group were all companies formed and registered in New Zealand); however, there are exceptions which narrow the consolidated banking group scope for two branch banks, to exclude nonbank entities which are not managed as part of the New Zealand banking operations. - Monthly and quarterly flow data (e.g., income statements) is available to bank supervisors for internal analysis on a current period, year-to-date and 12-month running total basis, as banks have differing quarter-ends for their financial years. - Liquidity (BS13) flow daily data for locally incorporated banks is reported on a calendar month basis, as well as measurement of minimum daily 1-week and 1-month mismatch ratios during the month. - Other regulatory requirements such as connected exposures limits are required to be monitored daily and reported with a peak end of day, quarter-end, and end of financial year position. ### EC6 — Powers to request information from banks and wider groups - The supervisor has the power to request and receive any relevant information from banks, as well as any entities in the wider group, irrespective of their activities, where the supervisor believes that it is material to the condition of the bank or banking group, or to the assessment of the risks of the bank or banking group or is needed to support resolution planning. This includes internal management information. - Description and findings re EC6: - EC1 noted the RBNZ’s powers to require a registered bank to supply it with information. - Section 93A of the RBNZ Act provides powers to request similar information from registered banks in relation to its associated persons (e.g., its subsidiaries and associated companies, and holding companies including New Zealand branches of the overseas parent bank), and section 93B requires those persons to provide the required information to the registered bank to enable that bank to comply. - Section 93C permits the RBNZ to request relevant information that it could require a registered bank to provide, by notice, from any other person whom it has reasonable grounds to believe has such information, for example, an external auditor. - The RBNZ has sole discretion to determine the nature and scope of information obtained from banks, either through regular reporting; Board and Management reports or targeted ad-hoc information requests. - Other monetary, credit and financial (nonprudential) statistical information is collected from banks under section 36. - The information gathering powers can also be used to obtain information the RBNZ considers is necessary to plan and prepare for bank resolution (including in respect of banks’ arrangements for, and testing of OBR prepositioning implementation plans), and to operationalize processes involved in invoking statutory management and OBR where appropriate. Banks, for example, would provide a copy of their OBR implementation plan annually. ### EC7 — Access to bank records and personnel - The supervisor has the power to access all bank records for the furtherance of supervisory work. The supervisor also has similar access to the bank’s Board, management and staff, when required. - Description and findings re EC7: - In addition to the information gathering powers in EC6, the RBNZ meets separately with banks’ senior management and with Board chairpersons and independent directors of locally incorporated banks as part of its annual bank engagement program. - In business-as-usual supervisory activities, access to these banks’ Board, management and staff is effected without resorting to formal legislative powers. - In the event of a material compliance failure or other supervisory concern regarding the accuracy or quality of information provided to the RBNZ (e.g., if the RBNZ has reasonable cause to believe information provided is false or misleading) section 99 and section 100 of the RBNZ Act provide powers for the RBNZ to issue a formal notice to supply specified information, or appoint a suitably qualified person to enter and search any premises and inspect. - Sections 101 to 104 of the RBNZ Act provide powers for investigation of the affairs of a registered bank where the RBNZ considers it needs to determine whether or not to exercise its regarding direction to, or statutory management of as registered bank, including by notice requiring supply of information, production of documents for inspection, copying, etc. or to require any officer or employee of that registered bank to answer any question relating to the business, operation, or management of that bank. - Section 106 provides for a High Court warrant to be issued in defined circumstances if the person who occupies the premises or has possession of the documents does not agree to provide the specified information. - The RBNZ indicates there are no legislative impediments to conducting on-site inspections; however, this is not the current practice, nor the intention. RBNZ supervisory approach is oriented more towards across the Board thematic reviews than single institutions inspections plan. ### EC8 — Enforcement of timely and accurate information submission - The supervisor has a means of enforcing compliance with the requirement that the information be submitted on a timely and accurate basis. The supervisor determines the appropriate level of the bank’s senior management is responsible for the accuracy of supervisory returns, imposes sanctions for misreporting and persistent errors, and requires that inaccurate information be amended. - Description and findings re EC8: - The RBNZ takes action to maintain banks’ compliance with requirements for timely and accurate information (primarily through re-publication and stating material changes), but the available sanctions for misreporting and persistent errors are limited to summary conviction (or directions to a bank or deregistration) and have not been imposed in that form to date. - The mechanism for enforcement that the RBNZ uses primarily is the public disclosure of breaches of compliance of conditions of registration. - The RBNZ has not found the need to exercise powers beyond naming and shaming that is involved in public disclosure in mass media and specialized journalists’ scrutiny. Enforcing actions on compliance with purely private prudential reporting has not been exercised as yet. - Section 83 of the RBNZ Act provides for the RBNZ, by notice, to require a registered bank to correct and republish a disclosure statement published as required under section 81 of the Act that the RBNZ considers contains information that is false or misleading. - The RBNZ ensures that material errors or omissions in disclosure statements are corrected and republished promptly. It records such events in its compliance issues register, and pursues with bank senior management remedial action, including through the use of external expert advisers to identify process improvements required, where recurring problems are found. - Practice was illustrated with examples of recent notice letters to banks regarding disclosure compliance failures under section 83. *Source: cr17120 - 2017. The prudential information requested in this assessment criteria are all included,* ### Section 89 provides an offence for failing to publish required information in a disclosure ### Section 89 provides an offence for failing to publish required information in a disclosure ### Offences and penalties - Section 89: offence for failing to publish required information in a disclosure statement. - Section 89A: offence for publishing false or misleading disclosure statements. - Sections 93, 93A, 93B, and 93C: offences for failure to comply with notices issued under those sections; each notice must specify the time and place in New Zealand at which the information must be supplied. - Penalties: available for such offences, on summary conviction, under section 156AB of the Act. - Practice: the RBNZ has not yet pursued prosecution in such instances, with appropriate remedial action being taken by banks at the RBNZ’s request. - Section 94: RBNZ power to require an audit (by an auditor approved by the RBNZ) of any information, data, or forecasts requested under section 93 or section 93C. ### EC9 — Supervisor verification of supervisory information (Description and findings) - The supervisor utilizes policies and procedures to determine the validity and integrity of supervisory information, including a program for periodic verification of supervisory returns by the supervisor’s own staff or external experts. - RBNZ practices: - Cross checking between disclosure statements and prudential returns. - Supplementary cross checking by the Statistical team. - RBNZ staff attest to Banking Oversight managers regarding comprehensiveness of banks’ quarterly public disclosure according to regulations. - Banks’ external audit process provides additional assurance to the RBNZ. - Gap: the RBNZ does not directly conduct periodic verification of banks’ prudential returns by any means and in any scope. - Power: section 94 permits RBNZ to require an approved auditor to audit information requested under s93 or s93C. ### EC10 — Roles, suitability, and assessment of external experts (Description and findings) - EC10 requires clear definition and documentation of roles and responsibilities of external experts, assessed suitability, quality of work, and consideration of conflicts of interest. - RBNZ practices: - Regular external audit review obligations in relation to bank disclosure statements under the OiCs are set out in PSD Banking Supervision policy document BS4 on Audit Obligations. - Section 95: power to require reports by suitably qualified experts on matters set out in terms of reference determined by the RBNZ and notified to a registered bank. - Used where RBNZ is concerned about material and ongoing compliance failures or prudent conduct of business and affairs. - Initial selection of s95 appointees normally made by the subject bank but requires RBNZ approval before appointment takes effect. - RBNZ considers appointee’s skills, experience, and potential conflicts of interest and may make further inquiries. - RBNZ uses professional consultants and industry experts to support supervisory work program. ### EC11 — Requirement for external experts to report material shortcomings (Description and findings) - EC11: external experts must bring material shortcomings identified during their work to the supervisor’s attention promptly. - RBNZ findings: - No explicit requirement for external experts to report material shortcomings identified in the course of work for supervisory purposes, unless severity meets threshold in section 96 of the RBNZ Act for reporting by the bank’s external auditor. - Section 96 severity threshold: where the bank or an associated person is insolvent, likely to become insolvent, or is in serious financial difficulties, and disclosure of that information is likely to assist or be relevant to the exercise by the RBNZ of its powers under Part 5 of the Act. - Auditor obligations under s96: - Auditor required, in such circumstances, to take all reasonable steps to inform the bank (or its associated person) of its intention to disclose and the nature of the information to be disclosed to the RBNZ. - Protection from civil or criminal liability, or professional censure, is provided to an auditor if the disclosure to the RBNZ is made in good faith. - RBNZ practice: encourages free and frank exchange with external auditors; auditors expected, with knowledge of the bank’s audit committee, to discuss key audit findings on a confidential basis. ### EC12 — Periodic review of information collected (Description and findings) - EC12: supervisor has process to periodically review information collected to ensure it satisfies supervisory need. - RBNZ practices: - Annual review of scope and prudential relevance of private risk reporting by the 10 largest locally incorporated banks before formalizing information request for each bank for the current year. - Regular reviews of OiC disclosure requirements aim to balance market discipline with supervisory access to timely prudential and financial reporting through cost-effective mechanisms other than published disclosure statements. - 2016 refinements: - Refining monthly reporting requirements with respect to banks’ balance sheet composition and structure, and bank asset quality data. - Developing enhanced quarterly prudential reporting for banks in respect of: - large exposures; - related parties; - detailed capital adequacy data including capital composition, risk weighted assets by risk bucket, and reporting of advanced model (IRB) banks’ key parameters across each asset class. - Purpose: meet identified gaps in provision of regular and consistent supervisory information. ### Assessment of Principle 10 — Summary and recommendations - Assessment: Materially Noncompliant. - Summary findings: - RBNZ has a developed framework of prudential reporting: quarterly published disclosure statements (with higher detail required for six month and annual reporting); regular private statistical and prudential reporting; and for large- and medium-sized New Zealand incorporated banks, copies of key bank risk and financial management reports to senior Management and Board committees. - Information reported consistent with international accounting standards applicable in New Zealand (see CP27). - Prudential reporting framework in place and under revision for further enhancements; RBNZ collects, reviews and analyses prudential reports and statistical returns on solo and subconsolidated basis (see EC1). - Key compliance gaps: - RBNZ does not conduct any independent verification of the prudential returns (EC9). - Supervisory model relying on public disclosure and director attestation is an impediment to compliance with CP10; verification is limited to cross-checking of reporting outcomes for consistency. - Current resources would not allow the RBNZ to do its own on-site inspections in practice. - RBNZ does not independently verify the valuation framework and control procedures are subject to adequate independent validation and verification; validation delegated to external audit and directors’ attestation. - No systematic practice to determine that valuations are sufficiently prudent. - Recommendations highlighted: - RBNZ is encouraged to develop processes for strong first-hand independent verification of banks’ prudential returns, especially in earnings and credit asset quality. - RBNZ should have an explicit requirement for external experts to bring material shortcomings identified in the course of work undertaken for supervisory purposes to its attention (EC11). ### Principle 11 — Corrective and sanctioning powers of supervisors (Essential criteria EC1–EC4) - Principle: supervisor acts at an early stage to address unsafe and unsound practices and has adequate range of supervisory tools, including ability to revoke banking license or recommend revocation. - EC1 (Description and findings): - Supervisor raises supervisory concerns early with management or Board; requires timely remediation. - Material issues addressed in writing to CEO or Board chair; RBNZ may call in CEO and/or Board chair. - Written progress reports required regularly; form basis for formal meetings with supervision team. - EC2 (Description and findings): - Supervisor has appropriate range of supervisory tools when a bank is noncompliant, engaged in unsafe or unsound practices, or depositor interests threatened. - Graduated supervisory response framework includes: - Formal advice and corrective action plans where no immediate systemic risk; possible enforcement via variation or imposition of condition of registration under s74; breaches recorded and monitored through the Compliance Issues Register. - Use of s95 reports by suitably qualified experts where material and ongoing compliance failures or imprudent conduct suspected; s95 scope may cover corporate, financial, prudential, or other matters of the bank or associated persons; findings presented to the bank’s Board, copied to RBNZ, with mandated remediation action plan, monitoring, and possible publication. - Activate powers in s101 to s104 to carry out an investigation of a bank meeting s113 criteria; may lead to recommendation to the MoF for consent to issue a direction under s113 or to remove/replace/appoint a director under s114. - Statutory management: sections 117 to 156 provide framework for handling registered banks in event of imminent financial stress or failure via appointment of a statutory manager by the Governor-General on advice of the MoF given in accordance with an RBNZ recommendation. - EC3 (Description and findings): - Supervisor can act where a bank falls below regulatory thresholds and intervene early to prevent breaches. - RBNZ emphasizes risk-based governance and expects boards to set target buffers above regulatory minima (e.g., for capital and liquidity). - Preventive action opportunities limited due to lack of sufficient supervisory guidelines. - Example: two newly-registered banks unintentionally breached related party exposure limits imposed as conditions of registration due to misunderstanding of definitions; RBNZ required immediate corrective action, additional procedures, and public disclosure in next quarterly disclosure statement; no further punitive action taken. - Market discipline pillar reinforces directors’ incentives via public disclosure and attestations. - Range of options to resolve pending problems: engagement with bank, Board, owners/parent; work-out plan or resolution strategy; constraints via conditions of registration, capital overlays, or directives until corrective action completed. - EC4 (Description and findings): - Supervisor has broad range of measures to address scenarios early, proportionate to gravity. - Possible measures include requiring timely corrective action, imposing sanctions, restricting activities, imposing prudential limits, withholding approvals, restricting payments to shareholders, restricting asset transfers, barring individuals, replacing or restricting powers of managers/Board members, facilitating takeover/merger, interim management, and revoking or recommending revocation of banking license. - RBNZ practice: - Proportionate supervisory approach from correction and republication of disclosure statement data for minor infractions to substantive corrective action (e.g., capital injection, commissioning external expert reports) for serious concerns. - Compliance Issues Register contains criteria for referral of material or repeated breaches to PSD’s Investigation and Enforcement team for further investigation and enforcement recommendations. - Formal powers summarized under responses to EC2, including conditions of registration under s74, directives with MoF consent under s113, and s113B powers to replace or restrict powers of managers or Board members with Minister consent. *IMF mission report content as provided* ### section 113 (1) (a) to (e) are met (e.g., a bank is not carrying on its business in a prudent ### cr17120 - section 113 (1) (a) to (e) are met (e.g., a bank is not carrying on its business in a prudent manner, but not merely because there has been a failure to comply with regulatory requirements), and the Governor-General has appointed a statutory manager of the bank under s117, the rights and powers of controlling owners are overridden, and the statutory manager may facilitate a takeover by or merger with a healthier institution, and has all the powers of the Board and Management of the bank. ### Statutory management, cancellation of registration, and overriding owners (EC5 — EC6) - Where section 113(1)(a) to (e) are met and the Governor-General has appointed a statutory manager under s117: - the rights and powers of controlling owners are overridden; - the statutory manager may facilitate a takeover by or merger with a healthier institution; - the statutory manager has all the powers of the Board and Management of the bank. - The MoF may, by notice given in accordance with a recommendation by the RBNZ, direct the RBNZ to cancel the registration of a bank where the RBNZ is satisfied that the bank meets the criteria of s77(2) of the Act, including for example: - material or persistent non-compliance with a condition of registration; - the bank has not carried on its business in a prudent manner; - the bank has failed to comply with any obligation under the Act or any related regulations. - Supervisory sanctions apply to banks and, when necessary, to management and/or the Board or individuals therein. - Conditions of registration are the usual tool for early corrective action and may be scoped to address: - incorporation and ownership structure of the registered bank; - the size and nature of the registered bank’s business or any part of its business; - the ability of the registered bank to carry on its business in a prudent manner; - the standing of the registered bank in the financial markets; - the suitability for their positions of the directors and senior managers of the registered bank; - the standing of the owner of the registered bank in the financial markets; - the registered bank’s capital in relation to the size and nature of its business; - the registered bank’s loan concentration and risk exposures; - the separation of the registered bank’s business from other business and from other interests of any person owning or controlling the registered bank; - the registered bank’s internal controls and accounting systems; - the registered bank’s risk management systems and policies; - the arrangements for outsourcing any business, or functions relating to any business, of the registered bank to be carried on by any person other than the registered bank; - the public disclosure of information by the registered bank as required by OiCs; - certain matters in relation to the home jurisdiction legal and regulatory requirements and the publication of financial or other information by the head-office or parent of a registered bank that is cross-border incorporated, or is a subsidiary of a cross-border incorporated entity. - More serious or urgent concerns may trigger: - RBNZ’s powers of direction to a bank; - removal of directors with the consent of the MoF; - initiation of statutory management by order of the Governor-General on the advice of the MoF given in accordance with a recommendation of the RBNZ. - “Associated person” of a registered bank includes: - subsidiaries and associated companies of the bank; - the bank’s holding companies (including New Zealand bank branches of the cross-border parent bank) or any owner of 20 percent or more of the bank’s voting or non-voting securities; - Associated person does not include subsidiaries of the bank’s holding company. ### Criteria for direction powers and statutory manager powers (EC6) - Criteria for initiating direction powers include where the bank or associated person: - is insolvent or is likely to become insolvent; - is about to suspend payment or is unable to meet its obligations as and when they fall due; - the affairs are being conducted in a manner prejudicial to the soundness of the financial system; - the circumstances are such as to be prejudicial to the soundness of the financial system; - the business has not been, or is not being, conducted in a prudent manner; - any of the following persons has failed to comply with any requirement imposed by or under this Act or regulations made under the Act: - the bank; - a director of the bank; - in the case of a cross-border incorporated bank, its New Zealand chief executive officer; - any of the following persons has been convicted of an offence against the Act: - the bank; - a director of the bank; - in the case of a cross-border incorporated bank, its New Zealand chief executive officer; - the bank has failed to comply with a condition of its registration. - Powers available to a statutory manager upon appointment include: - placing a moratorium on specified actions by any person in respect of the bank or associated person; - suspending payment of any money owed or the obligation to provide funding to any person; - creating a locally incorporated company for a cross-border incorporated (branch) bank and vesting any of the branch’s property or assets in that company; - being vested with management of the bank, empowered to carry on its business, and having all the powers, rights, and privileges of the bank, its Board of directors and its shareholders; - paying creditors and compromising creditors’ claims; - selling the registered bank in whole or part of its business. ### Supervisory sanctions, personal liability, and non-criminal measures (EC5) - Supervisory sanctions imposed through or in relation to a bank’s conditions of registration apply to the legal entity only. - RBNZ Act (s89A) provides for personal liability for a bank director, or the New Zealand Chief executive officer of a cross-border incorporated (branch) registered bank if a disclosure statement signed by or on behalf of that person is false or misleading. - Sections 156AA to 156AC impose penalties for offenses under Part 5 (bank registration and supervision); each offense, upon summary conviction, may apply to an individual or a body corporate, or both. - A small number of sections of Part 5 (e.g., s74 on failure to comply with a condition of registration, s95 on failure to publish a report under s95) impose offenses on the registered bank alone. - Non-criminal sanctions include: - power to issue a direction to a registered bank or its associated person limiting or ceasing the involvement of an officer or employee in management or conduct of business; - power to remove or replace a director of a bank (or appoint any person as a director); - each of these steps requires the prior consent of the MoF. ### Resolution cooperation and cross-border coordination (EC7) - RBNZ has statutory requirement to support the Australian financial authorities and, to the extent reasonably practical, avoid actions likely to have a detrimental effect on financial system stability in Australia; consultation with and considering advice of relevant Australian authorities is required before taking any action that could have such an effect. Matching obligations are imposed on APRA under Australian legislation. - The FMA is the New Zealand counterpart for financial business conduct and capital markets regulation; RBNZ and FMA have an agreement to cooperate and share information including in relation to any proposed major supervisory intervention. - Formal memorandums of understanding are in place with both APRA and FMA on cooperation and information sharing; regular engagement is maintained at executive, policy and operational levels. - RBNZ and Treasury MoU agreed in 2012 sets out coordination, including: - both have roles in event of financial distress and need to work together to ensure government has appropriate crisis resolution tools that meet each agency’s objectives; - RBNZ and Treasury will coordinate advice to the Minister in a period of actual or potential financial distress; - Treasury will lead on operational matters arising from financial distress where these have fiscal implications; - RBNZ is responsible for ensuring that the Treasury and the Minister are informed in a timely manner if an institution faces a material likelihood of distress. - RBNZ’s crisis management toolkit sets out requirements for engagement with other regulators and steps in the bank resolution process. - Crisis simulation exercises include representatives of official agencies; the trans-Tasman exercise in November 2011 included representatives from the Australian Treasury and APRA. - Appointment of a statutory manager provides resolution options including closure, assisting in restructuring, or merger with a stronger institution; RBNZ will cooperate and collaborate with relevant domestic and foreign authorities to the extent consistent with its statutory objectives. ### Additional criteria on timing and coordination (AC1 — AC2) - AC1: There are no legal provisions that specifically determine bank supervision requirements on timing of corrective actions. - AC2: When taking formal corrective action in relation to a bank, the supervisor informs the supervisor of nonbank related financial entities of its actions and, where appropriate, coordinates its actions with them: - RBNZ (PSD) has effective sharing of information on common financial entity groups and interests across co-located teams covering each sub-sector; - Effective communication and cooperation processes are established with the two private sector trustee company supervisors of NBDTs and the FMA where RBNZ actions might impact entities under their supervisory responsibility. ### Assessment of Principle 11 — Supervisory powers and corrective actions - Assessment: Largely Compliant - Key findings and observations: - RBNZ addresses supervisory concerns proactively and timely, including formal communication and escalation to senior management and the Board as appropriate. - Remediation progress and completion is monitored and documented in the compliance issues register. - A range of supervisory tools are available to address non-compliance. Where conditions of registration are insufficient, powers of direction or statutory management can be used where necessary. - These powers can mandate ring-fencing of the registered bank from actions of parent and affiliates. - Recent formal enforcement most commonly involved disclosure republication, additional conditions of registration, or use of s95 reports to effect corrective action. - There has been no need to use powers of direction, statutory management, or mandatory revocation of registration in respect of banks to date. - RBNZ will cooperate and collaborate with relevant domestic and foreign authorities, consistent with statutory objectives; specific legislative provision is made for cooperation with Australian authorities. - Preventive action would be enhanced by making compliance with banking supervision policy documents evidence of prudent banking; issuing guidelines on risk management and addressing non-compliance would make enforcement more pro-active. - Threshold for issuing directions (including to remove directors) is high, relates to possible systemic impacts or existing violations or business not being conducted in a prudent manner, and requires consent of the MoF. - Lack of supervisory guidance and requirements may hamper RBNZ’s ability to act at an early stage and may limit use of supervisory judgment. - RBNZ has an adequate range of supervisory tools including ability to revoke banking license following MoF agreement to RBNZ recommendation for revocation. ### Consolidated supervision — Principle 12 (EC1 — EC2 excerpts) - EC1 — Understanding group structure and material activities: - RBNZ prudential supervision focuses on the New Zealand banking group as defined in conditions of registration and in Part 5 of the RBNZ Act: - For New Zealand incorporated banks: the registered bank and all other entities included in the group as defined in section 6(1) of the Financial Markets Conduct Act 2013 (in practice, the New Zealand registered bank and all of its subsidiaries). - For overseas incorporated (branch) banks: the New Zealand business of the registered bank (the parent) and its subsidiaries as required to be reported in group financial statements for the group’s New Zealand business under section 461B(2) of the Financial Markets Conduct Act 2013 (in practice, all branches and subsidiaries in New Zealand of the parent bank). Exceptions to the standard definition have been granted by the RBNZ for two banking groups to exclude nonbank entities that are not managed or controlled within the banking operations in New Zealand. - Main tools for prudential monitoring and analysis include the PRESS risk assessment process as discussed in CP8. - Standard conditions of registration for New Zealand incorporated banks include: - nonfinancial activities must not in aggregate be material relative to the New Zealand banking group’s total activities; - insurance business assets are not greater than 1 percent of the New Zealand banking group’s consolidated assets; - a substantial proportion of the New Zealand banking group’s business is conducted in and from New Zealand. - Five larger locally incorporated banks use (branches of) wholesale funding subsidiaries operating in major financial centers overseas to raise funding in offshore markets. - Overseas Bank Disclosure OIC (Schedule 3, clause 14 (3)) requires directors and New Zealand chief executive officer to attest whether systems are in place to monitor and control adequately material risks of relevant members of the banking group including credit risk, concentration of credit risk, interest rate risk, currency risk, equity risk, liquidity risk, and other business risks, and that those systems were being properly applied. - EC2 — Imposition of prudential standards and consolidated reporting: - The primary manner RBNZ imposes prudential requirements on banks post-registration is through the conditions of registration for each bank issued under the Act. *International Monetary Fund — cr17120 (excerpted section content)* ### section 74 of the RBNZ Act. The standard conditions for locally incorporated banks and ### section 74 of the RBNZ Act. The standard conditions for locally incorporated banks and ### Conditions of registration and reporting scope - The standard conditions for locally incorporated banks and overseas incorporated (branch) banks are set out in Appendix 1 of the Banking Supervision document BS1 – Statement of Principles (which cover capital adequacy requirements; limitation on size insurance business; credit exposures to connected persons; and liquidity requirements). - These conditions of registration are targeted at the consolidated banking group as defined in the conditions of registration themselves (see EC1 above). - Published bank disclosure statements and prudential returns reported to the RBNZ are almost entirely at the consolidated banking group level, as defined in EC1, to give a comprehensive view of the group’s business. - Prudential limits are not imposed on banks’ large credit exposures but: - reporting to the RBNZ, and quarterly published data on the concentration of credit exposures to individual counterparties (e.g., see local OiC Schedule 13 for New Zealand incorporated banks) is based on large credit exposures of the New Zealand banking group. - Lending limits with respect to high loan-to-value (LVR) residential mortgage lending imposed through conditions of registration are applied to the bank itself as the primary residential mortgage lender. - An additional requirement: a bank must not act as a broker or arrange for a member of its banking group to provide a residential mortgage loan to avoid the restrictions. - Summary information on banks’ subsidiaries should be published in annual disclosure statements. - Bank supervisors can obtain updated information on each group’s structure, and organization charts, as needed. ### Risk and financial management reporting practices - Risk and financial management reporting to the RBNZ by the larger New Zealand incorporated banks under s93 of the RBNZ Act includes: - divisional risk reporting, - focused deep-dive risk reports, - key risk metrics for major business units, particularly for the large banks with multiple business lines. - The RBNZ finds this more granular information critical to understand the broad scope of business and risks in these banking groups – in more detail than the consolidated published and prudential reports. ### Home supervision, foreign operations oversight (EC3) - The supervisor reviews whether oversight of a bank’s foreign operations by management (of the parent bank or head office and, where relevant, the holding company) is adequate having regard to their risk profile and systemic importance and there is no hindrance in host countries for the parent bank to have access to all the material information from their foreign branches and subsidiaries. - The supervisor determines that banks’ policies and processes require the local management of any cross-border operations to have the necessary expertise to manage those operations in a safe and sound manner, and in compliance with supervisory and regulatory requirements. - The home supervisor takes into account the effectiveness of supervision conducted in the host countries in which its banks have material operations. - Description and findings re EC3: - New Zealand incorporated banks wishing to establish a subsidiary, branch or representative office in another country should seek the approval of the RBNZ before making application to the host supervisor or licensing authority, as outlined in paragraph 136 of the Statement of principles BS1. - At present, the RBNZ indicates that there are no material banking operations of New Zealand banks in foreign jurisdictions (other than funding subsidiaries issuing debt in foreign capital markets to fund the New Zealand banking group). - The RBNZ estimates that at this moment there are no sufficiently material risks in the banks’ offshore subsidiary funding operations to warrant monitoring and supervising those operations separately from the supervision of the banking group as a whole. - The RBNZ indicates that a future role as active home supervisor can be adopted without impediments. ### Home supervision on-site visits and policies (EC4) - The home supervisor visits the foreign offices periodically, the location and frequency being determined by the risk profile and systemic importance of the foreign operation. - The supervisor meets the host supervisors during these visits. - The supervisor has a policy for assessing whether it needs to conduct on-site examinations of a bank’s foreign operations, or require additional reporting, and has the power and resources to take those steps as and when appropriate. - Description and findings re EC4: - Currently there are no foreign operations of New Zealand incorporated banks which are significant enough to warrant additional attention. - The RBNZ does not have a policy of conducting on-site examinations of banks’ foreign operations where those operations are material. - Risk management matters or prudential vulnerabilities relating to a New Zealand incorporated bank’s foreign operations would be obtained through the consolidated private reporting and engagement meetings with bank senior management and directors in New Zealand, in the first instance, if there were any material foreign operations. - As host supervisor, the RBNZ has a well-established practice to allow APRA, as the most significant home supervisor, to conduct on-site inspections of Australia banks’ operations in New Zealand. RBNZ staff participate as observers. This is further discussed in CP13. ### Review of parent and affiliate activities (EC5) - The supervisor reviews the main activities of parent companies, and of companies affiliated with the parent companies, that have a material impact on the safety and soundness of the bank and the banking group, and takes appropriate supervisory action. - Description and findings re EC5: - The PRESS risk evaluation surveillance framework incorporates parent support assessments for the New Zealand bank as one of 10 key inputs. - The RBNZ supervisory model does not include the review of the main activities of companies affiliated with the parent banks of foreign banks. - The four largest banking groups in New Zealand are Australian owned, and their parent banks are supervised by APRA. - Given the systemic importance of those banks in New Zealand, the RBNZ places significant emphasis on maintaining close working relationships with APRA at the operational supervisory level, as well as at the policy, senior management and governance levels. - The RBNZ will initiate appropriate supervisory responses to limit the potential contagion impact on the safety and soundness of a New Zealand bank’s operations that might arise where concerns are identified regarding the activities or prudential condition of parent companies or their affiliates. - In the first instance, separation from interests of owners could be effected through conditions of registration, escalating to the use of directive powers or statutory management powers if necessary in extreme cases. ### Limits on group activities and locations (EC6) - The supervisor limits the range of activities the consolidated group may conduct and the locations in which activities can be conducted (including the closing of foreign offices) if it determines that: - (a) the safety and soundness of the bank and banking group is compromised because the activities expose the bank or banking group to excessive risk and/or are not properly managed; - (b) the supervision by other supervisors is not adequate relative to the risks the activities present; and/or - (c) the exercise of effective supervision on a consolidated basis is hindered. - Description and findings re EC6: - As indicated in EC3, there are currently no material foreign operations of New Zealand incorporated banks. - Should the RBNZ become aware of risks in a bank’s foreign offices, or have concerns regarding its ability to exercise effective consolidated supervision, the RBNZ can under section 74 of the RBNZ Act, issue conditions of registration that can constrain the size and nature of a bank’s business; and on other matters relating to the ability of the bank to carry on its business in a prudent manner. - Should additional powers be necessary, (text ends). *Source: cr17120 - section 74 of the RBNZ Act. The standard conditions for locally incorporated banks and overseas incorporated (branch) banks (PDF).* ### section 113 of the Act permits the RBNZ to give directions to a bank with the consent of ### cr17120 - section 113 of the Act permits the RBNZ to give directions to a bank with the consent of ### Scope of RBNZ powers and supervisory approach - Section 113 of the Act permits the RBNZ to give directions to a bank, with the consent of the MoF, to require the bank to consult with the RBNZ, and/or to take specified actions or cease carrying on any part of its business. - The RBNZ has no formal policies to limit the scope of foreign operations of New Zealand incorporated banks on the basis of weak host jurisdiction supervision arrangements. - The RBNZ supervises on a consolidated basis and also supervises individual banks in the group on a stand-alone basis, understanding their relationships with other group members. - Currently there are no New Zealand incorporated banks that have another registered bank as a subsidiary, though the policy framework does not preclude such registrations. - There are currently four banking groups with both a New Zealand incorporated bank and a New Zealand registered bank as a branch of the overseas parent bank (described as “dual-registered” banks). Where more than one registered bank exists in a group, each bank is prudentially supervised as a separate regulated entity with its own conditions of registration and applicable policy and reporting requirements. ### Findings on fit-and-proper standards and corporate ownership (AC1 / Principle 12) - Corporate ownership of registered banks is permitted in New Zealand. - At the time of bank registration, under s73 of the RBNZ Act, an assessment must be made of the ownership and incorporation structure of the applicant, and the standing of the owner in the financial markets, which will include public and private information on significant shareholders and parent company directors. - For a bank registration application from a subsidiary of an overseas entity, under section 73B of the RBNZ Act, an assessment must also be made of the law and regulatory requirements in the home jurisdiction that relate to, inter alia, the duties and powers of directors of the overseas person. - The RBNZ does not have the power to establish and enforce fit-and-proper standards for owners and senior management of parent companies of New Zealand incorporated banks. - For overseas incorporated (branch) bank registration applications, the RBNZ reviews at that time the suitability for their positions of the existing directors of the bank (head office), and the existing or proposed chief executive of the New Zealand (branch) operations. - Subsequent appointments to the position of the chief executive for the New Zealand operations of an overseas incorporated registered bank require prior non-objection from the RBNZ, as set out in the bank’s conditions of registration. - Assessment of Principle 12: Largely compliant. ### Comments, risk profile, and recommended preparatory actions - The RBNZ’s supervisory approach, risk and prudential reporting requirements, and monitoring and analysis are based on the registered bank’s banking group as defined in conditions of registration; these conditions allow supervision on a subconsolidated basis focused on the registered bank and its subsidiaries. - New Zealand banking group corporate structures are simple and there are no material foreign operations of New Zealand incorporated banks. The four banking groups with more complex structures are large Australian banking groups supervised by APRA. - Current RBNZ powers appear sufficient to constrain aspects of a bank’s operations and, in certain defined circumstances with the consent of the MoF, issue directions that may require a bank to cease carrying on a part of its business if risks or concerns on the wider group arise. - The RBNZ pays commensurate attention to consolidated supervision primarily by factoring “parent support” into PRESS risk assessments and by maintaining coordination with the insurance supervisory function of the RBNZ and the FMA. - The RBNZ would be ready to change its approach to consolidated supervision if the risk profile of banking groups changes. Recommended preparatory actions (as advised in the report) - Develop a proper framework for consolidated supervision, including: - having a proper economic definition of the banking group under supervision; - establishing a supervisory methodology to collect and analyze information on intragroup transactions; - developing formal policies to limit the scope of foreign operations of New Zealand incorporated banks on the basis of weak host jurisdiction regulation or supervision. ### Home-host relationships and cross-border cooperation (Principle 13 and ECs) - The RBNZ is not a home supervisor for any bank with material cross-border operations and therefore has not established bank-specific supervisory colleges in that capacity. - As host supervisor, the RBNZ: - participates in supervisory colleges established by APRA for NAB and ANZ; APRA organizes ANZ college and NAB college meetings about once every two years; - participates in the supervisory college established by DNB for Rabobank (now run by the ECB), attending on a cost-efficient basis given Rabobank’s limited New Zealand significance (about 2 percent of total bank assets); - participates in a limited way in supervisory colleges established by home supervisors of some banks registered as branches in New Zealand such as HSBC. - The RBNZ’s most significant home-host relationship is with APRA. Key cooperation features: - Good working relationships and information sharing between RBNZ and APRA supervisors, including day-long face-to-face meetings at least once a year and confidential information exchange in between; - A MoU concerning co-operation in banking and insurance supervision was signed with APRA in May 2012, providing a formal basis for sharing information. - Examples of collaborative work between RBNZ and APRA: - APRA and RBNZ collaborated on stress test exercises; most recent such exercise was an APRA-run stress test in 2014, which encompassed the New Zealand subsidiaries of the four major Australian banks. The RBNZ prepared the New Zealand scenario (particularly stress on the agricultural sector), led communications with New Zealand banks, analyzed results, and provided feedback. - The RBNZ participates as observer in APRA’s on-site regular inspections of New Zealand subsidiaries of the four major Australian banks. - RBNZ and APRA worked closely on Basel III policy alignment, especially on non-viability loss absorbency requirements so that the capital of subsidiaries of Australian-incorporated banks could be recognized by both regulators. - In 2016, RBNZ and APRA collaborated on a review of provisioning approaches for dairy sector losses taken by Australian-owned New Zealand incorporated banks. - The report notes that the interdependency between RBNZ and APRA demands more regular collaborative work on common interests (e.g., business continuity, crisis management, supervision of banking sector vulnerabilities) to improve supervision effectiveness and efficiency. ### Cross-border crisis cooperation, resolution, and operational preparedness (EC5–EC6, outsourcing) - The dominant position of Australian-owned banks in New Zealand and the importance of New Zealand operations in the four largest Australian banking groups create a cross-border context for recovery and resolution planning, requiring effective cooperation between RBNZ and APRA. - Legislative basis for cross-border cooperation: section 68A of the RBNZ Act (and parallel Australian provisions), imposing obligations to consult and avoid actions that may detrimentally affect financial stability without unduly constraining regulators’ actions. - A Memorandum of Cooperation (MoC) on Trans-Tasman Bank Distress Management was signed in 2010 by the RBNZ, the New Zealand Treasury, RBA, APRA, ASIC, and the Australia Treasury. The MoC: - provides a broad framework to promote and facilitate a coordinated response to a trans-Tasman banking crisis and allocate responsibility for response elements; - states participants will seek to cooperate where practical in all stages of resolving a crisis, including public communication and coordinated timing of public announcements; - was subject to a crisis simulation exercise in 2011 but has not been tested in an actual stress situation. - Further work remains to reach tangible outcomes on joint resolution; TTBC (Trans-Tasman Council on Banking) is undertaking work but has not yet achieved tangible outcomes. - The RBNZ has an interest in ensuring domestic financial stability would not be compromised by an orderly separation if joint resolution cannot be agreed. - The RBNZ’s BS11 (outsourcing policy) was established with separation in mind; the outsourcing policy is under review. Proposed measures include: - requiring large banks (as defined in the policy) to prepare a separation plan from their parent; - requiring banks that are part of an overseas banking group to satisfy the RBNZ that they can meet outsourcing policy requirements as a standalone entity in the event of separation. - The RBNZ has engaged with APRA in the outsourcing policy review. ### Prudential treatment of foreign banks and thresholds for local incorporation (EC7–EC9) - Foreign banks may operate in New Zealand either as branches or as locally incorporated banks. Branches are subject to fewer prudential and reporting requirements compared to locally incorporated banks: - Branches are not subject to the RBNZ’s capital or liquidity requirements and have fewer governance requirements compared to locally incorporated banks. - Branches are not subject to the RBNZ’s OBR policy. - Limits trigger local incorporation; local incorporation will be required if any of the following apply: - (i) the bank’s liabilities in New Zealand, net of amounts due to related parties exceed NZ$15 billion; - (ii) in the case of a retail deposit taker, the entity is incorporated in a jurisdiction that has legislation which gives deposits made, or credit conferred, in that jurisdiction a preferential claim in a winding up; - (iii) in the case of a retail depositor, the home jurisdiction does not impose adequate disclosure requirements; - (iv) the applicant is incorporated in a jurisdiction that has unsatisfactory supervisory arrangements (including disclosure arrangements) and market discipline. - The four largest banks in New Zealand are Australian owned locally incorporated banks, three of them with “dual registration” (subsidiary and branch registrations). As locally incorporated subsidiaries, these banks are subject to similar requirements to domestic banks and, due to their size, are subject to additional requirements such as outsourcing and OBR requirements that do not apply to smaller domestic banks. - Section 98A of the RBNZ Act allows the RBNZ to authorize a home country supervisor to conduct an inspection of a New Zealand registered bank provided sufficient provision exists to protect confidentiality of information obtained by the home country supervisor. The RBNZ is notified of APRA’s intended visits to New Zealand subsidiaries. - There are no registered banks that operate as booking offices or shell banks in New Zealand. The RBNZ will not register shell banks or booking branches because such banks will not meet the application criteria. - Entities incorporated in New Zealand may provide financial services solely outside New Zealand without being licensed as banks or NBDTs in New Zealand; the RBNZ does not hold detailed information about such New Zealand incorporated entities that provide financial services solely outside New Zealand. ### Information sharing and consultation on supervisory actions (EC2, EC4, EC10) - RBNZ and APRA maintain good information-sharing practices; front line supervisors meet face-to-face at least once per year and share confidential information between meetings. - MoU with APRA (May 2012) provides formal basis for sharing information in banking and insurance supervision; under the MoU APRA and RBNZ expect to inform each other of material administrative penalties or other enforcement actions taken against any trans-Tasman bank and to provide prior notice of any such action insofar as it is practical. - As host supervisor, the RBNZ cooperates with home supervisors to provide feedback on joint activities and has provided joint feedback letters following APRA-led supervisory colleges. - The RBNZ would consider information from another supervisor relevant to the New Zealand financial system and, where appropriate, consult with that supervisor before taking consequential action. *International Monetary Fund — cr17120, section excerpts on RBNZ supervisory powers, fit-and-proper standards, consolidated supervision preparedness, and home-host cooperation* ### section 68A of the RBNZ Act is about trans-Tasman cooperation. It is discussed in CP3, ### cr17120 - section 68A of the RBNZ Act is about trans-Tasman cooperation. It is discussed in CP3 ### Trans‑Tasman cooperation and Principle 13 (Assessment) - Assessment of Principle 13: Largely compliant - Context and legal basis: - section 68A of the RBNZ Act relates to reciprocal legislation underpinning trans‑Tasman arrangements. - The RBNZ is not a home supervisor for any bank with material cross‑border operations. - Home‑host relationships and practice: - As host supervisor, the RBNZ has established an enhanced home‑host relationship with APRA compared to common practices worldwide or to those required by this Principle. - The trans‑Tasman arrangements, including changes in reciprocal legislations (in the case of New Zealand, section 68A of the RBNZ Act), were successfully established. - The RBNZ maintains home‑host relationships with other relevant home supervisors. - Coordination, limitations, and areas for enhancement: - Although there are extensive coordinating efforts, sometimes specific national interests prevent supervisory approaches from being in sync and a view widely shared by stakeholders is that there is room to enhance coordination. - Proportionality in this Principle demands continuous effective practice of coordination to plan supervisory activities and undertake collaborative work in common areas of interest to improve the supervision of significant and systemic cross‑border banking groups in a cost effective manner (see EC3). - The RBNZ is encouraged to be proactive and identify areas of policy making and supervisory practice where cooperation and collaborative work with APRA can deliver tangible results. Examples listed include: - cross‑border outsourcing risks, - analysis of general banking risks, - group corporate governance, - cross‑border funding, - assessment of credit exposures, - obtaining and analyzing banks’ data, - assessment of risk management systems. - Collaborative work should also include cross‑border crisis management (see EC6) and banking resolution with the rest of the authorities involved (see EC5). - Practical tests and suggestions: - The implementation of the OBR policy is cited as perhaps the first time these heightened trans‑national arrangements have been tested; the continuous dialogue attests to the open nature of the communication. - Trans‑Tasman cooperation arrangements are expected to address cost‑efficient solutions that accommodate national interests. - The RBNZ could pursue the possibility of including in the Trans‑Tasman Memorandum of Cooperation specific provisions for the Australian authorities to improve the likelihood of continued provision of services to the New Zealand subsidiary by the parent bank or other group member as a supplement to some of the specific systems requirements proposed for separation arrangements. ### Prudential regulations and corporate governance (Principle 14, EC1) - Principle 14 summary: - The supervisor determines that banks and banking groups have robust corporate governance policies and processes covering, for example, strategic direction, group and organizational structure, control environment, responsibilities of the banks’ Boards and senior management,36 and compensation. These policies and processes are commensurate with the risk profile and systemic importance of the bank. - EC1 — Laws, regulations or the supervisor establish Board and senior management responsibilities: - Although not enforceable by the RBNZ, the Companies Act 1993 sets responsibilities for the directors of any company in New Zealand. - Section 131(1) requires every director, when exercising powers or performing duties, to act in good faith and in what the director believes to be the best interests of the company. - Part 8 of the Companies Act 1993 imposes a number of other general requirements on directors of companies, including specifically section 137 which imposes a duty of care. - RBNZ supervisory approach and guidance: - The RBNZ operates a three pillar approach to supervision, consisting of self‑discipline, market discipline and regulatory discipline. - Self‑discipline refers to a bank’s internal risk management and governance systems, responsibility for which rests primarily with the bank’s Board and senior management. - The RBNZ document BS14 provides guidance on good corporate governance generally, and also provides supporting definitions and application guidance for certain governance‑related conditions of registration that are imposed on all locally incorporated banks. - BS14 was issued in December 2010. - Before BS14 was issued in December 2010, there was no specific RBNZ policy document on corporate governance; the publication of BS14 served the dual purpose of issuing guidance on good corporate governance, and of expanding on the previous very limited conditions of registration relating to corporate governance. - As BS14 notes (paragraph 3(4)), it does not aim to be a comprehensive statement of good corporate practice, since there are many documents elsewhere providing such guidance; it notes two documents especially relevant for New Zealand banks: - Corporate Governance in New Zealand Principles and Guidelines: A Handbook for Directors, Executives and Advisers, published by the New Zealand Securities Commission in March 2004; and - The Basel Committee’s Principles for enhancing corporate governance, published in October 2010. - Part 2 of BS14 provides supporting material to a number of specific conditions of registration that the RBNZ imposes on all locally incorporated banks, relating to Board composition, the appointment of directors and senior managers, and the Board audit committee. *Source: cr17120 - section 68A of the RBNZ Act is about trans-Tasman cooperation. It is discussed in CP3* ### Part 3 of BS14 picks out key points from Principle 2 of the Basel 2010 principles. These ### cr17120 - Part 3 of BS14 picks out key points from Principle 2 of the Basel 2010 principles. These ### Board composition, qualifications, and RBNZ regulatory actions - Part 3 of BS14 covers: - qualifications and experience of Board members both individually and collectively, - directors’ professionalism and personal integrity, - reviewing Board performance, - Board involvement in selecting new members, - balance of skills and expert knowledge on the Board audit committee. - Planned RBNZ action: - RBNZ is planning to impose an additional condition of registration to make non-compliance with the guidance in Part 3 of BS14 evidence that a bank could be determined not to have been carrying on business in a prudent manner, in terms of s78 of the Act. - Purpose: give additional legal backing to any action the RBNZ might need to take to address weaknesses in competencies and experience of a bank’s Board or its audit committee. ### EC2 — Supervisor assessment of corporate governance policies and practices - Expectation (EC2): supervisor regularly assesses a bank’s corporate governance policies/practices and their implementation; requires banks to correct deficiencies in a timely manner. - Findings: - The RBNZ does not assess in a comprehensive way banks’ corporate governance policies and practices, and how they are implemented. - Corporate governance is one matter supervisors form a view on when assessing a bank’s control risks under the PRESS framework; assessment generally focuses on outcomes rather than policies/processes. - PRESS guidance issues for supervisors to consider include: - Strength and quality of the Board (sufficient mix of skills, knowledge and experience). - Corporate values and code of conduct. - Clear and transparent corporate structure (not complex or opaque). - Quality of CEO and senior management (sufficient experience, knowledge and control). - Management of conflicts of interest (conflict of interest policy). - Separate audit (or audit and risk) committee with a reporting line to the Board. - Independent risk management (including CRO), compliance and internal audit functions. - Compensation policy (compensation should not be based primarily on financial performance). - RBNZ has identified material deficiencies and required corrections in supervisory engagement (example: IRB model change without prior approval; subsequent s93 request for information; bank changed executive delegations to remove ‘solid’ reporting lines to the parent). ### EC3 — Nomination and appointment processes, Board committees - Expectation (EC3): supervisor determines governance structures/processes for nominating and appointing Board members are appropriate; Board membership includes experienced non-executive members; committees with experienced non-executive members. - Findings and requirements: - The RBNZ does not formally review banks’ governance structures/processes for nominating and appointing Board members. - Conditions of registration on Board composition include: - minimum of five directors; - majority of Board members (i.e., more than half) must be non-executive; - at least half of Board members must be independent; - any alternate for a non-executive director must be non-executive, and for an independent director must be independent; - at least half of the independent directors must be ordinarily resident in New Zealand; and - chairperson must be independent (and counts towards the required total of independent directors). - RBNZ non-objection requirement provides opportunity to object to proposed appointees lacking relevant experience. - BS14 guidance expectation (clause 17(7)): Board involvement in identifying potential Board members and ensuring candidates are qualified and able to commit necessary time and effort. - Audit committee requirement: - Bank must have a Board audit committee, or other separate Board committee covering audit matters, whose mandate includes ensuring the integrity of the bank’s financial controls, reporting systems, and internal audit standards. - A bank’s audit committee must have at least three members, all of them non-executive and a majority independent, and the chairperson of the committee must be independent and must not be the chairperson of the Board. - RBNZ does not impose specific requirements for risk oversight or remuneration committees. - Planned follow-up: impose a standard condition of registration on every locally incorporated bank, requiring internal processes to ensure suitability of directors and senior managers and compliance with those processes — to address lack of regular follow-up beyond initial non-objection. ### EC4 — Directors’ duties: duty of care and duty of loyalty - Expectation (EC4): Board members suitably qualified, effective and exercise their “duty of care” and “duty of loyalty.” - Findings: - Companies Act 1993 imposes requirements: s137 imposes a ‘duty of care’ and s131 imposes a ‘duty of loyalty’. - Standard condition of registration prohibits a bank’s constitution from allowing a director to act other than in the best interests of the bank. - Penalties for serious breach: up to five years’ imprisonment or a fine of up to $200,000. ### EC5 — Board oversight of strategy, risk appetite, culture, conflicts - Expectation (EC5): Board approves and oversees implementation of strategic direction, risk appetite and strategy; establishes corporate culture, values, conflicts of interest policies and strong control environment. - Findings: - For the 10 largest banks, RBNZ regularly obtains copies of the bank’s Risk Appetite Statement and annual strategic plan — can determine Board’s role in approving strategic direction and risk appetite. - RBNZ does not directly/systematically determine Board oversight of implementation of strategy/risk appetite but gains insight from discussions with independent directors and senior management; insight used in PRESS assessment. - RBNZ does not assess in a direct/structured way how Boards communicate corporate culture and values or routinely obtain codes of conduct. - Conflicts of interest disclosure requirements in full year disclosure statements include: - For each director, details of any transaction between the director (or a close associate) and the bank not on normal commercial terms or likely to influence the director. - Board policy for avoiding/dealing with directors’ conflicts. - Directors must attest every quarter that credit exposures to connected persons were not contrary to banking group interests (OIC, Schedule 2, clause 17). - Condition of registration: exposures to connected persons are not on more favorable terms than to non-connected persons; directors must attest every quarter that all conditions have been met (BS8). - RBNZ determines Boards establish conflicts policies in these specific areas only; does not determine more general conflicts policies or Board role in establishing a strong control environment. ### EC6 — Fit-and-proper standards, succession planning, oversight of senior management - Expectation (EC6): supervisor determines Boards have established fit-and-proper standards for selecting senior management, maintain succession plans, and actively oversee execution of Board strategies. - Findings: - RBNZ does not actively determine these outcomes comprehensively; relies on incentives on directors and directors’ attestation obligations. - Regular meetings with chairs and independent directors provide opportunity to discuss views on senior management. ### EC7 — Board oversight of compensation systems - Expectation (EC7): Board actively oversees compensation system; incentives aligned with prudent risk taking; consistent with long-term objectives and financial soundness. - Findings: - RBNZ has not reviewed banks’ compensation systems and Boards’ role on a systematic in-depth basis. - RBNZ follows targeted, risk-based approach on compensation risks (example: thematic review of housing lending in 2013-2014 requested details of compensation arrangements for front-line lending staff for five largest mortgage lenders, making up 96 percent of the market). That exercise examined nature of arrangements, not Board oversight. ### EC8 — Board and senior management understanding of operational structure and risks - Expectation (EC8): Board and senior management understand operational structure and risks, including opaque structures; risks effectively managed and mitigated. - Findings: - RBNZ takes a risk-based approach and does not determine this criterion mechanistically across all banks. - Based on knowledge of New Zealand banking group structures and financial statements, RBNZ is confident complex structures are not currently a material source of risk. ### EC9 — Power to require Board composition changes - Expectation (EC9): supervisor has power to require changes in Board composition if individuals not fulfilling duties. - Findings: - RBNZ Act gives RBNZ power to remove, replace or appoint directors of any bank, but criteria for exercising powers are high hurdles and most do not relate directly to individual directors’ performance. - Most relevant criteria: director failed to comply with the Act or regulations, convicted of an offense against the Act, or business not conducted in a prudent manner. - RBNZ must have reasonable grounds and obtain prior consent of the MoF for s113B actions. - No direct mechanism to withdraw a prior non-objection to require a director to resign, separate from s113B. - RBNZ concluded it could not determine a bank was not “carrying on business in a prudent manner” in terms of s78 solely because Board fell short of BS14 guidelines; plans to impose a condition of registration (under s74) concerning Board skills and experience on locally incorporated banks — breach of a condition of registration provides another ground (s113(1)(h)) for s113B. - Planned change (from EC3) to require internal processes ensuring suitability of directors and senior managers is relevant here and may be buttressed by high-level guidance. ### Additional criterion AC1 — Notification of material information affecting fitness and propriety - Expectation (AC1): laws/regulations/supervisor require banks to notify supervisor as soon as they become aware of material bona fide information that may negatively affect fitness and propriety of Board or senior management. - Findings: - No formal regulation or supervisory requirement currently requires such notification. - Notification is a supervisory expectation relying on banks volunteering information. ### Assessment of Principle 14 (Corporate governance) - Overall assessment: Materially Noncompliant - Commentary: - Strengths and regulatory features: - Companies Act 1993 and RBNZ requirements impose duties on bank Boards. - BS14 gives guidance on experience, qualification and personal qualities expected of Board members. - Non-objection regime ensures minimum fit-and-proper standards; RBNZ can in practice require changes in Board composition. - Requirements for minimum number of independent directors and an audit committee. - Directors’ attestation requirement incentivizes ensuring senior management in risk control areas are competent. - Key shortcomings: - RBNZ does not review governance structures/processes for nominating and appointing Board members (EC3). - Insufficient engagement to be certain directors are effective and exercise duty of care and duty of loyalty (EC4). - Does not determine Board communication of corporate culture and values or establishment of strong control environment (EC5). - Does not examine Board approach to selecting senior management or oversight of senior management performance (EC6). - No consideration of Board remuneration committees or systematic review of compensation systems and Board oversight (EC3, EC7). - RBNZ guidance (BS14) is narrow/focused on composition and qualifications; it does not address supervisory expectations on risk appetite statements, strategic planning and policy development and implementation. - Supervisor’s current schedule of meetings with chairs and independent directors falls short of the BCP expectation for closer involvement in determining how Boards carry out their role. - Mitigating actions: - Directors’ attestations and planned condition-of-registration changes (tying continuing suitability to a condition of registration) may improve adherence and link to attestations. ### Principle 15 — Risk management process (overview and selected EC findings) - Principle 15 summary: supervisor determines banks have comprehensive risk management process (Board and senior management oversight) to identify, measure, evaluate, monitor, report and control or mitigate all material risks; assess adequacy of capital and liquidity; develop contingency arrangements and recovery plans commensurate with risk profile and systemic importance. - EC1 — Risk management strategies and Board-set risk appetite: - Directors must attest via disclosure statements that bank has systems to monitor/control material risks; RBNZ has not issued guidelines defining what constitutes adequate systems/controls. - RBNZ obtains information and forms views on adequacy of risk management strategies in a risk-based fashion; more information from bigger banks and on biggest emerging risks. - RBNZ annually obtains and reviews risk appetite statements from the 10 largest banks; for the five largest banks typically requests report against risk appetite, business risk profile, and specific risk reports. - RBNZ meets jointly with CRO and CFO of the ten largest locally incorporated banks annually. - Thematic reviews (e.g., housing lending March 2014) and ICAAP review (June 2015) considered risk management frameworks and links to capital. - For big four Australian subsidiaries, RBNZ draws on APRA and parent bank reviews. - Market discipline: local OIC Schedule 17 clause 2 requires full year disclosure of risk management objectives, policies, strategies and processes. - RBNZ does not proactively/comprehensively determine Board’s role in rolling out risk appetite objectives across the bank; gains limited impression from regular meetings with chairs and independent directors and CRO/CFO. - Quarterly directors’ attestations provide assurance but are not against common benchmarks. - EC2 — Comprehensive risk management policies and processes: - RBNZ does not impose direct requirements in most risk areas; main mechanism is directors’ attestation that systems exist to monitor/control material risks including: credit risk, concentration of credit risk, interest rate risk, currency risk, equity risk, liquidity risk, operational risk and other business risk. - RBNZ imposes specific requirements on: - Capital adequacy: condition requiring ICAAP in accordance with BS12. - Liquidity risk: condition requiring an internal framework for liquidity risk management with key specific features; guidance in Section D of BS13. - RBNZ reviews adequacy in a targeted risk-based manner and forms a view on control risk under PRESS; does not systematically determine bank-wide adequacy across all material risk types. - RBNZ does not specifically determine that risk management framework adequately focuses on macroeconomic emerging risks, but discusses emerging risks in prudential interviews with CEOs, CROs. - EC3 — Documentation, review, communication, exceptions: - RBNZ does not determine compliance comprehensively across all banks; relies on regulatory requirements, directors’ attestations, selected documentation obtained in a risk-based manner, and thematic reviews. - Annual requests for key Board and senior management reports deliver documents showing documentation and review/update processes. - EC4 — Board/senior management understanding of risk information: - Directors’ attestation does not specifically relate to information directors receive. - Supervisors do not routinely review Board minutes. - Determination made through conversations with relevant people: routine meetings with independent directors, CRO, CFO, Chief Executive. - ICAAP review (2015) findings: - Five largest locally incorporated banks generally report risk and capital metrics adequately but did not specifically produce reports to assess sensitivity and reasonableness of central assumptions. - Next five largest domestic banks reported risks adequately but less evidence they link risks to capital. - Plans: development of a ‘theme day’ on market risk, funding, and liquidity risk management for the five largest banks (and potentially smaller domestic banks) to cover compliance with BS13; anticipated to become an annual engagement. - EC5 — Internal capital and liquidity adequacy assessment and supervisor review: - RBNZ does not review and evaluate these outcomes across all banks on a continuing basis. - Relies on combination of regulatory requirements, directors’ attestations, market discipline, and thematic reviews on a rolling basis. - EC6 — Models used to measure risk components: - RBNZ involvement limited to models related to specific supervisory requirements: - Internal Ratings Based (IRB) approaches for credit risk capital; - Advanced Measurement Approach (AMA) models for operational risk capital; - Stress testing models as part of ICAAP (BS12). - RBNZ does not set supervisory standards for market risk VaR models or other models beyond the above. - For accreditation, RBNZ needs methodology information but does not verify on-site or via ongoing requests that a bank operates accredited model exactly as described. - RBNZ does not determine all BS2B requirements for IRB or AMA are met in practice. - Board involvement expectation: Board Chair to attest on application accuracy and readiness to implement internal models approaches. - RBNZ has not systematically determined Boards/senior management understand model limitations; held 2014 meetings with Board Chairs of four modelling banks on IRB/AMA model presentation to Boards. - Post-accreditation, RBNZ does not determine regularly that banks conduct regular validation/testing of IRB/AMA models per BS2B; model validation may be subject of future thematic review. - EC7 — Information systems adequacy: - RBNZ does not comprehensively determine adequacy of banks’ information systems for measuring exposures; such determination would require on-site supervision not consistent with RBNZ model. - RBNZ relies on internal and external audit to identify material deficiencies in information systems. - s95 of the RBNZ Act can be used to require a report prepared by an RBNZ-approved person if concerns arise. - RBNZ routinely obtains banks’ key internal reports submitted to senior management and Board; assesses timeliness and suitability through those reports and meetings. - EC8 — Policies for new products, material modifications, major initiatives: - Strategic risk assessed under PRESS; RBNZ discusses major initiatives in regular meetings with CEO, Chair, CFO, CRO. - RBNZ does not determine in detail that Boards and senior management understand risks inherent in launching new products or major initiatives, nor confirm that major activities must be approved by Board or specific committee. - EC9 — Risk management function resourcing, independence, reporting, internal audit review: - RBNZ assesses these matters via multiple sources (more for larger banks). - Uses three lines of defense model as assessment standard. - Key sources: annual meetings with internal auditors of the 10 largest banks; routine annual meetings with bank CROs; thematic reviews (e.g., housing lending 2014, operational risk theme days December 2015). - RBNZ receives regular internal reports on risk exposures showing which reports go to senior management and Board. - EC10 — Dedicated risk management unit and CRO removal protocols: - No explicit regulatory requirement for banks to have a dedicated risk unit overseen by a CRO, but large banks have a CRO function. - No formal requirement that CRO removal be Board-approved in advance or disclosed publicly; no formal requirement to discuss removal with supervisor. - EC11 — Issuance of standards on key risk types: - RBNZ has not issued standards on risk management for most risks. - Liquidity risk: RBNZ issued comprehensive risk management guidelines (BS13) and imposed specific quantitative ratio requirements; guidance broadly aligned with Basel principles. - Operational risk: banks accredited to AMA must meet high-level standards in Part 8 of BS2B. - ICAAP guidance (BS12) sets high-level considerations for sound risk management framework and Board responsibilities. - EC12 — Contingency arrangements and recovery planning: - RBNZ has specific contingency planning requirements for liquidity risk and addresses contingency planning for other risks within general supervisory approach. - EC13 — Stress testing: - ICAAP (BS12) requires banks to perform rigorous and forward-looking stress tests identifying plausible severe loss events and assessing impact on capital adequacy; level of detail depends on size, nature and complexity of bank’s business. - IRB accreditation includes stress-testing requirements (BS2B paragraphs 4.252 to 4.254). - Joint APRA/RBNZ 2014 stress-test for four largest banks and RBNZ information gathering over 2014-15 from five largest banks identified areas for improvement. - RBNZ engaged five domestically owned banks in a basic credit stress test. *Source: cr17120 - Part 3 of BS14 picks out key points from Principle 2 of the Basel 2010 principles. These (IMF staff report).* ### 2014. This exercise was designed as an introduction to stress-testing for these banks, and ### cr17120 - 2014. This exercise was designed as an introduction to stress-testing for these banks, and ### Stress-testing frameworks and ICAAP thematic work - The 2014 exercise was designed as an introduction to stress-testing for these banks and as the first step to enhance stress-testing capacity. - The stress-testing frameworks of the ten largest locally incorporated banks were considered in the ICAAP thematic review; focus was on formalization of processes and Board involvement rather than model quality. - Findings: frameworks were satisfactory at the largest banks; some areas for improvement noted at smaller banks. - For 2015/16, the RBNZ gave the four largest banks a common scenario for internal process comparability. ### Principle 15 — Risk management (assessment: Materially Noncompliant) - Core findings: - RBNZ does not systematically and proactively assess how banks account for risks (including liquidity impacts) in internal pricing, performance measurement and new product approval (EC14). - RBNZ requires banks to determine a ‘Pillar 2’ capital allocation for other material risks, but this is not included in capital ratios and there is no explicit regulatory requirement for banks to hold capital against it (AC1). - RBNZ issues standards only for overall capital adequacy (ICAAP guidance in BS12) and liquidity risk management (BS13); compliance with ICAAP guidelines assessed in 2015 but liquidity guidelines not yet assessed. - RBNZ broadly compliant with EC10 (risk management unit/CRO) for the 10 largest banks; progressing towards EC13 (stress-testing approaches). - Commentary: - RBNZ relies on directors’ attestations and disclosure requirements as incentives. - Noncompliance identified for EC7, EC8, EC11, and EC14. ### Principle 16 — Capital adequacy (assessment: Compliant) - Legal and regulatory framework: - RBNZ Act 1989 enables capital requirements via conditions of registration (section 78(1)(c)); capital frameworks BS2A and BS2B. - Disclosure OiC requires banks to disclose capital ratios; penalties under RBNZ Act sections 89, 89A, and 89B for failures/false statements. - Minimum and buffer requirements (in force since January 1, 2013): - Common Equity Tier 1 (CET1) capital: 4.5 percent of risk weighted assets; - Tier 1 capital: 6 percent of risk weighted assets; - total capital: 8 percent of risk weighted assets; - buffer of common equity: 2.5 percent risk weighted assets. - Additional details: - RBNZ reports all locally incorporated banks comply with minimum ratios and hold capital above the buffer. - RBNZ can increase buffer via conditions of registration; no counter-cyclical buffer presently. - Branches of overseas banks: condition requires whole bank compliance with home country supervisor capital requirements. - RBNZ undertook a capital review over 2016-17 aiming for conservative approach relative to international standards; definition of capital in place since 2013. - Loss-absorption features: - AT1 and Tier 2 instruments must convert to shares or be written off on a non-viability trigger; AT1 automatically converts or is written off if capital ratio falls below 5.125 percent of risk weighted assets. - Banks must receive a notice of non-objection before including AT1 or Tier 2 in capital ratios. - Internal models and leverage: - Four Australian banks accredited to use internal models (IRB); accreditation via conditions of registration and BS2B processes. - RBNZ has chosen not to implement a leverage ratio at this stage; keeping under review. ### Principle 17 — Credit risk (assessment: Materially Noncompliant) - Supervisory engagement: - Credit risk is a key supervisory focus; thematic reviews of housing and rural portfolios conducted. - RBNZ does not formally “determine” that each bank’s credit risk processes provide a comprehensive bank-wide view (EC1, EC3, EC4). - ICAAP and stress testing: - Conditions of registration require ICAAP per BS12; ICAAP must be forward looking and include rigorous stress tests (paragraphs cited: 17, 18). - RBNZ has run multiple-institution stress tests (big-4 with APRA, New Zealand-owned banks, dairy lending). - Internal model banks subject to IRB-aligned stress test requirements. - Access and information: - RBNZ may require information in writing; obtains board risk reports from most locally incorporated banks. - No explicit power for access to lending officers or credit files except when appointing an investigator (section 101). - Overall comment: - Market/self-discipline via director attestations and disclosure supports outcomes, but RBNZ lacks systematic, detailed, prescriptive supervisory requirements for many ECs. ### Principle 18 — Problem assets, provisions and reserves (assessment: Materially Noncompliant) - Legal/accounting basis: - New Zealand has adopted IFRSs; impaired assets determined under IAS 39 or NZ IFRS 9 (if early adopter). - RBNZ expects banks to have policies/procedures for early identification and management of problem assets and adequate provisions, but does not set explicit rules for periodic review (EC1). - Reporting and audit: - OiCs require detailed asset quality and provisioning disclosure in quarterly disclosure statements; full-year disclosure statements undergo full audit. - RBNZ receives monthly asset quality returns (MBOR) including total lending, impaired assets, specific provisions, collective provisions, 90 days past due but not impaired, and watch list loans, across up to 12 sectors. - Supervisory assessment and action: - RBNZ assesses adequacy of classification/provisioning using disclosure, MBOR, risk reports and stress tests (EC7); can impose conditions of registration or other remedial measures. - RBNZ does not routinely assess provisioning frameworks, off-balance sheet inclusion, or perform systematic testing for circumvention (EC2, EC3, EC4, EC5). - Areas of weakness: - No issued definitions for problem assets, forbearance, cured loans. - RBNZ relies on accounting standards and external auditors rather than supervisory determinations. ### Principle 19 — Concentration risk and large exposure limits (assessment: Materially Noncompliant) - Framework and disclosure: - BS12 (ICAAP) requires banks to identify and monitor concentrated exposures; directors’ attestations mention concentration of credit risk. - Banks must publicly disclose concentration of credit exposures to individual counterparties/groups exceeding 10 percent of equity; report number of large exposures in 5 percent equity bands. - Supervisory information and planned reporting: - RBNZ collects monthly private data on large exposures in arrears and will introduce a new quarterly large credit exposures regulatory report; pilot phase commenced reporting as at March 2016. - RBNZ does not test/verify banks’ information systems. - Limits and supervision: - RBNZ does not impose regulatory limits on exposures to single counterparties/groups; relies on banks’ internal limits and supervisory monitoring. RBNZ reviewed large exposures in 2011 and plans re-examination pending new data. - Stress testing: - ICAAP and BS12 expect banks to include significant risk concentrations in stress-testing (EC7). ### Principle 20 — Transactions with related parties (assessment: Materially Noncompliant) - Definition and legal powers: - RBNZ defines “connected persons” in BS8 and can impose conditions requiring compliance with BS8; BS8 applies to locally incorporated banks (not branches). - “Substantial interest” defined as >20 percent holdings/rights or ability to control or significantly influence board composition. - Arm’s length and disclosure: - BS8 requires exposures to connected persons not be on more favorable terms than corresponding exposures to non-connected persons (EC2). - Directors must attest quarterly that credit exposures to connected persons were not contrary to bank interests; full-year disclosure requires details of director-related transactions. - Limits and calibration: - BS8 sets connected exposure limits by credit rating and prescribes aggregate limits: - Aggregate net limit to ‘nonbank’ related parties: 15 percent of banking group’s tier 1 capital; - Aggregate gross limit (before netting) for all related party exposures: 125 percent of banking group’s Tier 1 capital. - Rating-contingent table (Connected exposure limit % of Tier 1 capital): - AA/Aa2 and above 75 - AA-/Aa3 70 - A+/A1 60 - A/A2 40 - A-/A3 30 - BBB+/Baa1 and below 15 - BS8 allows netting under robust bilateral netting agreements; can require deduction of advances of a capital nature to connected persons from Tier 1 capital. - Supervisory shortcomings: - No requirement for Board prior approval of related-party transactions or write-offs (EC3). - RBNZ does not regularly review banks’ policies/processes for monitoring related-party transactions (EC6). - Reporting provides aggregate totals but not individual exposure detail on terms/approvals. ### Principle 21 — Country and transfer risks (assessment: Compliant) - Context and findings: - RBNZ does not actively determine country/transfer risk frameworks but relies on director attestations where risks are material. - Cross-border exposures are limited and concentrated primarily with Australia; largest banks’ parents based in Australia represent approximately 86 percent of the banking system. - RBNZ monitors Australia closely and has a close relationship with APRA. - Reporting: - Financial statements and half-year disclosures provide qualitative/quantitative breakdowns of New Zealand vs non-New Zealand exposures and identification of individual countries where material. - Conclusion: - Current monitoring judged adequate given scale and credit quality; would need to increase if exposures diversify. ### Principle 22 — Market risk (assessment: Largely Compliant) - Framework and supervisory approach: - Directors’ attestations and disclosure requirements cover market risk; ICAAP (BS12) expected to capture market risk. - PRESS process includes market risk assessment, linked to peak capital charge for interest rate risk, foreign currency risk and equity risk. - Practical exposure: - Market risk exposures are low for New Zealand banks: mainly interest-rate hedging and FX hedging for foreign-currency borrowing; assessments show low market risk. - Limitations: - RBNZ does not routinely determine/inspect banks’ mark-to-market systems, valuation processes, or model validation (EC4). - RBNZ sets Pillar 1 market risk capital via conditions of registration but does not conduct detailed checks on market risk capital compliance (EC5). - Stress testing: - ICAAP requires banks to include market risk in stress-testing (EC6). ### Principle 23 — Interest rate risk in the banking book (IRRBB) (assessment: Materially Noncompliant) - Legal and supervisory stance: - No explicit laws/regulations requiring an IRRBB framework distinct from market risk; interest rate risk captured within market risk capital requirement. - RBNZ does not systematically determine adequacy of banks’ IRRBB systems (EC1–EC3). - Exposure and historical stress tests: - Aggregate hedged interest rate risk exposures are relatively small; total capital requirement rarely more than 5 percent of Tier 1 capital. - RBNZ/APRA 2014 stress test included an interest rate shock scenario with mortgage lending rates peaking at 11–12 percent. - Supervisory data and gaps: - RBNZ does not obtain internal IRRBB measurement results in a mandated format (AC1) and does not assess whether banks’ internal capital measurement systems adequately capture IRRBB (AC2). ### Principle 24 — Liquidity risk (assessment: Compliant) - Prudential framework (BS13) and quantitative metrics (conditions of registration): - one-week mismatch ratio: not less than zero percent at end of each business day; - one-month mismatch ratio: not less than zero percent at end of each business day; - one-year CFR: not less than 75 percent at end of each business day. - Reporting and calibration: - Banks report monthly compliance with metrics and underlying data; breaches must be disclosed in audited quarterly disclosure statements. - CFR progressed from 65 percent to 75 percent to lengthen funding tenor and reduce short-term wholesale funding exposure. - List of eligible liquid assets broader than Basel standards due to local market constraints. - Supervisory oversight of framework: - Conditions require an internal liquidity risk management framework with contingency funding plans; PSD requests liquidity frameworks and Board reports under section 93 annually for large locally incorporated banks. - BS13 addresses funding diversification, liquid asset cushion, contingency planning, intraday needs and stress scenarios. - Additional items: - Branches are not currently subject to prudential liquidity requirements (to be reconsidered). - RBNZ to run ‘theme day’ engagements to deepen oversight; four foreign-owned subsidiaries (~90 percent of assets) subject to home country LCR as well as RBNZ requirements. - Assessment: - Framework judged aligned with prudential objectives and proportionate to New Zealand conditions despite limited on-site testing. ### Principle 25 — Operational risk (assessment: Materially Noncompliant) - Supervisory approach: - Directors’ attestations and disclosure include operational risk; ICAAP (BS12) expected to incorporate operational risk. - PRESS process includes operational risk assessment informed by complexity, IT, outsourcing, operational losses and payment system resilience. - Thematic reviews and activities: - 2013 thematic IT security survey; 2014 outsourcing stocktake; 2015 work on digitization/digital disruption. - Banks with AMA operational risk capital must have Board-approved frameworks and annual review of processes by auditors. - Gaps: - RBNZ does not conduct systematic, in-depth determinations of operational risk frameworks (EC1–EC6) other than outsourcing (BS11 applies to banks with NZ liabilities > $10 billion). - No general operational risk guidelines outside outsourcing; assessments are limited in scope and scrutiny. ### Principle 26 — Internal control and audit (assessment: not explicitly rated in excerpt) - Regulatory posture: - RBNZ Act and conditions (notably BS14 on corporate governance) are not prescriptive on internal control and audit minimums beyond audit committee separation. - RBNZ relies on directors’ attestations and Companies Act sections 131–138 corporate governance responsibilities to incentivize adequate internal controls. - Observations: - Supervisory engagement collects Board papers and audits; RBNZ expects banks to tailor internal control frameworks to their circumstances. *International Monetary Fund — CR17120 (selected excerpts and assessments as contained in the provided content)* ### Section 74 of the RBNZ Act permits the RBNZ to impose conditions of registration that ### Section 74 of the RBNZ Act permits the RBNZ to impose conditions of registration that ### Legal powers and governance expectations - Section 74 of the RBNZ Act permits the RBNZ to impose conditions of registration relating to matters referred to in sections 73(2)(a) and (e) and 78(1)(e), (f) and (fa), including: - incorporation and ownership structure of the bank; - suitability for their positions of the directors and senior managers of the bank; - separation of the business carried on by the bank from other business and from other interests of any person owning or controlling the registered bank; - the bank’s internal controls and accounting systems; and - the bank’s risk management systems. - BS14 (the RBNZ’s Corporate Governance policy) sets Board responsibilities, including ensuring the integrity of the bank’s financial controls, reporting systems and internal audit standards, and that the Board collectively takes decisions in the best interests of the bank without undue influence from divergent parties. - OiCs issued under section 81 require directors to make attestations in quarterly public disclosure statements, including attesting that the bank has systems to monitor and control adequately the banking group’s material risks (credit risk, interest rate risk, currency risk, equity risk, liquidity risk and other business risks) and that those systems are being properly applied. - Section 95 authorizes the RBNZ to require a registered bank to supply a report, prepared by a person approved by the RBNZ, on the financial and accounting systems and controls of that registered bank. ### Supervisory approach and expectations for control functions (EC2–EC5) - EC2 expectation: supervisor determines appropriate balance in skills/resources of back office, control functions and operational management relative to business origination units; staff of back office and control functions must have sufficient expertise and authority (and, where appropriate, access to the bank’s Board). - Description and findings re EC2: - The RBNZ does not explicitly determine that there is an appropriate balance between back office/control functions and front office business/origination. - The RBNZ relies on directors’ attestations in quarterly public disclosure statements and on Board and senior management to ensure internal control expectations, including attestations that the bank has systems to monitor and control material risks. - RBNZ discusses internal controls with banks in regular consultations covering independence, credibility, capability and resourcing of back office and control functions. - EC3 expectation: supervisor determines banks have an adequately staffed, permanent and independent compliance function; staff suitably trained, experienced and have sufficient authority; Board exercises oversight of compliance management. - Description and findings re EC3: - The RBNZ does not explicitly determine compliance with EC3 expectations. - The RBNZ’s supervisory model places responsibility for internal risk management and governance on the bank’s Board and senior management; the RBNZ holds discussions with banks on compliance function strength. - EC4 expectation: supervisor determines banks have an independent, permanent and effective internal audit function charged with assessing effectiveness of policies/processes/internal controls and ensuring compliance. - Description and findings re EC4: - OiCs require directors to attest that systems exist to monitor/control material risks and to state in disclosure statements whether the banking group has an internal audit function. - RBNZ staff review disclosure information on audit functions; all banks report regular review of the audit function’s operation and resources. - For the 10 largest New Zealand incorporated banks, RBNZ staff meet with internal auditors annually; meetings are comprehensive and have in some cases led to supervisory engagement with Boards or senior management. - The RBNZ discusses independence and effectiveness of internal audit with senior management and meets with independent directors of Board audit and risk committees. - RBNZ conducts exit interviews with departing internal auditors to discuss reasons for leaving, successor challenges and relationship with senior management. - EC5 expectation: supervisor determines internal audit function characteristics (sufficient resources; appropriate independence and reporting; timely information on material changes; full access to staff/records; risk-based methodology; audit plan; authority to assess outsourced functions). - Description and findings re EC5: - The RBNZ does not explicitly determine the characteristics in EC5. - Supervisory staff meet with internal auditors and judge effectiveness, including experience/background and resourcing; RBNZ reflects on reporting lines and raises concerns if reporting lines are deemed inappropriate. ### Assessment of Principle 26 (internal audit and control) - Assessment: Materially non-compliant - Comments: - The RBNZ does not comply with most requirements of Principle 26. - This outcome is largely due to the RBNZ’s supervisory approach, which places primary responsibility for determining adequacy of internal risk management and governance systems on the bank’s Board and senior management, informed by standards such as BS14 and legal provisions. - The RBNZ’s role is described as light-handed monitoring based on senior management and directors’ regular consultations. - The report notes the importance of independent verification of internal controls as a critical area to ensure soundness of individual institutions. ### Financial reporting and external audit (Principle 27) — key obligations and supervisory roles - Principle 27: supervisor determines banks maintain adequate and reliable records, prepare financial statements in accordance with internationally accepted accounting policies/practices, publish information that fairly reflects financial condition and performance, and that statements bear an independent external auditor’s opinion; supervisor also determines adequate governance and oversight of the external audit function. - EC1 expectation: supervisor holds the Board and management responsible for preparing financial statements in accordance with internationally accepted accounting policies/practices and supported by recordkeeping systems. - Description and findings re EC1: - Financial reporting obligations exist in primary legislation (Financial Markets Conduct Act 2013 – FMCA) for which the FMA is responsible; RBNZ is responsible for disclosure requirements imposed by OiCs. The supervisor for this criterion includes both the FMA and the RBNZ. - The FMA enforces FMCA; RBNZ enforces its own disclosure requirements. RBNZ’s disclosure requirements reinforce FMCA responsibilities for Boards and management to prepare full year financial statements in accordance with IFRS. - RBNZ disclosure provisions require directors to attest that every disclosure statement (including full year) is not false or misleading; RBNZ Act provides heavy penalties for false attestations. - RBNZ disclosure requirements mandate interim financial statements comply with NZ IAS 34; OiCs require every registered bank to publish a disclosure statement every quarter. - Under FMCA, a registered bank is a “FMC reporting entity” (section 451) and subject to Part 7 financial reporting requirements, including preparation of annual group financial statements in accordance with generally accepted accounting practice in New Zealand (‘NZ GAAP’) (see s460 and s461). - The New Zealand External Reporting Board (XRB) issues New Zealand equivalents to IFRSs (NZ-IFRS); registered banks are classified as ‘Tier 1 for-profit entities’ and subject to the full version of NZ IFRSs. - Section 455 FMCA requires keeping proper accounting records and a satisfactory system of control of accounting records; section 458 requires keeping records for at least seven years; section 459 requires making accounting records available for inspection to the FMA and other authorized persons. - Directors’ attestations within the RBNZ disclosure regime impose responsibility on directors and senior management to ensure record-keeping systems support preparation of financial statements in accordance with NZ IFRS. - The external auditor is responsible for evaluating whether the group’s financial statements are prepared in accordance with the applicable financial reporting framework (auditing standard ISA (NZ) 700, paragraphs 12 and 13). - EC2 expectation: supervisor holds the Board and management responsible for ensuring annual financial statements bear an independent external auditor’s opinion from an audit conducted in accordance with internationally accepted auditing practices and standards. - Description and findings re EC2: - Section 461D of FMCA requires every registered bank to ensure annual financial statements are audited by a qualified auditor. - “Qualified auditor” is defined in section 461E as a licensed auditor or a registered audit firm under the Auditor Regulation Act 2011; subsections 461E(4) and (5) address independence by preventing persons with various connections to the bank from being a qualified auditor. - Auditor independence is also supported by professional ethical standards. - If a bank contravenes section 460 or 461D, section 534 of FMCA ties responsibility back to directors, who must be regarded as having contravened the same provision for civil liability purposes (civil liability does not automatically follow; defenses exist in sections 499 to 501). Both the bank and its directors commit a criminal offence where they knowingly fail to comply with accounting standards. *IMF assessment and findings as presented in the source document.* ### Section 461F of FMCA requires that audits of registered bank financial statements ### Section 461F of FMCA requires that audits of registered bank financial statements ### Applicable standards and audit requirements (Sections 461F–461G; Financial Reporting Act 2013) - Section 461F of FMCA: audits of registered bank financial statements required by s461D must be carried out in accordance with applicable auditing and assurance standards. - Section 461G of FMCA: the auditor’s report resulting from the audit must comply with the requirements of all applicable auditing and assurance standards. - “Applicable auditing and assurance standard”: defined in section 5(1) of the Financial Reporting Act 2013 as a standard issued by the XRB under section 12 of the FR Act, that applies to an audit in accordance with the standard. - The XRB issues New Zealand versions of the International Standards on Auditing (ISAs) issued by the IAASB. ISAs (NZ): - Are changed only where there are compelling reasons; differences are few and tend to make them more conservative. - Cross-references and commencement dates are set by the XRB, but substantive alignment with ISAs is maintained. ### Oversight, enforcement, and interaction of authorities - FMA responsibilities and powers: - FMCA provides a robust legal framework and the FMA is responsible for enforcing FMCA requirements. - The FMA is required to perform regular reviews of audit firms on their compliance with the Auditing and Assurance Standards issued by the XRB. Reviews include internal quality control systems and a reasonable number of audit files, including bank audits. - The FMA may issue direction orders under section 468 of the FMCA and, following section 475 processes, can direct a bank not to use a proposed auditor who does not meet requirements. - RBNZ’s prudential role to ensure external audit quality and publication: - OiCs require a full year disclosure statement to include an auditor’s report on the disclosure statement as a whole, including financial statements prepared in accordance with NZ GAAP; auditor’s report must include everything required by ISAs (NZ) (Schedule 1 of local and branch OiC). - Director attestation requires directors to attest that the disclosure statement includes all information required by the OiC, including the specified auditor’s report. - The RBNZ’s disclosure regime ensures publication of the external auditor’s opinion and director responsibility for its inclusion. - Interaction on auditor competency or conflicts: - RBNZ cannot directly cancel or suspend an auditor’s license; it may require a bank to remove or replace an auditor under s113A(f) of the RBNZ Act only on bank-related grounds. - Concerns about auditor quality would be raised with the auditor and/or bank and, if warranted, referred to the accredited body and the FMA. - Accredited bodies and the FMA (under the AR Act) have disciplinary powers including canceling or suspending licenses; FMA can issue directions to registered audit firms following audit quality review. ### EC3 — Valuation practices and fair value estimation - RBNZ expectations and supervisory approach: - Supervisor determines banks use valuation practices consistent with accounting standards widely accepted internationally and expects frameworks for fair value estimation to be subject to independent verification and validation, with documentation of significant differences between financial reporting and regulatory valuations. - RBNZ does not carry out its own determination of these matters; it relies on external auditors and directors’ attestations. Scarce supervisory resources limit RBNZ compliance with this assessment criterion. - RBNZ generally expects banks to use financial reporting valuation for regulatory purposes except where regulatory requirements explicitly require otherwise; quarterly disclosure statements anchor private prudential data to accounting valuations. - Main divergence and public disclosure: - Main area of divergence: regulatory definition of capital (e.g., ‘total equity’ on accounting balance sheet vs regulatory ‘common equity tier 1 capital’) due to regulatory deductions and Basel adjustments. - Banks’ Pillar 3 disclosure of capital adequacy is included in quarterly financial statements; full year financial statements generally provide sufficient detail to reconcile accounting equity with components of regulatory capital. - Audit role on fair value: - Auditor cannot give the required “true and fair view” opinion without sufficient evidence that fair value methods or estimates align with relevant accounting standards (see ISA (NZ) 540). - Level 3 fair value reporting: for the 2014/2015 financial year, total Level 3 assets and liabilities across the large banks amounted to $2 million. ### EC4 — Scope of audits and required approach (risk and materiality) - Legal/regulatory basis: laws/regulations require audits of banks to follow New Zealand equivalents of ISAs (ISAs (NZ)) which set scope, standards, and require a risk- and materiality-based approach. - Relevant ISAs (NZ): - ISA (NZ) 200 ‘Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing (New Zealand)’ sets high-level audit scope. - ISA (NZ) 320 ‘Materiality in Planning and Performing an Audit’ requires use of materiality. - ISA (NZ) 315 ‘Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment’ details risk identification and assessment. - RBNZ supplementary requirements: RBNZ requires auditors to give opinions on supplementary information published in full-year disclosure statements in addition to financial statements. ### EC5 — Audit coverage of key banking areas - Local auditing standards (ISAs (NZ)) require auditors to assess whether financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework (NZ IFRSs). - Audits are expected to cover loan portfolios, loan loss provisions, nonperforming assets, asset valuations, trading and other securities activities, derivatives, asset securitizations, consolidation and involvement with off-balance sheet vehicles, and adequacy of internal controls over financial reporting (as encompassed within ISAs (NZ) objectives). ### EC6 — Power to reject or rescind auditor appointment - RBNZ limitations and alternative mechanisms: - RBNZ does not have explicit power to reject or rescind an auditor appointment on competence/independence grounds; s113A(f) allows removal/replacement only on bank-related grounds. - FMCA requires every registered bank to ensure annual financial statements are audited by a ‘qualified auditor’ (licensed auditor or registered audit firm under Auditor Regulation Act 2011). - AR Act delegated model: FMA accredits bodies that can provide effective audit regulatory systems; currently NZICA and CPA Australia are accredited bodies responsible for issuing licenses to members. - If RBNZ has concerns about auditor quality or conflicts, it raises concerns and can refer to accredited body and the FMA for disciplinary action (including cancellation/suspension of license). A bank could no longer use a suspended auditor per section 461D of FMCA. - FMA can issue directions to registered audit firms following audit quality reviews; audit firms are required to follow these directions. - FMA enforcement powers under FMCA (including direction orders) provide a mechanism to prevent banks using auditors that do not meet standards. ### EC7 — Auditor rotation requirements - Rotation rules for FMC reporting entities: - XRB PES 1 'Code of Ethics for Assurance Practitioners' (regulation in New Zealand) addresses long association and partner rotation: for an audit of a public interest entity, an individual shall not be a key audit partner for more than seven years, and after standing down, must not resume that role for at least two years. All registered banks qualify as ‘public interest entities.’ - Listed entities are also subject to NZX listing rules: section 3.6 requires an Audit Committee and duties include ensuring the external auditor or lead audit partner is changed at least every five years (paragraph 3.6.3(f)). - Note: few locally incorporated banks are listed; only one (Heartland) has listed equity, while a few others have some listed debt issues. ### EC8 — Supervisor meetings with external audit firms - Practice: the banking supervisor for each of the 10 biggest locally incorporated banks meets annually with the audit partner responsible for the external audit of the bank. - Valuation practices are not a specific agenda item for these meetings. ### EC9 — Auditor reporting obligations to the supervisor and confidentiality protection - Statutory reporting: under section 96 of the RBNZ Act, the auditor of a registered bank must disclose to the RBNZ (after informing the bank of the intention to do so) information obtained in the course of holding office as an auditor if, in the auditor's opinion, the information: - indicates that the bank is insolvent or in serious financial difficulties, or - is likely to assist, or be relevant to, the RBNZ in the exercise of its supervisory responsibilities. - RBNZ assessment: while wording does not exactly match EC9, RBNZ considers this to be a broadly similar test of when the auditor is expected to inform the supervisor. *International Monetary Fund — cr17120 (Section 461F of FMCA requires that audits of registered bank financial statements)* ### Section 98 protects an auditor from any civil, criminal or disciplinary proceedings brought ### cr17120 - Section 98 protects an auditor from any civil, criminal or disciplinary proceedings brought ### Auditor protection and reporting (Section 98 and s461G) - Section 98 protects an auditor from any civil, criminal or disciplinary proceedings brought against the auditor arising from the disclosure, in good faith, of any such information to the RBNZ. - Under section 461G of the FMCA: - If the auditor’s report on a bank’s financial statements indicates that it has not complied with Part 7 of the FMCA, the auditor must within seven days of signing the report send a copy of it, and of the financial statements, to the FMA and the XRB. - Footnote: The reference in s461G to ‘supervisor’ is to a supervisor of an issue of debt securities or of a managed fund under FMCA, not to the banking supervisor. ### Additional criteria — AC1: Access to external auditors’ working papers - Description and findings: - The RBNZ does not have the power to obtain working papers from the external auditor itself. - The FMA has wide ranging powers to obtain information under section 25 of the Financial Markets Authority Act 2011, which include powers to require production of working documents and to require auditors to attend interviews if necessary. - Under section 52 of the FMA Act, the FMA may authorize a suitable qualified or trained person to exercise the FMA’s power to obtain information. This power is rarely used to authorize another regulatory agency to require the supply of information under section 25 directly. - Standard practice: the FMA uses the power under section 25 to obtain documents and information itself, and shares these with other regulatory agencies to the extent permitted by section 30 of the FMA Act. ### Assessment of Principle 27 - Rating: Largely compliant - Comments: - The New Zealand legal framework ensures that financial statements of every bank are prepared in accordance with New Zealand equivalents to internationally recognized accounting standards (NZ IFRSs), and are audited by a qualified external auditor in accordance with auditing standards applicable in New Zealand that are equivalent to internationally recognized auditing standards (ISAs). - The Auditor Regulation Act 2011 promotes the expertise and integrity of auditors and provides powers to remediate audits that are deficient. - The RBNZ does not itself determine that banks use valuation practices consistent with IFRSs (see EC3). It relies on the external auditing process and director attestations to deliver this prudential outcome and considers it more appropriate and efficient for those with the relevant expertise to fulfil these responsibilities rather than duplicating efforts. - The RBNZ meets annually with the external auditor of the 10 largest locally incorporated banks. The standard agenda for these meetings does not cover valuation practices; valuation practices are trusted to external auditors (EC8) and would only be discussed on an exceptions basis under the agenda item “issues identified during the most recent financial year”. Other areas of supervisory responsibility delegated to external auditors are normally not covered in these meetings either. ### Principle 28 — Disclosure and transparency (overview) - Principle statement: The supervisor determines that banks and banking groups regularly publish information on a consolidated and, where appropriate, solo basis that is easily accessible and fairly reflects their financial condition, performance, risk exposures, risk management strategies and corporate governance policies and processes. #### EC1 — Periodic public disclosures - Description and findings: - All registered banks operating in New Zealand are required to publish regular disclosure statements. These disclosure requirements are set out in OiCs, but are administered by the RBNZ. - Separate requirements apply to New Zealand incorporated banks and to overseas incorporated banks. - All banks are currently required to publish disclosure statements on a quarterly basis. The disclosure statement for the bank's full financial year contains more comprehensive information than those for the half year and ‘off-quarters’ (i.e., the first three months and first nine months of its financial year). - The RBNZ recently conducted a stocktake of the prudential requirements for banks and NBDTs. One outcome is a proposal to enhance disclosure with a new quarterly “Dashboard” of key financial information on all locally-incorporated banks. The RBNZ is still evaluating proposals related to these issues. - The starting point for disclosure statement content is financial statements, following standard IFRS requirements for the full year and using interim financial reporting standards (NZ IAS 34) for the half-year and off-quarter. - The OiCs require substantial supplemental information not required by IFRS, including the bank’s capital adequacy position. - Comparability: - Banks have significant discretion and are generally permitted to present disclosure data in the format they deem appropriate. - Definitions in disclosure statements reference a mix of financial statement definitions and capital adequacy definitions. - Broad comparability of underlying concepts is ensured by the link to financial reporting standards (NZ IFRSs). Capital adequacy definitions are more standardized (as prescribed in BS2A and BS2B). - The RBNZ prepares its own summaries of key publicly disclosed information and presents this on its website. - Relevance: - The RBNZ has conducted several reviews (including a major review in 2011 and the Regulatory Stocktake in 2015) and regularly engages with stakeholders to ensure ongoing relevance. - The RBNZ has deliberately chosen not to impose a materiality threshold on the information in disclosure statements. - Timeliness: - Full financial year disclosure statements must be published within three months of the year-end. - Half-year disclosure statements must generally be published within two months of that date. - Disclosure statements for the first and third quarters must generally be available within two months of the end of those quarters. - Reliability: - A bank's disclosure statement is required to contain certain statements signed by each Director and, for overseas incorporated banks, the New Zealand chief executive officer. These must state whether the bank has systems to monitor and control material risks; whether the bank has complied with its conditions of registration; whether loans to connected persons are contrary to the interests of the banking group; and that the information is not false or misleading. - Directors and, for overseas incorporated banks, the New Zealand chief executive officer, face criminal and civil penalties under the RBNZ of New Zealand Act if information is found to be false or misleading. - Where the RBNZ believes a disclosure statement is false or misleading, it requires a bank to publish corrections or a new disclosure statement. - Financial statements included in year-end disclosure statements are subject to a full audit; interim half-year statements are subject to review by an external auditor. - Solo vs. Consolidated: - Public disclosure is focused on the “New Zealand Banking Group,” generally the same group used for the Financial Reporting Act 2013 and the Financial Markets Conduct Act 2013, except where the RBNZ specifies a different group by notice. - The RBNZ privately collects “solo” information for prudential purposes but requires a small number of public disclosures on the ‘solo’ entity (e.g., locally incorporated banks must disclose solo capital ratios in full and half-year disclosure statements alongside group capital ratios). #### EC2 — Scope and content of required disclosures - Description and findings: - Required disclosures include both qualitative and quantitative information on financial performance, financial position, risk management strategies and practices, risk exposures, aggregate exposures to related parties, transactions with related parties, accounting policies, and basic business, management, governance and remuneration. - “Subpart 2 – Content of Disclosure Statements” in the OiCs shows the relevant schedules and information required for each period. - NZ IFRS require extensive information on most EC2 headings. The RBNZ’s additional requirements supplement disclosures, particularly regarding capital and asset quality. - For branches, the RBNZ does not require supplementary related party exposure information beyond IAS 24 disclosures. - On remuneration, the RBNZ does not have supplemental disclosure requirements; remuneration disclosures are those required in s211 of the Companies Act 1993, which requires remuneration information in annual reports unless shareholders holding at least 95 percent of voting shares agree the report need not do so. - Branch disclosure is less extensive than for locally incorporated banks, reflecting a risk-based approach and low systemic importance of branches. - Banks using the IRB approach to capital adequacy (the four major New Zealand banks) face more extensive reporting requirements than smaller banks for capital adequacy. #### EC3 — Disclosure of material group entities - Description and findings: - NZ financial statement requirements ensure group structure is clearly presented in annual financial statements. - NZ IFRS 10 requires a parent to present consolidated financial statements. - NZ IFRS 12 requires disclosure enabling users to evaluate: - the nature of, and risks associated with, interests in other entities; and - the effects of those interests on financial position, financial performance and cash flows. - Application guidance in NZ IFRS 12 makes clear that all material entities must be disclosed (including special purpose entities). - RBNZ supplemental requirements ask registered banks to provide details on ownership structure (ultimate parent bank and ultimate holding company and interests of 5 percent or more of voting securities), priority of creditor claims, and details on any guarantees or cross guarantees—generally required quarterly, with parent/ultimate holding company details required in the half year or off quarters only if there have been changes. - Most detailed supplemental requirements relate to the “Banking Group,” generally the bank and any companies controlled by it. - Overseas incorporated banks operating a branch in New Zealand must disclose information both for the New Zealand branch and for the overseas bank. #### EC4 — Review and enforcement of disclosure compliance - Description and findings: - On a quarterly basis, each supervisor makes an attestation to his/her Manager stating that the disclosure statement: - materially contains the information required by the relevant OiC; - does not have any material errors or omissions; and - is materially in the form required by the relevant OiC. - When supervisors discover missing elements, they notify banks and regularly request banks correct and republish corrected disclosure statements on their websites. - Supervisors take action when they believe information may be false or of concern. #### EC5 — Publication of aggregate information on the banking system - Description and findings: - The RBNZ publishes a number of aggregate and bank-specific statistical reports to facilitate public understanding and support market discipline. - A list of the RBNZ’s main statistical publications is available under “registered banks” on the main statistics page of the RBNZ’s website. Most statistics are aggregates, presented monthly or quarterly and published relatively quickly, usually within a month or so of the information date. - The RBNZ publishes individual bank data with a longer lag to facilitate comparison across banks on metrics including profitability, credit ratings, capital ratios, balance sheet structure and asset quality, based on public disclosure statements: - Bank-specific information for New Zealand incorporated banks - Bank-specific information for overseas branches - The RBNZ publishes balance sheet aggregates based on public disclosure statements. - The RBNZ publishes the semi-annual Financial Stability Report containing charts and discussions about bank capital, asset quality and liquidity, and presents this report throughout the country engaging stakeholders. - As part of macroprudential monitoring, the RBNZ publishes a quarterly chartpack presenting key macroprudential indicators. #### Additional criteria — AC1 (disclosure of exposures during reporting period) - Description and findings: - Most reporting on risk exposures is based on exposures at the end of the period. - For a few key items, banks must disclose both the end-period amount and the peak end-of-day exposure during the period. This applies to: - market risk exposures, - related party exposures, and - individual credit concentration. ### Assessment of Principle 28 - Rating: Compliant - Comments: - The RBNZ is committed to high-quality public disclosure in line with international standards. New Zealand has comprehensive financial reporting requirements which the RBNZ supplements, particularly regarding capital and asset quality. - The RBNZ is actively engaged to achieve disclosure requirements that meet user needs and is encouraged to assess whether public disclosure meets actual user needs to enable market discipline. - The RBNZ is also encouraged to complement disclosure requirements with information on remuneration as discussed under EC2. ### Principle 29 — Abuse of financial services (overview) - Principle statement: The supervisor determines that banks have adequate policies and processes, including strict customer due diligence (CDD) rules to promote high ethical and professional standards in the financial sector and prevent the bank from being used, intentionally or unintentionally, for criminal activities. #### EC1 — Legal duties, responsibilities and powers related to AML/CFT - Description and findings: - The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the AML/CFT Act) came into force on June 30, 2013. - Section 130 1 (a) of the AML/CFT Act and related regulations establish the duties, responsibilities and powers of RBNZ as an AML/CFT supervisor of banks (along with all NDBT and life insurers). This includes the 24 registered banks for compliance with the Act. - The RBNZ’s functions as an AML/CFT supervisor are set out in section 131, which include: - monitor and assess the level of ML/TF risk; - monitor banks’ compliance with this Act and regulations, and for this purpose to develop and implement a supervisory program; - enforce compliance with this Act and regulations; and - co-operate with domestic and international counterparts to ensure the consistent, effective, and efficient implementation of this Act. *International Monetary Fund — New Zealand: extract from CR17120* ### Section 132 of the Act provides the RBNZ all the powers necessary to carry out its ### Section 132 of the Act provides the RBNZ all the powers necessary to carry out its ### RBNZ statutory powers and supervisory tools - Section 132: RBNZ may, on notice, access all records, documents or information relevant to its supervision and monitoring of reporting entities for compliance with this Act; conduct on-site inspections in accordance with section 133; provide guidance to assist reporting banks in their compliance with the Act; co-operate and share information with overseas counterparts. - Section 139: enables an AML/CFT supervisor to disclose any information (which may include suspicious transaction information) to any government agency (which includes NZ Police and the FIU for law enforcement purposes). - RBNZ operational practice: - RBNZ meets regularly with the two other AML supervisors (the Department of Internal Affairs and FMA) and the FIU at the AML/CFT Supervisors Forum to share operational information. - RBNZ has not taken action (other than supervisory feedback responses and actions) in relation to non-reporting of suspicious transactions by a bank because issues have not met the material issue threshold or similar. ### Scope of required reporting and criminal activities - Section 40: if a person conducts or seeks to conduct a transaction through a reporting entity that the reporting entity has reasonable grounds to suspect is or may be relevant to the investigation or prosecution of any person for a money laundering offence or other criminal activities (as described in section 40), the reporting entity must report a suspicious transaction report. - Banks must report suspicious transactions to the Financial Intelligence Unit (FIU) as required by Section 40. - There is no legislative requirement to report suspicious activities and incidents of fraud to the RBNZ; the FIU may share information with the RBNZ as the banks’ AML supervisor. - RBNZ receives operational risk reports from banks on a regular basis that report on fraud and financial crime. ### EC2 — Policies, processes and supervisory approach to ethical/professional standards - Supervisor objective: determine banks have adequate policies and processes that promote high ethical and professional standards and prevent the bank from being used, intentionally or unintentionally, for criminal activities, including prevention, detection, and reporting. - RBNZ supervisory methods: - mixture of on-site inspections, desk-based reviews and thematic reviews. - AML Supervision Manual developed and being adapted with experience. - Since June 30, 2013, RBNZ has conducted 31 on-site inspections of the 25 registered banks. - Every entity must produce an annual report for AML/CFT purposes; reports feed risk-based supervisory prioritization. - Risk assessment factors include size, customers, products and jurisdictions. - Higher-risk banks receive on-site visits every year or 18 months. - RBNZ dedicated team capacity: should be able to visit at least 20 entities per year. - On-site visit scope tailored to riskier areas; follow-up on-site visits possible. - Desk-based work and thematic reviews complement on-site inspections. - On 27 June 2016, RBNZ published an updated version of the Banking Supervision Handbook document Guidelines on Anti-Money Laundering and Countering Financing of Terrorism (BS5). ### EC3 — Reporting to supervisor vs FIU - Section 40 requires reporting suspicious transactions to the FIU. - No legislative requirement to report suspicious activities/incidents of fraud to the RBNZ. - FIU may share information with RBNZ. - RBNZ receives operational risk reports from banks that include fraud and financial crime. ### EC4 — Supervisor sharing information with authorities - Section 139 authorizes disclosure of information to government agencies (including NZ Police and FIU) for law enforcement purposes. - RBNZ routinely informs the FIU and, if applicable, other designated authority if RBNZ becomes aware of additional suspicious transactions. - RBNZ participates in AML/CFT Supervisors Forum for information sharing with other supervisors and the FIU. ### EC5 — Customer due diligence (CDD) requirements and findings - CDD core elements required (as listed in EC5): - (a) customer acceptance policy identifying unacceptable business relationships; - (b) customer identification, verification and due diligence program on an ongoing basis, including beneficial ownership verification and understanding purpose/nature of relationship; - (c) policies/processes to monitor and recognise unusual or potentially suspicious transactions; - (d) enhanced due diligence (EDD) on high-risk accounts with escalation to senior management; - (e) EDD on politically exposed persons (PEPs) with senior management approval and source of wealth/funds verification; - (f) clear record-keeping rules with at least a five-year retention period. - Statutory provisions cited: - Section 58: reporting entity must undertake an assessment of AML/CFT risk before conducting CDD or establishing an AML/CFT program. - Section 31 (and section31(4)): ongoing CDD and regard to initial CDD and level of risk. - Sections 11(1)(b), 16(1)(b) and 24(1)(a): verification of beneficial ownership. - Section 17: obtaining information on nature and purpose of proposed business relationship and assessing EDD need. - Sections 57(c) & (d): program must include procedures, policies, and controls for account monitoring and reporting suspicious transactions. - Section 22(1)(d) and Section 22: requirement to conduct EDD in particular high-risk accounts. - Section 26 and Section 26(2)(b): PEP identification, senior management approval, and source of wealth/funds requirements. - Sections 49 - 54: record-keeping obligations and retention periods (5 years after completion of a transaction; 5 years after end of business relationship or completion of occasional wire transfer). - RBNZ findings: - RBNZ considers local banks' compliance with CDD requirements generally good, with compliance rates fluctuating between banks. - RBNZ has conducted AML/CFT on-site visits of all registered banks; some higher-risk banks have received more than two on-site visits. - RBNZ considers CDD compliance a core obligation and is satisfied with its level of understanding of CDD compliance. ### EC6 — Correspondent banking requirements and findings - Section 29: financial institution with or proposing to have a correspondent relationship must conduct enhanced customer due diligence on respondent financial institution; Section 29(2) outlines ECDD requirements including gathering information to fully understand respondent’s business and AML/CFT controls and senior management approval for new relationships. - Section 37: if CDD cannot be conducted in accordance with the Act (i.e., cannot satisfy section 29(2)(a)-(g)), the reporting entity must not establish or must terminate the business relationship. - Section 39: reporting entities must not establish or continue a business relationship with, or allow an occasional transaction through, a shell bank or a financial institution that has a correspondent relationship with a shell bank. - RBNZ approach: - RBNZ assesses sections 29 and 37 in on-site interactions with banks that have or may have correspondent relationships. - Supervisory attention to correspondent banking is commensurate to the less intense risk these activities have in New Zealand. - Supervisory focus is risk-based and primarily on banks’ CDD activities; responsibility is largely on banks to perform proper due diligence. - Revision of procedures or lack thereof would trigger more intense scrutiny by RBNZ. ### EC7 — Controls and systems to prevent and detect abuse - Section 57: banks must have adequate and effective procedures, policies and controls for conducting CDD, account monitoring and reporting suspicious transactions. - RBNZ considers adequacy and effectiveness of these procedures in every AML supervisory interaction and on-site review. - RBNZ response to insufficient controls: - measured and considered responses when identifying banks without sufficient controls or material non-compliance, including issuance of public and private warnings. - Banks undertook remedial measures following warnings. ### EC8 — Enforcement powers and consequences for non-compliance - AML/CFT Act provides for criminal and civil liability for non-compliance. - RBNZ civil powers under section 79: issue formal warnings, accept enforceable undertakings, seek injunctions from the High Court and apply to the court for a pecuniary penalty. - Sections 92-112: provide offences for non-compliance with AML/CFT requirements. - RBNZ additional registration powers (via Reserve Bank Act): - RBNZ can withdraw, restrict, or suspend a financial institution's registration through the RBNZ Act under power in s78 rather than the AML/CFT Act 2009. - RBNZ can recommend to the Minister that the bank’s registration be cancelled (via s77(2)(f)), or give the bank directions under s113(1)(e) (subject to the Minister’s consent). - Scope of directions provided by s113A is wide-ranging and can effectively require suspension of operations. - BS5 (Guidelines on Anti-Money Laundering and Countering Financing of Terrorism) links AML/CFT Act and Reserve Bank Act and states Reserve Bank expects registered banks’ AML/CFT “policies, systems and procedures” to comply with the AML/CFT Act and related regulations. ### EC9 — Internal/external audit, compliance officers, screening, and training - Statutory requirements: - Section 59: reporting entity must have its risk assessment and AML/CFT program audited every 2 years by an independent and appropriately qualified person; Section 59(7) requires providing a copy of any audit to its AML/CFT supervisor on request. - Section 56: reporting entity must designate an employee as an AML/CFT compliance officer who reports to a senior manager. - Section 57: program must include adequate and effective procedures, policies, and controls for vetting staff and for training on AML matters for senior managers, AML/CFT compliance officer and other AML/CFT-related employees. - RBNZ supervisory practice: - RBNZ requests audit reports during on-site inspections or desk-based reviews. - RBNZ reviews structural arrangements, reporting lines, vetting, training material content, frequency of training and testing of staff in supervisory interactions. ### EC10 — Staff reporting channels and management information systems - Supervisor expectations: - banks must have clear policies and processes for staff to report problems related to abuse of financial services to local management and/or the dedicated officer; - banks must utilize adequate management information systems to provide Boards, management and dedicated officers with timely and appropriate information on such activities. - RBNZ assessment: these minimum requirements are considered when assessing banks for compliance with the AML/CFT Act (sections 59, 56, and 57 cited). *Source: cr17120 - Section 132 of the Act provides the RBNZ all the powers necessary to carry out its* ### Section 57 of the AML/CFT Act requires each reporting entity to have an AML/CFT ### Section 57 of the AML/CFT Act requires each reporting entity to have an AML/CFT ### AML/CFT program requirements (Section 57) - Section 57 requires each reporting entity to have an AML/CFT program with adequate and effective, procedures, policies and controls for complying with customer due diligence requirements (including account monitoring) (section 57(c)) and reporting suspicious transactions (section 57(d)). - Section 57 requires each reporting entity to have an AML/CFT program with adequate and effective, procedures, policies and controls for monitoring and managing compliance with, and the internal communication of and training in, those procedures, policies, and controls (section 57(l)). - The RBNZ, as a matter of course, reviews: - the identification of unusual transactions, - the investigation of those transactions, - the reporting to and by the AML/CFT compliance officer when conducting on-site inspections or desk-based reviews of a reporting entity. - The RBNZ, as a matter of course, considers the management reporting and dissemination of relevant information in a timely manner when conducting on-site inspections or desk-based reviews of a reporting entity. ### Whistleblower protection (EC11 / Section 44) - Laws provide that a member of a bank’s staff who reports suspicious activity in good faith either internally or directly to the relevant authority cannot be held liable. - Section 44 of the AML/CFT Act provides protection for a person reporting suspicious transactions and states that no civil, criminal and disciplinary proceedings lie against a person who discloses or supplies any information in any suspicious transaction report. - Section 44 does not apply if the information is provided in bad faith and does not apply in respect of proceedings for an offence under sections 92–97. ### Supervisor cooperation and information sharing (EC12) - The RBNZ is a member of the AML/CFT Supervisors’ Forum that meets fortnightly to discuss operational AML/CFT issues. This group comprises the RBNZ, DIA, FMA, FIU, and Ministry of Justice. - The RBNZ is member of the AML/CFT National Coordination Committee (NCC) established under section 150 of the Act; this group meets monthly to primarily discuss policy and operational issues. Recent invitees include the IRD, Ministry of Foreign Affairs and Trade and the MBIE. - The AML/CFT supervisors of the Five Eyes nations, under the International Supervisors Forum (ISF), have quarterly teleconference meetings to exchange information and good practice, including thematic discussion, lessons learned from on-site visits and enforcement actions, emerging trends and risks and identification of future issues. - The AML/CFT Supervisor Manager for DIA will represent NZ at the ISF plenary in Washington DC in the referenced year. - The RBNZ is a member of the Five Eyes Law Enforcement Group’s International Supervisors Forum, which includes representatives from AUSTRAC, FINCEN, FINTRAC, FCA, and New Zealand (RBNZ, DIA and FMA). - The RBNZ is authorized to share information with other competent authorities in accordance with the AML/CFT Act (Section 132 (2) (d) and 139), and may use, for the purposes of AML/CFT supervision, information it has obtained or is held by it in the exercise of its powers or the performance of its functions and duties under the RBNZ Act 1989, and vice versa (sections 137 (1 and 2), and 140). - New Zealand AML/CFT supervisors are working to formalize more MOUs at the international level to facilitate the exchange of information and assistance with foreign supervisory authorities, focusing on FINTRAC/CANAFE and FINCEN at present. ### Supervisor resources and expertise (EC13) - The supervisor has in-house resources with specialist expertise for addressing criminal activities and regularly provides information on risks of money laundering and the financing of terrorism to the banks. - The AML/CFT supervision team has members with international and domestic ML/FT expertise in private sector banking and law enforcement. - Example: a senior analyst of the AML/CFT team wrote before joining the team: NZ’s National ML/FT Risk Assessment 2010 while working at the New Zealand Police FIU as well as the quarterly published typology reports. He has written the RBNZ’s sector risk assessment on ML/TF which is planned to be published in late 2016. ### Assessment of Principle 29 and supervisory comments - Assessment of Principle 29: Compliant - Comments: - The RBNZ is the designated AML/CFT competent authority under the AML/CFT Act for banking activities. - New Zealand amended its AML/CFT legislation and improved its AML/CFT regime; a newly revamped AML/CFT framework with a dedicated AML/CFT Act came into force on June 30, 2013. - The Act (and relevant regulations) captures the requirement for a bank to understand its ML/TF risks, and apply the appropriate CDD based on the level of risk of a customer. - RBNZ benefits from a specialist unit that has built expertise and relationships with other authorities, including in Australia. - The RBNZ has achieved significant progress in addressing deficiencies in the regime prior to 2013, including RBNZ Regulations of 2008, and efforts are moving in the right direction and according to the Principle. - Implementation is recent and probably with short staffing. - The next FATF assessment in 2019 would be a relevant landmark to assess progress in the maturity of the framework. ### Relevant dates and references in the text - NL: The revamped AML/CFT Act came into force on June 30, 2013. - Sector risk assessment planned to be published in late 2016. - Next FATF assessment referred to as 2019. *International Monetary Fund — cr17120 (excerpt).* ### section 68B, have to be established clearly in such a way that the relationship ### cr17120 - section 68B, have to be established clearly in such a way that the relationship ### Assessment: Principles and supervisory recommendations - Principle 3: Recommendations in CP2 and CP13, as they relate to cooperation and collaboration with national and trans-Tasman authorities, also address deficiencies in achieving compliance with CP3. - Principle 8: Increase the analysis of the risk mitigants listed for the individual risks, retain work papers, and share the results of the analysis with banks. - Principle 9: Carry out, or have carried out on its behalf, on-site inspections to verify or test data and information on which the analysis of key risks relies (for example, the credit portfolio, Board minutes, and the implementation of Board policies and regulatory reports). On-site reviews can be targeted and their frequency based on risk. - Principle 10: The RBNZ is encouraged to develop processes for strong first-hand independent verification of banks’ prudential returns, especially in the areas of earnings and credit asset quality, given the credit profile of the banking industry. This will allow the effective identification of prudential concerns through an independent assessment of risks, while ensuring that these risks are mitigated in a timely manner. - Principle 11: Make compliance with BS Policy documents evidence of prudent practice (s78) and eliminate Ministerial consent for directions under section 113(1)(e) of the RBNZ Act (thereby also aligning with IPSA and the NBDT Act). These changes would facilitate the implementation of enforcement action on a preventive basis and support the use of supervisory judgment. - Principle 12: RBNZ is advised to prepare itself for the possibility that the current circumstances and mitigating factors change, and develop a proper framework for consolidated supervision. Examples include: - developing a proper economic definition of the banking group under supervision; - establishing a supervisory methodology to collect and analyze information on intragroup transactions; - developing formal policies to limit the scope of foreign operations of New Zealand incorporated banks on the basis of weak host jurisdictions. - Principle 13: RBNZ is encouraged to identify areas where policy making and supervisory activities for the day-to-day supervisory assessment of risks would benefit further from active cooperation and collaborative work with APRA, to enhance RBNZ’s cost-effective approach to supervision pursuing its own statutory mandate. Examples: coordinated approach on the assessment of group risk exposures, risk management, corporate governance and cross-border crisis management. - Principle 14: The significant reliance on self-discipline is not supported by published and enforceable supervisory expectations. The update of BS14 should include expanded guidelines on risk appetite statements, on required policies to be developed by the Boards, and on codes of conduct. - Principles 15, 17, 18, 19, 20, 21, 22, 23, 25: Achieving compliance would require a major change to the RBNZ’s supervisory approach. ### Recommended supervisory actions and capacity building - Supervisory regulations or enforceable policies should be issued establishing benchmarks and requirements for measuring, monitoring and managing risks, to provide guidance to banks on supervisory expectations when attestations are made. - Adopt a more intrusive approach, including on-site inspections (by the RBNZ or its appointed representative) to determine compliance and deepen supervisors’ understanding of banking operations and risks. - Increase the forward looking capacity of supervision by increased use of stress testing. - Additional resources and training would be required. - Principle 17/18: Issue detailed guidelines addressing loan classification, extended loans, forbearance, nonperforming and cured loans, and provisioning; conduct on-site reviews to ascertain credit portfolio quality and verify accuracy of internal bank reports shared with the RBNZ. - Principle 19: Establish lending limits for concentrated credit exposures and ensure banks properly aggregate exposures across any connected group of counterparties. - Principle 20: Expand requirements on related party loans to include prior approval by the Board and reporting on write-offs for Board approval; expand information collected to include terms, names and repayment status; expand definition of related party to include related parties of the bank’s directors and other parties and transactions, as defined in footnotes to CP20. - Principle 26: Ensure independent verification of internal controls as a critical area to ensure the soundness of individual institutions and an indispensable means to exercise effective regulatory discipline. - Principle 27: While respecting differences between external auditors and the RBNZ, engage external auditors in focused and effective dialogue to discuss valuation practices and other areas of prudential concern delegated to external auditors. ### Authorities’ response: overview and context - Authorities responding: FMA, MBIE, RBNZ, and Treasury. - Authorities welcome the IMF Detailed Assessment Report (DAR) and strongly support the FSAP for promoting and improving financial sector regulation quality and outcomes. - New Zealand banking system context: - Highly concentrated and largely foreign owned, with subsidiaries of the four large Australian banks accounting for a large share of total banking assets. - New Zealand is not a member of the Basel Committee on Banking Supervision (BCBS) or the Financial Stability Board (FSB) but looks to adopt recommendations of international standard setting bodies when appropriate and customizes them for New Zealand circumstances. - Historical and policy timeline: - Last New Zealand FSAP conducted during 2003–04. - Reserve Bank introduced a new prudential liquidity policy in 2010 to address reliance on wholesale market funding. - Open Bank Resolution (OBR) was introduced in 2012. - Reserve Bank implemented Basel III higher minimum capital requirements at the start of 2013. - Supervisory developments since the global financial crisis: - Reserve Bank stepped up supervisory intensity, engagement with banks, and improvements in supervisory analysis and data. - DAR acknowledges significant improvements in the Reserve Bank’s ‘regulatory’ pillar. - Current supervisory model: - Relies on three pillars: regulatory pillar (formal enforceable rules and requirements), self-discipline (incentives for directors and senior managers), and market discipline (information, incentives and mechanisms for market participants). - Authorities recognise the regime remains somewhat unusual given emphasis on self-discipline and market discipline and relatively low-intensity supervisory approach. ### Authorities’ planned considerations and initial reactions - Authorities view DAR recommendations as an opportunity to reflect on the current model and how the three pillars might better contribute to sound and efficient banking. - Recommendations imply extensions or adjustments including: - common benchmarks and enforceable requirements for measuring, monitoring and managing all key risks; - greater willingness to take supervisory or enforcement actions on a preventive basis using supervisory standards to mitigate imprudent behaviour; - subject supervisory and disclosure information to more verification by the Reserve Bank or external experts; - reassess limitations of market discipline relative to the Reserve Bank’s approach; - reassess resources needed to adequately fulfil Reserve Bank’s supervision responsibilities. - Reserve Bank to consider recommendations with other relevant New Zealand authorities; too early to provide definitive response. - Reserve Bank notes recommendations tied to improving self-discipline and market discipline merit particular attention; example: initiated a thematic review of the attestation framework partly in response to IMF findings. - Authorities acknowledge importance of trans-Tasman cooperation given significant presence of Australian-owned banks; current home-host arrangements with Australian authorities considered very sound and consistent with international best practice, but authorities will continue to develop and deepen cooperation. - DAR places importance on ensuring continued independence of the Reserve Bank in its regulatory and supervisory functions; DAR does not point to examples of government interference. New Zealand authorities will consider recommendations to ensure appropriate separation between the Reserve Bank and the executive branch of government. ### Conclusions by the New Zealand authorities - The FSAP produced many potentially useful insights for the Reserve Bank’s prudential framework. - Authorities will consider the recommendations systematically over the coming months with a view to ensuring New Zealand’s approach to banking sector regulation continues to be cost-effective while promoting the soundness and efficiency of the financial system. *IMF Detailed Assessment Report (DAR) excerpts as provided.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17120.pdf_