## _cr04126 ## Source details **Canonical URL:** [_cr04126](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04126.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04126.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04126.pdf.json) --- ### Executive summary and overall stability assessment - Financial-sector structure and vulnerabilities: - The New Zealand financial sector is dominated by institutions that are based in Australia. - Supervisory practices are based on a liberal disclosure-based regime, with limited supervisory intervention. - The low savings rate creates a large dependency on foreign funding. - Offsetting strengths and outlook: - Favorable macroeconomic outlook, profitable and well-functioning financial system, and overall sound and transparent financial policies mitigate vulnerabilities; short-term risks appear low. - New Zealand’s large net foreign indebtedness position owes entirely to private sector borrowings; sovereign rating strong due to prudent fiscal policies and no net foreign-currency debt. - Medium-term recommendation: - Supervisory enhancements recommended to ensure an adequate framework to monitor and support financial stability. ### Main findings on institutions, markets, and supervision - Banks and ownership: - Five foreign-owned banks dominate the financial system; they are profitable and well capitalized. - Bank-market discipline: disclosure regime supplemented by active home country supervision for the big banks. - Foreign exchange and hedging: - Foreign exchange hedging is widespread; markets allow private sector to manage FX risks under diverse counterparties and market conditions. - Stress-testing and resilience: - Stress tests show resilience in the banking sector consistent with high capital and profits. - Significant exchange rate swings and house price declines could be absorbed by all big banks. - Dynamic stress scenarios (agriculture and external funding costs) have more persistent profit effects but no systemic concerns. - Supervision and crisis management: - Banking supervision is disclosure-based with limited prudential requirements and no active on-site role for supervisors. - Absence of a depositor-protection mandate and foreign ownership of systemically important banks pose unique crisis-management challenges. - Outsourcing of NZ bank operating systems to parent institutions and Australian depositor-preference law may complicate crisis management. - Cooperation efforts with Australian authorities are underway and welcome. - Nonbank financial institutions and securities markets: - NBFIs are not systemically important and are profitable; largest nonbank institutions receive oversight from overseas regulators and account for around half of sector assets. - Securities markets are relatively small; restructurings (NZX) and regulatory reforms strengthened framework but gaps remain delaying early detection and enforcement. ### Principal recommendations (summary) - Disclosure-based regime: - Maintain the quality, scope, and timeliness of disclosure to ensure it continues to meet best international practice. - Importance of independent directors: - Fit-and-proper criteria should continue to apply in a comprehensive manner. - RBNZ could offer independent bank directors the possibility of discussing areas of concerns without absolving directors of statutory responsibilities. - Surveillance: - For banks, monitor more regularly liquidity and large exposure early warning indicators. - Consider commissioning third-party reports and establish a small specialist team to make focused, on-site visits on particular aspects of credit and operational risk. - Bank resolution and crisis management: - Review possible approaches to bank resolution, and the operational and legal consequences, with a view to establishing internal operational guidelines. - Nonbank supervision: - Review practices and resource needs for government agencies involved in oversight, especially the offices of the Registrar and the Government Actuary, to enhance public access to timely and comprehensive data. - Securities markets regulation: - Enhance regulatory framework by including minimum standards of conduct for collective investment scheme operators, improving reporting mechanisms, strengthening standards and penalties relating to market abuse, and strengthening oversight of market intermediaries that are not exchange members. ### Macroeconomic context and key indicators - Structural framework and recent performance: - Reforms over the past 20 years: floating exchange rate, deregulated financial markets, privatization, medium-term framework, inflation-targeting under independent central bank. - Real GDP growth: nearly four percent per annum since 1999. - Recent inflation: declined to about 1½ percent in the year to December 2003. - Exchange rate movements: appreciated by 66 percent against the U.S. dollar and 36 percent on a trade weighted basis between December 2001 and February 2004. - Current account: deficit approaching a three-year high of 4½ percent of GDP. - Labor market: unemployment reached a 16-year low in 2003. - Foreign debt: - Gross foreign debt exceeds 100 percent of GDP, bulk owed by private sector. ### Banking sector structure, key aggregates, soundness, and funding (selected exact figures) - Structure and ownership: - Number of registered banks: 18. - Assets at end-2002: exceeding $NZ 200 billion (about 160 percent of GDP). - Only two smaller banks are New Zealand-owned. - Ten banks operate as foreign branches. - Five banks are local subsidiaries of foreign parent banks. - One bank is a joint venture between a foreign bank and a local company. - Five registered banks hold nearly 90 percent of the sector’s assets and deposits and earn more than 80 percent of industry profits; among these five, one operates as a branch of an Australian parent and four are subsidiaries of Australian parent banks. - Key macro and sector totals: - Total population (million, end-2002): 3.942 - GDP per capita (2002) in USD: 16,762 - Real GDP (% change): 1999: 4.0, 2000: 3.9, 2001: 2.7, 2002: 4.3, 2003: 3.5 - Nominal GDP (NZD billion): 1999: 105.7, 2000: 112.3, 2001: 120.5, 2002: 126.4, 2003: 133.1 - Gross official reserves, e.o.p. (USD billion): 1999: 4.5, 2000: 3.9, 2001: 3.6, 2002: 4.8, 2003: 5.1 - Total external debt (NZD billion): 1999: 102.9, 2000: 99.9, 2001: 110.2, 2002: 108.8, 2003: 103.9 - Banking sector debt (NZD billion) - loans only: 2000: 60.3, 2001: 70.6, 2002: 71.4, 2003: 76.0 - Financial soundness and capitalization (selected): - Total system assets (NZD billion): 1999: 158.4, 2000: 180.1, 2001: 189.6, 2002: 204.5, Jun-03: 212.5 - Total assets of locally incorporated banks (NZD billion): 1999: 107.9, 2000: 116.0, 2001: 126.7, 2002: 135.2, Jun-03: 142.5 - Tier 1 regulatory capital to risk-weighted assets (weighted average): 1999: 7.1, 2000: 7.7, 2001: 7.6, 2002: 8.5, Jun-03: 8.6 - Total regulatory capital to risk-weighted assets (weighted average): 1999: 10.3, 2000: 11.1, 2001: 10.7, 2002: 11.3, Jun-03: 11.4 - Aggregate system equity to aggregate system assets: 1999: 3.2, 2000: 2.8, 2001: 2.7, 2002: 2.5, Jun-03: 2.4 - Aggregate equity asset ratio for locally incorporated banks: 1999: 4.6, 2000: 4.3, 2001: 4.0, 2002: 3.7, Jun-03: 3.5 - Total liquid assets (percent of system assets): 1999: 13.4, 2000: 12.1, 2001: 11.7, 2002: 11.0, Jun-03: 10.1 - Liquid assets to deposits and other borrowings: 1999: 28.6, 2000: 26.9, 2001: 23.7, 2002: 22.3, Jun-03: 19.8 - Loans, advances and lease finance as percent of total system assets: 1999: 77.0, 2000: 72.9, 2001: 75.8, 2002: 75.9, Jun-03: 75.9 - Asset quality, provisioning and profitability: - Aggregate impaired assets to total assets (in basis points): 1999: 34.1, 2000: 30.4, 2001: 31.7, 2002: 25.4, Jun-03: 28.1 - Aggregate total provisions to total assets (in basis points): 1999: 43.7, 2000: 39, 2001: 36.3, 2002: 35.3, Jun-03: 43.1 - Aggregate total provisions to total impaired and past due assets: 1999: 91.4, 2000: 87.1, 2001: 41.1, 2002: 65.9, Jun-03: 77.4 - Profit before tax and provisions to average assets: 1999: 1.5, 2000: 1.5, 2001: 1.7, 2002: 1.9, Jun-03: 2.0 - Profit after tax and extraordinary items to average assets: 1999: 1.1, 2000: 1.1, 2001: 1.1, 2002: 1.3, Jun-03: 1.3 - Interest margin: 1999: 2.4, 2000: 2.3, 2001: 2.3, 2002: 2.6, Jun-03: 2.6 - Summary statements: aggregate industry return on assets has exceeded 1½ percent over last five years; after-tax returns on equity have consistently exceeded 20 percent; impaired assets are only slightly more than 0.5 percent of bank assets; general and specific provisions cover about three-quarters of total impaired and overdue assets. ### Loan portfolio composition, credit risk, and funding patterns - Mortgage and sectoral lending shares: - Mortgage lending (residential and commercial) as share of total loans: 1999: 50, 2000: 58, 2001: 56, 2002: 57, Jun-03: 59, Sep-03: 59 - Households share of total loans: 1999: 47, 2000: 46, 2001: 45, 2002: 45, Jun-03: 47, Sep-03: 48 - Agricultural loans: slightly more than 11 percent of lending (text). - Funding and foreign liabilities: - About 30 percent of bank liabilities are owed to nonresidents (text); nearly 50 percent of GDP. - About half of banks’ foreign liabilities are to affiliates. - FX denominated liabilities to total liabilities: 1999: 21.9, 2000: 22.5, 2001: 22.6, 2002: 18.2, Jun-03: 19.4, Sep-03: 19.3 - Share of FX denominated liabilities owed to related entities: 1999: 53.5, 2000: 39.2, 2001: 47.5, 2002: 37.5, Jun-03: 33.0, Sep-03: 33.0 - FX hedging: - Over 96 percent of foreign-currency-denominated overseas debt is hedged in the banking sector. - 78 percent of foreign-currency-denominated overseas debt is hedged in other sectors. - Approximately 70 percent of hedging is done using financial contracts; remainder naturally hedged. ### Nonbank financial institutions, insurance, and market infrastructure (selected) - NBFIs and managed funds: - NBFIs account for 25 percent of financial system assets. - Managed funds assets at end-2002: $NZ 44 billion (16 percent of system assets). - Private superannuation funds assets at end-2002: $NZ 17 billion. - New Zealand Superannuation Fund assets at end-January 2004: about $NZ 3.1 billion; expected to grow by about $NZ 2 billion a year (text). - Insurance sector: - Insurance companies account for about 5 percent of system assets. - Accident Compensation Commission assets at end-June 2003: approximately $NZ 5.9 billion. - Earthquake Commission assets at end-June 2003: approximately $NZ 4.1 billion. - Securities markets and intermediaries: - New Zealand equity markets market capitalization: about 44 percent of GDP. - Ownership of New Zealand-listed equities mostly offshore and domestic institutional investors; about one-fourth held directly by households. - NZX demutualized in December 2002; new SME market launched; NZFOE trading to be transferred to Australia in 2004. ### Finance companies, building societies, credit unions, and market intermediaries - Finance companies and building societies: - Finance companies provide over a third of consumer credit; operate in higher-risk property lending and vehicle, plant, and machinery leasing. - Largest finance company is a subsidiary of one of the major banks; most others are privately held. - Finance companies sector returns on equity: above 20 percent; returns on assets: around 2 percent. - Building societies returns on equity averaging nine percent for the last three years; return on assets averaging about 0.75 percent. - Credit unions: - Declined to less than one percent of total financial system assets. - Market intermediaries: - Include share brokers, futures dealers, investment advisers, and managers of collective investment schemes (CIS). - Most market intermediaries (not exchange members) are subject to minimal or no regulatory supervision. ### Supervision framework, observance, and recommended supervisory enhancements - Supervisory philosophy: - Built around three pillars: self discipline (directors’ quarterly attestations), market discipline (quarterly disclosure statements), and regulatory discipline (RBNZ prudential requirements, licensing, supervision). - Primary objective: systemic stability, not depositor protection. - No official deposit protection or policyholder protection scheme. - On-site and off-site supervision: - RBNZ lacks a regular targeted on-site supervision program despite statutory powers. - RBNZ achieved material compliance with most Basel Core Principles, with some differences reflecting policy choices. - Recommendations include: more frequent monitoring of liquidity and large exposures, selective use of Section 95 powers, commissioning independent third-party reviews, establishing a small specialist team for focused on-site visits, and supplementing disclosures with supervisor-specific early-warning indicators. - Crisis management and LoLR: - RBNZ required to act as LoLR when needed to ensure system soundness; would lend only where solvency not in material doubt and after market sources exhausted. - Information RBNZ would use to judge eligibility for LoLR not formally articulated; potential information gaps and response time concerns noted. - RBNZ reviewing alternative resolution policy options (including open-bank resolution and creditor recapitalization) and feasibility of operationalizing such policies. - Cross-border and Australian interdependence issues: - Australian depositor-preference scheme may prioritize Australian depositors over assets in Australia in resolution. - Basel II divergence risk: New Zealand plans standardized approach; Australia plans internal ratings-based approach — implications should be discussed among regulators. - Outsourcing and “hollowing out”: estimate that at least half of banks operating in New Zealand are no longer separable entities due to IT and back-up site outsourcing; RBNZ considering registration conditions and targeted audits. - Recommended action-plan highlights (selected Basel Core Principles and securities recommendations): - Finalize a crisis-management strategy and explore cooperation forms with Australian authorities. - Review permissibility of deposit-taking by nonbank institutions. - Use Section 95 powers selectively for independent verification of credit procedures; may require amending the Act for routine onsite inspections. - Obtain more frequent data directly from banks for early-warning prudential indicators including liquidity. - Develop specialist risk-review team for themed visits and up-to-date early-warning indicators. - For securities: amend legislation to set high-level standards for exchanges and intermediaries, develop formal oversight plan for exchanges, enhance disclosure and enforcement regimes, and implement criminal/civil penalties for market manipulation and insider trading under proposed 2004 reforms. ### Stress-testing scenarios, assumptions, and aggregated results (selected exact scenario descriptions and results) - Market-Risk Scenarios (Table 5 exact descriptions): - Scenario 1: 30 percent depreciation of the New Zealand dollar relative to all other currencies - Scenario 2: 30 percent appreciation of the New Zealand dollar relative to all other currencies - Scenario 3: 300 basis point increase in interest rates across the NZ yield curve - Scenario 4: 300 basis point increase in the long end (5+ years) of the NZ yield curve, short rates unchanged - Credit-Risk Scenarios (Table 5 exact descriptions): - Commodity Prices 1: A decline in the dairy payout to $2.50/kg for two consecutive years - Property prices and economic weakness 2: 20 percent decline in residential property prices, with unemployment rising from 5 to 9 percent, and households’ real disposable income falling by 4 percent - Credit-Risk Scenario 3: 20 percent fall in commercial property prices, 20 percent fall in corporate earnings - Foot-and-Mouth Disease Scenario (Table 8 assumptions): - 80 percent decline in meat exports - 20 percent depreciation of the New Zealand dollar against all other currencies - 50 basis point increase in the risk premium for New Zealand dollar denominated assets - A decline in the long-term capital/output ratio and net foreign assets - Increase in Offshore Funding Costs Assumptions (Table 8): - A depreciation of the New Zealand dollar by 40 percent - An increase of short- and long-term interest rates to 18–20 percent - A permanent increase in the risk premium on New Zealand dollar-denominated assets - Market-risk stress-test results (Average Loss as a Percent of 2003 Profits; Largest Individual Bank Maximum Risk Loss as a Percent of 2003 Profits): - Assuming Typical Bank Exposure: - Scenario 1: 1.98; 2.75 - Scenario 2: -1.00; 0.39 - Scenario 3: 2.75; 3.82 - Scenario 4: 0.43; 0.91 - Assuming Worst Case Exposures: - Scenario 1: 3.80; 8.60 - Scenario 2: -0.70; 2.80 - Scenario 3: 6.20; 14.40 - Scenario 4: 3.60; 7.10 - Notes: Negative numbers represent gains; percentages reference actual reported annual pre-tax profit for the 12-month period ending in March 2003. - Credit-risk stress-test results (Average Cumulative Loss as a Percent of 2003 Profits; Largest Individual Bank Loss as a Percent of 2003 Profits): - Credit Shock 1: - Year 1: 3.09; 8.33 - Year 2: 4.35; 11.38 - Credit Shock 2: - Year 1: 8.31; 15.84 - Year 2: 18.78; 32.56 - Year 3: 28.39; 44.11 - Credit Shock 3: - Year 1: 1.90; 3.46 - Year 2: 6.63; 10.79 - Year 3: 9.76; 19.50 - Note: Percentages reference actual reported annual pre-tax profit for the 12-month period ending in March 2003. - Interpretations: - Market-risk shocks to trading books produced small losses given trading-book size. - A maximum loss for one bank of less than 15 percent of pre-tax profits emerges under a 300 basis point nominal interest-rate increase with most disadvantageous internal limits. - A 20 percent decline in property prices plus income falls produces losses varying by commercial property concentration; worst individual bank loss estimate below half of March 2003 annual pre-tax profits in the scenario set referenced. - Foot-and-mouth scenario would not threaten solvency of major banks but would impose a modest long-lasting drag on profitability. - Funding-costs stress scenario shows greater potential for loss but does not suggest any bank’s capital position would be endangered. ### Transparency, accountability, and supervisory observance (selected) - RBNZ monetary policy transparency: - RBNZ exhibits a high degree of transparency in conduct of monetary policy. - Monetary Policy Statement issued approximately every quarter and includes comprehensive medium-term economic forecasts (Section 15 requires at least every six months). - Central bank data comply with SDDS standards in all significant respects. - Governor and officials appear before Parliament’s Finance and Expenditure Committee generally "four or five times a year." - Transparency of banking supervision: - RBNZ is sole authority for bank registration and supervision; publishes Statement of Principles and supervision material; Board and Governor accountability mechanisms in place. - An MOU between domestic regulatory agencies is being developed and "is expected to be publicly disclosed." - Recommended: make details of the domestic MOU public; consider further disclosure improvements. - Securities regulation transparency and IOSCO observance: - Recent reforms and NZX restructuring strengthened securities regulatory framework; additional reforms needed to fully implement IOSCO Principles. - Main planned or recommended reforms include legislative amendments to entry and ongoing standards for exchanges, oversight plans for exchanges, enhanced disclosure review resources, and criminal/civil penalties for market manipulation and insider trading under proposed 2004 law reforms. ### Authorities’ responses and planned actions - RBNZ responses to supervisory compliance assessment: - RBNZ accepts some potential gaps and has work underway or planned to address them, including crisis management strategies, increased co-operation with Australian authorities, greater use of powers to require independent reports, review of roles of directors and auditors, and review of disclosure requirements. - RBNZ’s overall view: basic supervisory approach appropriate for New Zealand’s circumstances but some refinements are needed to ensure effectiveness in a less benign economic environment. - Securities and market authorities: - Authorities consider FSAP findings helpful and note work already underway to improve IOSCO observance. - Securities Commission funded to develop risk-based issuer review criteria and to implement reforms; Securities Commission decided to develop a formal oversight plan for regulated exchanges in the year of the report. _Italic source: IMF Financial Sector Assessment Program — New Zealand (chapter/section content provided in the supplied PDF)._ ### 1. Principal Recommendations ........................................................................................... ### _cr04126 - 1. Principal Recommendations ........................................................................................... ### Executive summary and overall stability assessment - The New Zealand financial sector is dominated by institutions that are based in Australia. Supervisory practices are based on a liberal disclosure-based regime, with limited supervisory intervention. The low savings rate creates a large dependency on foreign funding. - The favorable macroeconomic outlook, the profitable and well-functioning financial system, and overall sound and transparent financial policies mitigate the aforementioned vulnerabilities, and make short-term risks appear low. - New Zealand’s large net foreign indebtedness position owes entirely to private sector borrowings. Its strong sovereign rating reflects prudent fiscal policies and no net foreign-currency debt. - The strength of the financial system reduces concerns about the lack of an active supervisory framework. In the medium and longer run, supervisory enhancements are recommended to ensure that an adequate framework to monitor and support financial stability remains in place. ### Main findings - The five foreign-owned banks that dominate the financial system are profitable and well capitalized. For these institutions, the discipline of New Zealand’s market-based disclosure regime is supplemented by active home country supervision. - The foreign exchange market has allowed the private sector to manage its foreign exchange risks and secure cover from a diverse set of counterparties under a wide range of market conditions. Foreign exchange hedging is widespread. - Stress tests show resilience in the banking sector, consistent with the sector’s high levels of capital and profits. Significant exchange rate swings and house price declines could be absorbed by all big banks. Dynamic stress test scenarios involving shocks to agriculture and to external funding costs show more persistent effects on bank profits, but do not raise systemic concerns. - Banking supervision is based on disclosure and market discipline, with the sole objective of ensuring systemic stability. The supervisory regime employs limited prudential requirements, with no active on-site role for supervisors. The benefits of this regime include low compliance costs, greater flexibility for financial institutions, an enhanced role for market discipline, and reduced moral hazard risks. The ongoing strength of the financial system has reduced concerns about the lack of an active supervisory component. - The absence of a depositor-protection mandate, along with the foreign ownership of all systemically important banks may pose unique challenges for the RBNZ if a financial crisis were to occur. Outsourcing of New Zealand bank operating systems to parent institutions and Australian depositor preference law may complicate crisis management. These risks have been recognized and control measures are being analyzed. Efforts underway to improve cooperation with the Australian authorities are welcome. - Nonbank financial institutions (NBFIs), while not systemically important, are also profitable. Overseas regulators provide additional supervision for a handful of the largest nonbank institutions, which account for around half of the assets of the sector. - Securities markets are relatively small, with trading and ownership concentrated offshore. Restructuring of the New Zealand Stock Exchange (NZX) and reforms in regulation have strengthened the regulatory framework, but some gaps remain that may delay early detection and enforcement actions against improper conduct. ### Principal recommendations (summary) - Disclosure-based regime - Maintain the quality, scope, and timeliness of disclosure to ensure it continues to meet best international practice. - Importance of independent directors - Fit-and-proper criteria should continue to apply in a comprehensive manner. The RBNZ could offer independent bank directors the possibility of discussing areas of concerns without absolving directors of their statutory responsibilities. - Surveillance - For banks, monitor more regularly liquidity and large exposure early warning indicators. Consider commissioning third-party reports and establish a small specialist team to make focused, on-site visits on particular aspects of credit and operational risk. - Bank resolution and crisis management - Review possible approaches to bank resolution, and the operational and legal consequences that might arise, with a view to establishing internal operational guidelines. - Nonbank supervision - Review practices and resource needs for the government agencies involved in oversight, especially the offices of the Registrar and the Government Actuary, with a view towards enhancing public access to timely and comprehensive data. - Securities markets regulation - Enhance regulatory framework by including minimum standards of conduct for collective investment scheme operators, improving reporting mechanisms, strengthening standards and penalties relating to market abuse, and strengthening oversight of market intermediaries that are not exchange members. ### Macroeconomic context and key indicators - New Zealand has a resilient macroeconomic framework supported by reforms over the past 20 years: a floating exchange rate, deregulated financial markets, far-reaching privatization, a sound and transparent medium-term framework, and an inflation-targeting framework under an independent central bank. - Real GDP growth: nearly four percent per annum since 1999. - Foreign debt: gross debt now exceeds 100 percent of GDP, with the bulk owed by the private sector. - Recent inflation: declined to about 1½ percent in the year to December 2003. - Exchange rate movements: the currency has appreciated by 66 percent against the U.S. dollar and 36 percent on a trade weighted basis between December 2001 and February 2004. - Current account: deficit is approaching a three-year high of 4½ percent of GDP. - Labor market: unemployment reached a 16-year low in 2003. ### Financial sector context - The financial sector has shifted from publicly-owned, tightly regulated banks to an almost fully private, foreign-owned sector with a radically reduced scope of regulation since the mid 1980s. - Nonbank financial institutions and securities markets have declined in importance and are now secondary players, as banks have expanded their range of activities. *Source: _cr04126 - 1. Principal Recommendations (IMF chapter/section).* ### 8. The banking sector includes 18 registered banks and, at end-2002, held assets ### _cr04126 - 8. The banking sector includes 18 registered banks and, at end-2002, held assets ### Banking sector structure and ownership - The banking sector includes 18 registered banks and, at end-2002, held assets exceeding $NZ 200 billion (about 160 percent of GDP). - Ownership and organization: - Only two smaller banks are New Zealand-owned, including a recently formed retail bank owned by NZ Post. - Ten banks operate as foreign branches. - Five banks are local subsidiaries of foreign parent banks. - One bank is a joint venture between a foreign bank and a local company. - Market concentration: - Five registered banks dominate the sector, holding nearly 90 percent of the sector’s assets and deposits and earning more than 80 percent of industry profits. - Among these five, one operates as a branch of an Australian parent; the other four are subsidiaries of Australian parent banks. ### Key macroeconomic and sector totals (selected figures from Table 2) - Total population (million, end-2002): 3.942 - GDP per capita (2002) in USD: 16,762 - Real GDP (percentage change): 1999: 4.0, 2000: 3.9, 2001: 2.7, 2002: 4.3, 2003: 3.5 - Nominal GDP (in NZD billion): 1999: 105.7, 2000: 112.3, 2001: 120.5, 2002: 126.4, 2003: 133.1 - Gross official reserves, e.o.p. (USD billion): 1999: 4.5, 2000: 3.9, 2001: 3.6, 2002: 4.8, 2003: 5.1 - Total external debt (NZD billion): 1999: 102.9, 2000: 99.9, 2001: 110.2, 2002: 108.8, 2003: 103.9 - Banking sector debt (NZD billion) - loans only: 2000: 60.3, 2001: 70.6, 2002: 71.4, 2003: 76.0 ### Financial soundness and capitalization (Table 3) - Total system assets (NZD billion): 1999: 158.4, 2000: 180.1, 2001: 189.6, 2002: 204.5, Jun-03: 212.5 - Total assets of locally incorporated banks (NZD billion): 1999: 107.9, 2000: 116.0, 2001: 126.7, 2002: 135.2, Jun-03: 142.5 - Share of system assets in foreign branches: 1999: 31.9, 2000: 35.6, 2001: 33.2, 2002: 33.9, Jun-03: 32.9 - Capital adequacy: - Tier 1 regulatory capital to risk-weighted assets (weighted average): 1999: 7.1, 2000: 7.7, 2001: 7.6, 2002: 8.5, Jun-03: 8.6 - Minimum observed tier 1 regulatory capital to risk-weighted assets: 1999: 6.5, 2000: 6.7, 2001: 6.3, 2002: 7.1, Jun-03: 7.7 - Total regulatory capital to risk-weighted assets (weighted average): 1999: 10.3, 2000: 11.1, 2001: 10.7, 2002: 11.3, Jun-03: 11.4 - Minimum observed total regulatory capital to risk-weighted assets: 1999: 9.6, 2000: 9.6, 2001: 9.5, 2002: 10.5, Jun-03: 10.3 - Aggregate system equity to aggregate system assets: 1999: 3.2, 2000: 2.8, 2001: 2.7, 2002: 2.5, Jun-03: 2.4 - Aggregate equity asset ratio for locally incorporated banks: 1999: 4.6, 2000: 4.3, 2001: 4.0, 2002: 3.7, Jun-03: 3.5 - Asset composition and liquidity: - Loans, advances and lease finance as percent of total system assets: 1999: 77.0, 2000: 72.9, 2001: 75.8, 2002: 75.9, Jun-03: 75.9 - Total liquid assets (percent of system assets): 1999: 13.4, 2000: 12.1, 2001: 11.7, 2002: 11.0, Jun-03: 10.1 - Liquid assets to deposits and other borrowings: 1999: 28.6, 2000: 26.9, 2001: 23.7, 2002: 22.3, Jun-03: 19.8 - Loans, advances, and lease finance to deposits and other borrowings: 1999: 105.2, 2000: 105.9, 2001: 102.2, 2002: 101.6, Jun-03: 100.2 - Loans, advances, and lease finance to NZD retail funding: 1999: 192.8, 2000: 195.5, 2001: 188.1, 2002: 186.0, Jun-03: 185.0 - Funding sources and external liabilities: - Share of total liabilities owed to nonresidents: 1999: 29.2, 2000: 31.0, 2001: 33.9, 2002: 30.5, Jun-03: 29.0, Sep-03: 29.3 - FX denominated liabilities to total liabilities: 1999: 21.9, 2000: 22.5, 2001: 22.6, 2002: 18.2, Jun-03: 19.4, Sep-03: 19.3 - Share of FX denominated liabilities owed to related entities: 1999: 53.5, 2000: 39.2, 2001: 47.5, 2002: 37.5, Jun-03: 33.0, Sep-03: 33.0 - Asset quality and provisioning: - Aggregate impaired assets to total assets (in basis points): 1999: 34.1, 2000: 30.4, 2001: 31.7, 2002: 25.4, Jun-03: 28.1 - Aggregate impaired and past due assets to total assets (in basis points): 1999: 47.8, 2000: 44.8, 2001: 88.4, 2002: 53.6, Jun-03: 55.7 - Aggregate total provisions to total assets (in basis points): 1999: 43.7, 2000: 39, 2001: 36.3, 2002: 35.3, Jun-03: 43.1 - Aggregate total provisions to total impaired and past due assets: 1999: 91.4, 2000: 87.1, 2001: 41.1, 2002: 65.9, Jun-03: 77.4 - General and specific provisions cover about three-quarters of total impaired and overdue assets (text). - Profitability: - Profit before tax and provisions to average assets: 1999: 1.5, 2000: 1.5, 2001: 1.7, 2002: 1.9, Jun-03: 2.0 - Profit after tax and extraordinary items to average assets: 1999: 1.1, 2000: 1.1, 2001: 1.1, 2002: 1.3, Jun-03: 1.3 - Profit after tax and extraordinary items to average equity: 1999: 22.5, 2000: 24.0, 2001: 24.6, 2002: 26.1, Jun-03: 24.2 - Interest margin: 1999: 2.4, 2000: 2.3, 2001: 2.3, 2002: 2.6, Jun-03: 2.6 - Summary statements in text: - Over the last five years aggregate industry return on assets has exceeded 1½ percent, and after-tax returns on equity have consistently exceeded 20 percent. - Capitalization is above international minimum prudential benchmarks. - The aggregate equity-asset ratio of locally incorporated banks is 4.6 percent. - Tier 1 CARs are all in excess of 8.5 percent and total CARs are approaching 11.5 percent. - Among registered banks, the least well-capitalized institution has a Tier 1 CAR of 7.7 percent and a total CAR of 10.3 percent. - Impaired assets are low, comprising only slightly more than 0.5 percent of bank assets. ### Loan portfolio composition and credit risk - Mortgage lending (residential and commercial) as share of total loans: 1999: 50, 2000: 58, 2001: 56, 2002: 57, Jun-03: 59, Sep-03: 59 - Sectoral distribution of loans to total loans (selected shares): - Households: 1999: 47, 2000: 46, 2001: 45, 2002: 45, Jun-03: 47, Sep-03: 48 - Non-residents: 1999: 7, 2000: 11, 2001: 13, 2002: 14, Jun-03: 13, Sep-03: 12 - Agricultural loans are the second largest group, accounting for slightly more than 11 percent of lending (text). - Risk factors and mitigants: - Concerns about a possible reversal of property prices due to recent increases in house prices. - Banks cite risk mitigants: - Low average loan-to-value ratios of about 60 percent. - Conservative conditions on new lending, with most lending above a loan-to-value ratio of 80 percent covered by mortgage insurance. - Substantial increase in demand for housing due to net immigration and cultural preference for home ownership. - Lending for purposes other than property acquisition may be understated because consumer and small business loans are reportedly often secured by residential property. - Stress tests conducted as part of the FSAP examine this issue further (text reference). ### Funding patterns and foreign exposure - The banking system is funded largely by domestic deposits, but a significant share of capital inflows are borrowings by the banking sector. - About 30 percent of bank liabilities (nearly 50 percent of GDP) are owed to nonresidents (text). - About half of banks’ foreign liabilities are to affiliates. - Currency composition and use: - About one-third of banks’ foreign borrowing is denominated in NZDs; the remainder is split between Australian dollars, U.S. dollars, and other currencies and generally swapped back into NZDs. - Only a minor share of foreign borrowing is on-lent in foreign currency. ### Nonbank financial institutions and insurance sector - The nonbank financial sector accounts for 25 percent of financial system assets (Table 4). - Managed funds are the largest nonbank component, accounting for $NZ 44 billion in assets at end-2002 and 16 percent of system assets (Table 4 and text). - Almost two-thirds of managed funds are invested in unit trusts or group investment funds. - Private superannuation funds accounted for $NZ 17 billion in assets at end-2002. - A government New Zealand Superannuation Fund established in 2001 had about $NZ 3.1 billion in assets at end-January 2004 and is expected to grow by about $NZ 2 billion a year (text). - Insurance sector: - Insurance companies account for about 5 percent of system assets. - Measured in premiums per capita, New Zealand ranks twenty-eighth in the world (text). - Life insurance has declined in importance over the past five years; the nonlife sector has stable growth and by premium income is almost twice the life insurance market. - Two government-run agencies: - Accident Compensation Commission held approximately $NZ 5.9 billion in assets at end-June 2003. - Earthquake Commission held approximately $NZ 4.1 billion in assets at end-June 2003. *Source: Reserve Bank of New Zealand, Ministry of Economic Development, Statistics New Zealand, and related tables in the source document.* ### 16. Finance companies, building societies, and credit unions undertake bank-like ### 16. Finance companies, building societies, and credit unions undertake bank-like ### Finance companies, building societies, and credit unions — structure, size, and performance - Finance companies and building societies finance themselves largely by deposit taking. - Finance companies and building societies have grown rapidly in the past five years, but remain small compared to the major banks. - Credit unions have declined in size and membership, holding less than one percent of total financial system assets. - Finance companies operate in areas not fully covered by the major banks, including: - household lending (finance companies provide over a third of consumer credit); - higher-risk property lending; - vehicle, plant, and machinery leasing. - Building societies concentrate on deposit taking and property lending only. - Ownership and market structure: - The largest finance company is a subsidiary of one of the major banks; most others are privately held. - Profitability: - Finance companies sector: returns on equity above 20 percent for the sector as a whole; returns on assets of around 2 percent. - Building societies (member-owned): returns on equity averaging nine percent for the last three years; return on assets averaging about 0.75 percent. ### Securities markets — size, ownership, and market intermediaries - New Zealand equity markets market capitalization: about 44 percent of GDP. - Ownership patterns: - Ownership of New Zealand-listed equities is mostly in the hands of offshore investors and domestic institutional investors. - Only about one-fourth of listed equities are held directly by households. - Market intermediaries include share brokers, futures dealers, investment advisers, and managers of collective investment schemes (CIS). - Market infrastructure and recent developments: - The New Zealand Stock Exchange (NZX) is the country’s only registered securities exchange and was demutualized in December 2002. - Efforts underway to increase access by small- and medium-size enterprises (SMEs), including the recent launch of a new market with listing standards tailored to SMEs. - The parent corporation of the New Zealand Futures and Options Exchange (NZFOE)—the only futures and options exchange in the country—has announced that trading in NZFOE products will be transferred to Australia in 2004. ### Supervision and regulation — framework and institutional roles - General framework: - New Zealand regulators do not carry any duty to protect individual depositors or policyholders, or to safeguard individual institutions. - There is no official deposit protection or policyholder protection scheme. - The supervisory and regulatory framework was introduced as a component of the financial sector reforms initiated in the 1980s; much of the current nonbank regulatory framework, particularly in relation to securities markets, was established in the 1970s. - Banking sector supervision (RBNZ role and practices): - Supervision built around three pillars: self discipline, market discipline, and regulatory discipline. - Self-discipline: directors must attest quarterly that their bank’s risk-management systems are adequate and properly applied; noncompliance threatens civil and criminal penalties. - Market discipline: issuance of quarterly disclosure statements on financial condition, risk profiles, and risk-management policies; disclosure requirements reinforced by the absence of deposit insurance and a cultural ethos of “buyer beware.” - Regulatory discipline: RBNZ applies prudential requirements, licenses, and supervises registered banks. - RBNZ enforcement and supervisory activities include: - Regular scrutiny of all quarterly disclosure statements; - Annual consultation with senior management and annual meetings with boards of larger banks; - Maintenance of working relationships with banks, other regulators, and credit-rating agencies. - Gaps and legislative changes: - RBNZ lacks a regular or targeted on-site supervision program despite statutory powers to conduct on-site work. - Recent legislative changes expanded RBNZ powers, including a prior approval requirement for all significant changes in bank ownership and 2003 amendments clarifying and expanding registration and enforcement powers and obligations. - Basel Core Principles: - RBNZ achieved material compliance with most Basel Core Principles in the assessment of observance. - Some differences (e.g., monitoring of credit risks) relate to conscious policy choices to rely on market oversight or to risks not currently relevant to New Zealand. - Home-country supervision: - A second layer of supervision is provided by home-country supervisors of systemically important banks and their nonbank subsidiaries. - Parent companies of local banks impose credit culture and risk-management systems vetted by home supervisors; home supervisors conduct periodic on-site visits. - RBNZ has memoranda of understanding with the Australian Prudential Regulation Authority and the U.K. Financial Services Authority. - RBNZ maintains regular contact with foreign authorities but does not participate in on-site work nor receive supervisory reports sent to home-country regulators. - Nonbank financial institutions and securities markets oversight: - Oversight is largely indirect, relying on market disclosure, rating agencies, self-regulatory organizations, trustees, and auditors, plus licensing and registration requirements for some categories. - Many NBFIs are domestically owned and not monitored by overseas regulators or exchanges; the largest institutions (accounting for over half the sector’s total assets) receive additional oversight from foreign regulators. - Failures of larger nonbank institutions could have significant reputational effects on market stability. - The Ministry of Economic Development (MED) is the main regulator of nonbank institutions through business units including the Registrar of Companies and the Government Actuary. - MED enforcement powers include: (i) compel additional information; (ii) appoint auditors; (iii) suspend registration; (iv) place companies in statutory management or liquidation. - Ongoing oversight, including review of periodic financial reports, is limited for some sections of the nonbank sector. - Securities sector regulation: - Principal regulator: Securities Commission; other roles: Takeovers Panel and Registrar of Companies. - Principal elements: initial and ongoing disclosure requirements for public issuers and CIS; entry standards and oversight of some market intermediaries (principally exchange members); supervision of most CIS operators by trustees and private supervisors; regulation of takeovers; restrictions on abusive conduct in secondary markets. - NZX and NZFOE establish and monitor prudential standards and trading rules for exchange conduct, including disclosure requirements. - Most other market intermediaries, notably investment advisors, are subject to minimal or no regulatory supervision. - Regulatory improvements and coordination: - Government, securities regulators, and NZX are taking steps to raise securities regulation quality to high international standards. - Government has provided sufficient funding to the Securities Commission and the Takeover Panel to enable them to fulfill responsibilities. - NZX management is investing in regulatory functions and cooperates with the Securities Commission and the Takeover Panel. - Main government regulatory agencies (MED, Securities Commission, RBNZ) appear well coordinated and maintain close contacts to monitor cross-linkages between NBFIs and banks. - Some gaps remain in the regulatory framework that may hinder early detection of incompetent or fraudulent conduct and effective enforcement; authorities intend significant reforms in the next few years. - AML/CFT assessment: - New Zealand’s observance of the FATF Principles for AML/CFT is being assessed by a team from FATF and the Asia Pacific Group on Money Laundering (APG). - Field work has been completed; the ROSC from the assessment will be circulated to the Board once it is completed. ### Short-term stability issues — overview and stress testing - Overall assessment: - In all areas of short-term stress considered, the exposures of the New Zealand financial system appear well-contained. - Systems are in place to ensure an adequate response if stresses were to occur. - Stress-testing exercise (RBNZ coordination): - RBNZ coordinated a stress-testing exercise among the five systemically important banks in preparation for the FSAP. - Stress tests were undertaken by banks and results were aggregated by the RBNZ; the mission did not have access to individual bank data. - Stress tests focused on risks judged relevant to the New Zealand market (Table 5): exchange rates, interest rates, commodity prices, property prices and economic weakness, and specific shocks (foot-and-mouth disease; increase in offshore funding costs). - Stress testing of Australian parent groups was beyond the scope; Australian banking groups appear profitable and well capitalized, with New Zealand operations accounting (on average) for less than twenty percent of group assets or profits. - Risk scenarios and model assumptions (selected exact scenario descriptions and assumptions): - Market-Risk Scenarios (Table 5): - Scenario 1: 30 percent depreciation of the New Zealand dollar relative to all other currencies - Scenario 2: 30 percent appreciation of the New Zealand dollar relative to all other currencies - Scenario 3: 300 basis point increase in interest rates across the NZ yield curve - Scenario 4: 300 basis point increase in the long end (5+ years) of the NZ yield curve, short rates unchanged - Credit-Risk Scenarios (Table 5): - Commodity Prices 1: A decline in the dairy payout to $2.50/kg for two consecutive years - Property prices and economic weakness 2: 20 percent decline in residential property prices, with unemployment rising from 5 to 9 percent, and households’ real disposable income falling by 4 percent - Credit-Risk Scenario 3: 20 percent fall in commercial property prices, 20 percent fall in corporate earnings - Foot-and-Mouth Disease Scenario Assumptions (Table 8): - 80 percent decline in meat exports - 20 percent depreciation of the New Zealand dollar against all other currencies - 50 basis point increase in the risk premium for New Zealand dollar denominated assets - A decline in the long-term capital/output ratio and net foreign assets - Increase in Offshore Funding Costs Assumptions (Table 8): - A depreciation of the New Zealand dollar by 40 percent - An increase of short- and long-term interest rates to 18–20 percent - A permanent increase in the risk premium on New Zealand dollar-denominated assets - Stress-test results — market risk (Table 6): - Market risk results (Average Loss as a Percent of 2003 Profits; Largest Individual Bank Maximum Risk Loss as a Percent of 2003 Profits) - Assuming Typical Bank Exposure: - Scenario 1: 1.98; 2.75 - Scenario 2: -1.00; 0.39 - Scenario 3: 2.75; 3.82 - Scenario 4: 0.43; 0.91 - Assuming Worst Case Exposures: - Scenario 1: 3.80; 8.60 - Scenario 2: -0.70; 2.80 - Scenario 3: 6.20; 14.40 - Scenario 4: 3.60; 7.10 - Notes: - Negative numbers represent gains. - Percentages reference actual reported annual pre-tax profit for the 12-month period ending in March 2003. - Stress-test results — credit risk (Table 7, Average Cumulative Loss as a Percent of 2003 Profits; Largest Individual Bank Loss as a Percent of 2003 Profits) - Credit Shock 1: - Year 1: 3.09; 8.33 - Year 2: 4.35; 11.38 - Credit Shock 2: - Year 1: 8.31; 15.84 - Year 2: 18.78; 32.56 - Year 3: 28.39; 44.11 - Credit Shock 3: - Year 1: 1.90; 3.46 - Year 2: 6.63; 10.79 - Year 3: 9.76; 19.50 - Note: Percentages reference actual reported annual pre-tax profit for the 12-month period ending in March 2003. - Key interpretations of stress-test results: - Market-risk shocks to bank trading books produced only small losses given the small size of the trading book. - A maximum loss for one bank of less than 15 percent of pre-tax profits emerges if nominal New Zealand interest rates were to increase by 300 basis points and bank positions were all fixed at their most disadvantageous internal risk management limit. - Credit-risk scenario with a 20 percent decline in property prices and some decline in household income would produce losses that vary by portfolio concentration on commercial property; the worst individual bank loss estimate would be below half of the bank’s March 2003 annual pre-tax profits. - Results reflect characteristics of mortgage portfolios, including a 60 percent average loan-to-value ratio and contract features that allow homeowners to remain current on loans during temporary unemployment and income reductions. - Foot-and-mouth scenario would not pose a risk to the solvency of the major banks; it would impose a modest but long-lasting drag on profitability due to contained direct exposures to agriculture and exchange rate depreciation that bolsters export industries. - Banks expressed views that the foot-and-mouth scenario assumptions might be too optimistic and that a serious outbreak could have more far-reaching effects than RBNZ simulations suggest. - Funding-costs stress scenario: - Shows greater potential for loss than other scenarios. - Early quarters: bank profitability falls as market risk and banking book losses arise from higher interest rates and sharp NZD depreciation. - Over time: higher interest rates generate greater interest revenues as credits mature and are repriced, but the rate rise and weak economy cause a rise in residential mortgage defaults, particularly on mortgages associated with investment properties. - Lending to commercial property developers is expected to generate losses. - Losses are attenuated by mezzanine creditors (primarily finance companies and contributory mortgage companies) absorbing some losses. - Despite depressed profits, results do not suggest any bank’s capital position would be endangered by this scenario. _Italic source: IMF Financial Sector Assessment Program — New Zealand (chapter/section content provided in the supplied PDF)._ ### 35. The NBFIs are small in comparison to the banking system, but are able to offer a ### _cr04126 - 35. The NBFIs are small in comparison to the banking system, but are able to offer a ### NBFIs: disclosure, data collection, and systemic implications - NBFIs offer a wide range of financial products similar to those offered by banks. - Regulatory and disclosure framework: - NBFIs are subject to prospectus and investment statement requirements under the Securities Act. - NBFIs are not subject to quarterly disclosure and directors’ attestations as required of banks. - Most NBFIs are only required to report their financial results on an annual basis, and often with a substantial reporting lag. - Additional disclosures are required if there have been material adverse developments since the date of the most recent prospectus. - Data collection capacity: - The government entity largely responsible for collecting this information, the MED, has only limited capacity to compile and aggregate the relevant data. - Systemic and market-discipline implications: - Lack of timely and comprehensive disclosure of individual and aggregate data for the sector potentially reduces the effectiveness of market discipline. - This lack may hamper effective early intervention and could allow direct or indirect spillover effects on banks given ownership links and similar business practices. - Recommendation: - Efforts to coordinate and strengthen data collection and disclosure would help regulators, market participants, and depositors to have a more accurate and timely picture of developments in the sector. ### Foreign Currency Exposure: overall assessment and hedging - Context and risk drivers: - The stability of the financial system could be sensitive to management of exchange rate risk, access to overseas funding, and liquidity of the foreign exchange market. - Short-term foreign-exchange-related risks at this time seem contained, given appropriate risk management and functioning markets. - Historical exchange-rate movements: - From January 1997 to November 2000, the New Zealand dollar depreciated by about 45 percent against the U.S. dollar. - The New Zealand dollar subsequently appreciated by 73 percent by February 2004. - Hedging statistics and practices: - Over 96 percent of foreign-currency-denominated overseas debt is hedged in the banking sector. - 78 percent of foreign-currency-denominated overseas debt is hedged in other sectors. - Approximately 70 percent of the hedging is done using financial contracts; the remainder is naturally hedged against foreign exchange assets or receipts. - Operational FX risk is conservatively managed with large exporters consistently hedging receivables and forecasting receipts over their planning horizon. - Public sector exposure: - The public sector has no net foreign-exchange-denominated debt. - Residual NZD exchange-rate risk: - There is little evidence of major residual NZD exchange rate risk remaining for the country. - Factors mitigating residual risk: - Counterparties to hedges are varied but nondomestic: foreign households and retail investors, overseas insurance companies and fund managers, international currency overlay investors and hedge funds. - Market participants are widely dispersed geographically and relatively numerous. - Demand for New Zealand dollar risk appears fairly steady; almost half of New Zealand’s international financial liabilities are denominated in domestic currency. ### Foreign exchange market: structure, liquidity, and infrastructure - Market structure and participants: - Seven banks are currently market makers in the NZD. - Most trading takes place outside New Zealand—primarily in Australia, but also in London and New York. - Historical trading volumes (April 2001): - Average daily trading volume in Australia and New Zealand was approximately $NZ 2.8 billion in the spot market and $NZ 13 billion in the swap market. - There are indications that trading volumes have declined, possibly substantially, since then. - Market characteristics: - Trading spreads are similar to those of other comparable currencies. - Settlement risk is present but will be greatly reduced when the New Zealand dollar becomes eligible for inclusion in the Continuous Linked Settlement (CLS) Bank, currently expected by end-2004. - RBNZ reserves and intervention capability: - The RBNZ maintains limited liquid reserves (approximately $NZ 4.3 billion). - The RBNZ has the technical capability to intervene in foreign exchange markets, although it has not intervened since 1985. - The RBNZ recently recommended to the Minister of Finance that the RBNZ should have the capacity to intervene to influence the level of the exchange rate when the rate was “exceptionally and unjustifiably” high or low. ### Money and bond markets: composition and liquidity - Money market composition: - Instruments: treasury bills, bank bills, and commercial paper; derivatives include bank bill futures, interest rate swaps and options, and forward-rate agreements. - Secondary markets exist for most instruments; bank bills and their futures are the most liquid. - Secondary markets for treasury bills and commercial paper are much less liquid because investors tend to hold these instruments until maturity. - Trading activity is dominated by five or six major banks and three brokers. - Government bond market: - Government bonds outstanding: around $NZ 21.8 billion. - Daily turnover in the secondary market around $NZ 3 billion, mostly in repo transactions. - Bonds are issued through the New Zealand Debt Management Office, with the RBNZ acting as agent. - There are about 10 active bidders in regular tenders, held approximately 12 times a year. - In the secondary market, there are seven price makers and three active brokers. - Corporate bonds and Eurokiwi: - Corporate bonds outstanding: around $NZ 7.2 billion for approximately 30 issuers, mostly with maturities of three to seven years; most issues are illiquid. - Eurokiwi bonds outstanding: presently around $NZ 11.9 billion; denominated in NZD and offered by offshore entities to investors outside of New Zealand. ### Systemic liquidity provision and central bank facilities - RBNZ operations and facilities: - The RBNZ conducts daily open market operations (OMO), including foreign exchange swaps. - A range of standing facilities exists in the context of the overnight interest rate target (the Official Cash Rate or OCR). - Interbank market functioning: - The interbank market for overnight funds appears to function well; most banks meet liquidity needs via secured and unsecured lending or daily injection of funds through OMO. - Market frictions occur when imbalances in holdings of government bonds arise (e.g., one bank accumulating a large position in cash or government securities). - In such circumstances, banks prefer to pay a penalty rate (of 25 or 30 basis points above the OCR) to the RBNZ for use of its standing facilities. - This preference avoids paying banks holding surplus liquidity a rate at or above the OCR when secured with government securities and departs from the market convention of settling transactions at the OCR rate. - RBNZ monitoring and LoLR capacity: - The RBNZ collects information on a daily basis on interbank lending positions and monitors payment system transactions for signs of settlement difficulties. - The market does not always clear because of stickiness in the price, raising issues about market reaction to disruptions. - The standing facilities provide a mechanism for banks to acquire liquidity from the central bank in the event of market frictions. - The RBNZ has adequate powers under the Reserve Bank Act to provide lender-of-last-resort (LoLR) facilities, but since the 1989 revision of the Act, the RBNZ has not provided emergency liquidity support to any institution. - The RBNZ is reviewing internal policies relating to LoLR facilities as part of efforts to formalize crisis management approaches. - Payment system assessment note: - The mission did not undertake an assessment of the payment system. The RBNZ provided a detailed self-assessment of the Core Principles for Systemically Important Payment Systems, which did not indicate any major deficiencies. ### Medium-term and structural issues: regulatory information, crisis frameworks, and external linkages - Broad need: - Ongoing changes in the financial sector landscape and ownership patterns imply a need to reinvigorate the regulatory and operating framework. - Adaptations may be required in: information available to the RBNZ and other regulators; crisis management arrangements; and explicit acknowledgement of increased financial interdependence with Australia and other financial centers. ### Banking supervision: disclosure, supervisory checks, and director roles - Disclosure and market discipline: - New Zealand led in disclosure when first introduced and achieved a high degree of financial sector stability. - International best practices for disclosure have evolved and in some instances surpassed practices in New Zealand. - Quarterly disclosure could be enhanced: - Current quarterly statements are not sufficiently comprehensive or timely for wholesale counterparties or for some supervisory judgments. - It would be appropriate to review the contents of the statements and supplement them with focused, prudential information directly for the supervisor. - The RBNZ might benefit from having its own set of early-warning indicators, including information on individual bank liquidity and large exposures. - Independent supervisory checks: - There are almost no independent supervisory checks on banks’ systems and controls, aside from external auditors’ checks. - The RBNZ might consider commissioning third-party reports and establishing a small specialist team in-house to make focused, on-site visits on particular aspects of credit and operational risk. - Directors and fit-and-proper criteria: - Directors play a critical part; fit-and-proper criteria and vetting processes should be kept under review. - Independent directors might benefit from more regular communication with the RBNZ, perhaps at an annual meeting to review developments and issues. ### Crisis management: LoLR powers, information gaps, and resolution options - Crisis-profile concerns given the regulatory philosophy and foreign ownership: - Key concerns: (i) the ability of the RBNZ to act as an LoLR; (ii) foreign bank branches being systemically important; and (iii) subsidiaries of foreign banks being unable to be economically viable on their own despite legal standing. - Lender-of-last-resort (LoLR) policy and practice: - Under the Reserve Bank Act, the RBNZ is required to act as an LoLR when needed to ensure soundness of the financial system. - The RBNZ has specified it would only provide credit to an institution whose solvency is not in material doubt, after the institution had fully exhausted market sources of liquidity, and where it is necessary to maintain stability of the financial system. - The information the RBNZ would use to independently determine eligibility for LoLR operations has not been formally articulated. - The RBNZ may not have access to sufficiently timely and detailed supervisory data to make a speedy judgment about an institution’s solvency; the RBNZ can request further information from a bank under Section 93, but a response may take significant time. - The present LoLR system relies heavily on directors’ or parent-banks’ attestations as to the solvency of a New Zealand bank operation. - The RBNZ may wish to consider whether additional or more timely information might help it reach a better judgment on solvency in a crisis situation. - Problem bank resolution policies: - The “hands-off” supervisory approach and reliance on disclosure may delay detection of emerging problems, lengthening supervisory response time in a crisis. - Remedial actions are complicated for foreign branches by legal uncertainties about which assets and liabilities would be subject to statutory management control. - For foreign-owned subsidiaries, dependence on the parent bank complicates determination of true condition and can give rise to cross-jurisdictional issues and delays. - All systemically important banks are foreign-owned, making these issues particularly acute. - RBNZ actions under review and options being assessed: - The RBNZ has been reviewing alternative policy options, including a specific open-bank resolution policy based on recapitalization by creditors. - The RBNZ has been conducting feasibility studies and attempting to clarify IT-related and other issues to make such policies operational. - Possible resolution options include: government bail-out; recapitalization with loss sharing between the government and depositors; orderly liquidation; or a “lifeboat” rescue by the banking industry. - The RBNZ’s bank resolution policies are not yet fully defined and warrant further assessment. ### Cooperation with Australia: ownership, outsourcing, and regulatory coordination - Interdependence concerns: - Recent increase in Australian ownership of banking assets has raised awareness of interdependence between New Zealand and Australia’s banking systems. - Specific concerns: (i) loss of control over systems and functions; (ii) effects of Australian depositor protection on New Zealand depositors; and (iii) regulatory harmonization between both countries. - All issues are under review by the RBNZ and actively discussed with Australian counterparts; dialogue may need to be intensified. - In parallel, the RBNZ is working on stand-alone policies regarding local incorporation, director attestations, and outsourcing. - Outsourcing and “hollowing out” of functionality: - Closer integration and foreign ownership have led to increasing outsourcing of IT and management functions to parent companies. - The RBNZ estimates that at least half of the banks operating in New Zealand are no longer operating as separable entities, given account and back-up information may not be readily available on site in New Zealand or in an accessible back-up site. - This situation is not concerning in normal times but would be a serious impediment to RBNZ actions in a systemic crisis. - RBNZ responses and options: - The RBNZ is working with banks to assess where core functions are being located and plans to use the conditions of registration to ensure necessary management skills and back-up sites are available in New Zealand. - Preliminary discussions have taken place with Australian regulators; further contact and a coordinated response to “third-party outsourcing” might be necessary. - The RBNZ might consider increasing its systematic knowledge about the core functionality of New Zealand banks through a targeted audit of banks. *Source: _cr04126 - excerpt.* ### 58. A second concern for the New Zealand authorities relates to the possible effects ### A second concern for the New Zealand authorities relates to the possible effects ### Cross-border depositor-preference and branch/subsidiary risks - The Australian depositor-preference scheme prescribes priority of Australian depositors over assets in Australia in the case of a bank resolution. - Particular concerns: - One systemically important bank operates as a branch of an Australian bank; the parent bank may be able to shift assets easily to Australia. - Interbank-lending operations might allow banks operating as subsidiaries to concentrate assets in the home country to the detriment of New Zealand depositors. - Mitigants and actions: - The connected lending limits imposed by the RBNZ may reduce risks associated with asset shifting. - The RBNZ is discussing the issue with the Australian authorities, but the issue remains. ### Home- and host-country regulatory requirements; Basel II divergence - New Zealand banks are effectively subject to home- and host-country regulations. - Incremental compliance burden from Australian regulators is mainly: - Preparation of quarterly rather than six-monthly disclosure statements. - Other regulatory differences: - Some differences in capital adequacy requirements. - The RBNZ imposes additional requirements concerning connected lending limits. - Potential future issue: - Basel II implementation divergence: New Zealand plans to implement the standardized approach and Australia plans to adopt the internal ratings-based approach. - The extent and possible implications of such reforms should be discussed among regulators before final decisions on new regulation are made. ### Summary assessments — banking sector structure and performance - Assessment context: - The BCP assessment was conducted during October and November 2003 onsite in New Zealand within the framework of the FSAP for New Zealand. - Assessment sources included a comprehensive self-assessment by the New Zealand authorities, RBNZ staff interviews, laws and regulations, interviews with Australian Prudential Regulatory Authority staff, and meetings with bank officers and auditors. - Banking sector at a glance: - 18 registered banks holding assets exceeding $NZ 200 billion (about 160 percent of GDP). - Sector dominated by 5 systemically important institutions, all Australian-owned, holding nearly 90 percent of the sector’s assets and deposits. - Only two smaller banks are New Zealand-owned; one is a newly formed retail bank owned by the New Zealand Post Office which enjoys an explicit guarantee from its parent. - Profitability and capitalization: - Over the last five years, aggregate industry return on assets has exceeded 1½ percent. - After-tax returns on equity have consistently exceeded 20 percent. - Capitalization is above international minimum prudential benchmarks. - Impaired assets are low, comprising only slightly more than 0.5 percent of bank assets. - General and specific provisions cover about three-quarters of total impaired and overdue assets. - Accounting and legal framework: - New Zealand accounting standards are consistent with international best practice. - New Zealand has announced its intention to adopt International Accounting Standards (IAS) with effect from January 1, 2007; scope for early adoption from January 1, 2005. - The RBNZ Act provides a range of powers to address compliance and safety-and-soundness concerns; some crisis-management powers require the consent of the Minister of Finance. - Supervisory philosophy and disclosure: - Supervision is based on disclosure, director attestation, and more frequent external audit requirements. - Banks must publicly report frequently; financial statements must be audited twice annually (mid-year audits limited in scope). - The primary goal of supervision is systemic stability, not depositor protection; there is no official deposit protection scheme. - The RBNZ can act as lender of last resort; the RBNZ Act is not prescriptive on how this responsibility is to be carried out. - The RBNZ is reviewing its crisis management arrangements. ### Basel Core Principles—main findings (selected) - Objectives, Autonomy, Powers, and Resources (CP1): - Framework is sufficiently robust; RBNZ Act specifies sole responsibility for bank registration and supervision. - Formal funding arrangements via five-year agreements negotiated between the Governor and the Minister of Finance. - Licensing and Structure (CPs 2-5): - Clear restrictions on the use of the word “bank,” but deposit taking is not restricted to banks; nonbank deposit takers face much less comprehensive registration requirements. - No laws requiring supervisory approval for acquisitions or investments by registered banks. - Prudential Regulations and Requirements (CPs 6-15): - Explicit rules exist for capital adequacy and connected lending. - Reliance on director attestations and disclosures may leave information gaps for credit (CP 7) and risk management (CPs 12 and 13). - The RBNZ’s role in anti-money laundering (CP 15) needs review. - Methods of Ongoing Supervision (CPs 16-20): - RBNZ does not conduct routine onsite inspections; has Section 95 powers to commission independent onsite reviews but has not regularly used them. - Offsite supervision relies largely on publicly available information; more up-to-date early-warning indicators, including liquidity, would strengthen supervision. - Information Requirements (CP 21): - Quarterly public disclosure of comprehensive financial information is central to RBNZ’s approach. - Formal Powers of Supervisors (CP 22): - A “hierarchy of supervisory response” exists; some crisis-management powers require Minister of Finance approval. - Cross Border Banking (CPs 23-25): - RBNZ is empowered to undertake globally consolidated supervision; banks are supervised on a consolidated basis. ### Recommended Action Plan (selected recommendations) - Powers to Address Safety and Soundness Concerns (CPs 1 and 22): - Finalize a crisis-management strategy. Explore possible forms of cooperation with the Australian authorities, as appropriate. - Permissible Activities (CP 2): - Keep under review the ability of nonbank institutions to accept deposits given potential regulatory arbitrage and reputational risk. - Credit Policies (CP 7): - Consider selective and focused use of Section 95 powers to verify banks’ credit procedures and controls (independent third-party reports or small risk review team); may require amending the Act for routine onsite inspections. - Large Exposures (CP 9): - Consider obtaining more frequent data directly from banks as part of early-warning prudential indicators, which could include liquidity. - Market Risks and Other Risks (CPs 12 and 13): - Supplement information from disclosures and consultations with more comprehensive and current data (as per CP 7 and CP 9 recommendations). - Money Laundering (CP 15): - Review the RBNZ’s role as part of the intergovernmental examination of anti-money laundering measures. - On- and Off-Site Supervision (CP 16): - Complement off-site work by setting up a specialist risk-review team for themed visits and by developing up-to-date early-warning indicators. ### Authorities’ response (RBNZ summary) - The RBNZ believes New Zealand has a strong banking system and a supervision framework suited to its circumstances, characterized by: - Primary supervisory goal of systemic stability rather than depositor or creditor protection. - An explicit duty to pursue efficiency as well as soundness. - Supervisory methods aimed at strengthening incentives for prudent behavior through governance, market discipline, and reliance on directors, auditors, and external reviewers rather than detailed prescriptive rules. - The RBNZ views its approach as appropriate for New Zealand’s context despite differences with other jurisdictions. *Source: _cr04126 - 58.* ### 78. The compliance assessment acknowledges that the New Zealand approach has ### _cr04126 - 78. The compliance assessment acknowledges that the New Zealand approach has ### RBNZ response to compliance assessment (paras 78–80) - The compliance assessment acknowledges genuine strengths in the New Zealand approach, that disclosure provides a discipline on banks, and that attestation requirements are taken seriously by directors, but notes the approach adopted "leaves some potential or actual gaps." (para 78) - RBNZ’s view: - All high-level Basel Core Principles are addressed within the New Zealand framework, but "not always in a conventional manner." (para 79) - Alternative methods used were conscious and considered "generally effective." (para 79) - RBNZ accepts some potential gaps identified by the assessors and either has work underway or plans work to address these gaps. Examples listed: - work on crisis management strategies and capacity; increased co-operation with Australian authorities (already underway); (para 79) - over the coming year: greater use of powers to require banks to undergo independent reports on key matters of prudential interest; review whether policies relating to the role of directors and auditors need to be bolstered; review whether there is a need to supplement disclosure statements with additional reporting to the supervisor; (para 79) - periodic reviews of disclosure requirements to ensure they "continue to reflect global best practice"; further reviews planned. (para 79) - Overall judgment: "the RBNZ remains satisfied that our basic approach to supervision is appropriate for New Zealand’s current circumstances, but we accept that some refinements are needed to ensure that it would continue to be effective in a less benign economic environment." (para 80) ### Transparency of monetary policy — General and main findings (paras 81–93) - Assessment basis: detailed self-assessment by RBNZ; review of RBNZ website documents including Annual Report, Bulletin, Policy Targets Agreement, Monetary Policy Statement, Reserve Bank of New Zealand Act 1989, Agency Agreement, Operational Guidelines; discussions with Bank staff, commercial banks and market participants. (para 81) - Summary finding: "The RBNZ exhibits a high degree of transparency in all aspects of its conduct of monetary policy." (para 82) - Legal and institutional clarity: - Under the Reserve Bank of New Zealand Act 1989, the sole objective of monetary policy is "the achievement and maintenance of stability in the general level of prices." The Policy Targets Agreement (PTA) between the Minister of Finance and the Governor operationalizes this objective; the PTA is public and accessible on the RBNZ website. (para 83) - Other functions listed in the Act include: power to deal in foreign exchange (Section 16); power to temporarily suspend foreign exchange business (Section 22); duty to advise the Minister on foreign exchange matters (Section 23); duty to manage foreign exchange reserves (Section 24); sole right to issue currency in New Zealand (Section 25); power to act as lender of last resort (Section 31); duty to give financial sector policy advice to the Minister (Section 33); power to maintain securities registry services (Section 35); power to register and supervise banks (Section 67 and various sections in Part V). (para 84) - Reporting and publication practices: - Section 15 requires a Monetary Policy Statement at least every six months; RBNZ issues MPS approximately every quarter and includes comprehensive medium-term economic forecasts. (para 86) - Governor and senior staff give seminars and speeches; active public information service including website, Annual Report, Monetary Policy Statements, post-election briefing papers (most recent issued in August 2002), RBNZ Bulletin (quarterly), Discussion Papers, speeches, brochures. (paras 87, 90) - Central bank data comply with SDDS standards in all significant respects; a forward release calendar is disseminated on the Bank’s website for a range of central bank data corresponding to the subset specified by SDDS. (para 88) - A summary statement of financial position is issued on the Bank’s website at a specified date each month; timing of release is publicly disclosed; statement discloses aggregate market transactions and key balance sheet items. (para 89) - Accountability and assurance: - Governor and officials appear before Parliament’s Finance and Expenditure Committee generally "four or five times a year," typically after the release of each Monetary Policy Statement and Annual Report; Committee occasionally conducts fuller enquiries. (para 91) - RBNZ must publish comprehensive financial statements subject to annual external audit; Minister of Finance empowered to engage external reviews as he or she sees fit. (para 92) - Act contains provisions on personal financial conduct, conflicts of interest, legal protection for directors and staff (liability only for exercising powers in bad faith), and provision for Government indemnity for liability arising from exercising powers or omitting to exercise powers conferred by the Act. (para 93) - Recommended actions (summary from Table 2): - Practice 1.2.1: "The details of the terms under which any overdraft is advanced should be disclosed." (Table 2) - Practice 1.2.2: "Disclosure should be made of all relevant details of the amounts and terms of credits, advances or overdrafts provided to central government by the Bank, and the terms and conditions of government deposits with the Bank." (Table 2) - Authorities’ response: "All comments by the authorities have been incorporated and they are in agreement with the assessment." (para 94) ### Transparency of banking supervision — General and main findings (paras 95–103) - Assessment basis: detailed self-assessment by RBNZ; review of RBNZ website documents; discussions with RBNZ staff, commercial banks and market participants. (para 95) - Main findings: - RBNZ is sole authority responsible for registering and supervising banks; no supervisory jurisdiction over other categories of financial institution. The RBNZ Act 1989 sets out functions, powers, accountability and transparency obligations. RBNZ responsibilities disclosed publicly (Annual Report, website, brochures, Bulletin). (para 96) - An MOU between domestic regulatory agencies is being developed and "is expected to be publicly disclosed." RBNZ has publicly referred to nature of financial sector regulatory framework and interagency cooperation; information presented on the RBNZ website. (para 97) - Act requires RBNZ to explain its approach to implementing policy via issuance of a Statement of Principles for bank registration and supervision; RBNZ issues a wide range of material including Annual Report, Bulletin, post-election briefing papers and website publications. (para 98) - RBNZ Board: non-executive directors appointed by the Minister of Finance (including the Governor); Board required to issue an annual report on its assessment of RBNZ’s and Governor’s performance; Board meets periodically with Minister and must report concerns. (para 99) - Public release of supervision documents: Part V of the Act contains relevant powers; the banking supervision handbook contains the Statement of Principles and prudential regulations; Bulletin articles summarize developments. (para 100) - Accountability and assurance: Governor and officials appear before Parliament’s Finance and Expenditure Committee "four or five times a year"; Committee rarely discusses financial stability functions in detail. (para 101) - Financial statements and external audit requirements same as monetary policy section; Minister may engage external reviews as he or she sees fit. (para 102) - Recommended actions (Table 3): - Practices 5.2 and 6.1.5: "Details of the MOU between domestic regulatory agencies should be made public." (Table 3) - Authorities’ response: "All comments by the authorities have been incorporated and they are in agreement with the assessment." (para 103) ### Transparency of securities regulation and supervision — General and main findings (paras 104–109) - Assessment basis: joint self-assessment by the Securities Commission, Takeovers Panel and Registrar of Companies; review of agencies’ websites; discussions with agency staff and market participants. (para 104) - Main findings: - High degree of transparency in the securities regulatory framework, but "the complexities of the oversight regime are not always well explained." Recommendation: each regulator should include on its website a common description of the securities regulatory regime, outlining respective roles, responsibilities and interrelationships, with relevant links across agencies’ sites. Also recommended: legislation should be accessible in its entirety, not only by articles and sections. (para 105) - Roles and legal bases: - Securities Commission (SC), Office of the Registrar of Companies (ROC), and Takeovers Panel (TP) implement securities regulation. Securities Act establishes SC and regulates public offers; Securities Markets Act addresses insider trading, disclosure by public issuers, substantial security holder disclosure, disclosure of dealings by directors and officers, registration of exchanges, dealings in futures contracts; Takeovers Act establishes TP and the Takeovers Code; Companies Act sets rules on incorporation and administration and establishes ROC. (para 106) - Appointment and removal procedures specified in relevant legislation; for ROC, terms limits and criteria for removal exist only insofar as ROC falls within the State Sector Act and there are no detailed specifications for ROC officials. (para 107) - Relationships and coordination: - Elements of SC–NZX relationship publicly disclosed; MOUs in force between SC and NZX and between SC and TP are made available to the public. SC, ROC and RBNZ meet quarterly as the Financial Regulators’ Coordination Group (membership listed). An MOU between domestic regulatory agencies is being developed and "is expected to be in place before the end of 2004, at which point it will be publicly disclosed." (para 107) - Open processes and publication: - SC empowered to publish reports or comments and makes extensive use of this power; Official Information Act applies at the end of inquiries; Ombudsman acts as appeal authority; SC issues policy and practice guidance on its website and in its quarterly bulletin. (para 108) - TP is subject to the Official Information Act; must give and publish reasons for exemptions (subject to commercial confidentiality deferral); transparency required in inspection and inquiry work; TP policies for administering key sections of the Code are published; Panel discloses regulatory framework and operating procedures via website, press releases, annual report and Code Word; decisions and reasons are widely publicized within a legally specified timeframe. (para 109) *Source: Excerpts from the IMF staff report annex assessing observance of the IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies (Reserve Bank of New Zealand self-assessment and authorities’ responses).* ### 110. Financial policies affecting securities regulation are subject to extensive prior ### _cr04126 - 110. Financial policies affecting securities regulation are subject to extensive prior ### Consultation, publication, and public availability (paras. 110–111) - Financial policies affecting securities regulation are subject to extensive prior consultation with affected parties, whether contained in statutory regulations, financial reporting standards, exchange rules or policy statements of a financial agency (para. 110). - Agencies are required to act independently in formulating new policies, as expressed in the Output Agreement with the Minister of Commerce (para. 110). - Policy changes are published and subject to notice and comment requirements (para. 110). - The TP and SC maintain active programs of communication with the investment community and the general public, including annual reports and quarterly bulletins (para. 111). - The SC uses its extensive powers of comment to report on the application of the law (para. 111). - The RC, through the Companies Office, publishes an annual report detailing the activities of the Companies Office (para. 111). - Government agencies report extensively on their financial and service performance and significant regulatory action taken in their annual reports (para. 111). ### Accountability, oversight, and governance (paras. 112–113) - Officials of all Crown entities are required, when asked, to appear before the responsible Parliamentary Committee; requests commonly relate to annual budget or annual report but can cover policies, objectives, activities, performance, quality of regulation and state of the markets (para. 112). - Select Committees have powers to obtain information, and to request and require attendance of persons (para. 112). - The ROC, TP, SC must all prepare financial statements that comply with GAAP and which are audited by independent auditors (para. 113). - The Auditor-General is required to audit the financial statements prepared by the SC and TP and must express an independent opinion on the financial statements and report that opinion to the public (para. 113). - The Commission’s annual report must be presented to the House of Representatives (para. 113). - Internal governance procedures and conflict of interest guidelines are described in the establishment laws and annual reports; legal protections for members and staff of SC and TP are stated in the establishment laws and protect from liability those persons exercising powers of inspection under the Act (para. 113). ### Summary assessment context and market developments (paras. 115–117) - Assessment based on authorities’ self-assessment; review of laws, procedures, public information concerning authorities, NZX and NZFOE; and interviews. Methodology used: Methodology for Assessing Implementation of the IOSCO Objectives and Principles of Securities Regulation adopted by IOSCO in October 2003 (para. 115). - NZX demutualized in late 2002, self-listed in 2003, and launched a new, regulated market targeted at developing and non-traditional enterprises (para. 116). - SFE Corporation (SFE) will transfer trading in NZFOE products to Australia in 2004 and has entered into a deal with NZX for trading on SFE of products based on NZX-listed securities (para. 116). - The SC is the principal statutory regulator, while the TP and RC have more narrowly defined roles; MED involved in policy development; NZX exercises self-regulatory functions (para. 117). ### Main findings—summary (paras. 118–129) - Recent reforms and NZX’s restructuring have strengthened the securities regulatory framework; additional reforms are needed to fully implement the IOSCO Principles and authorities have committed to introduce them (para. 118). - Principles Relating to the Regulator (1–5): - Regulatory scheme complex but functions and powers transparently set out in legislation and publications. - Structures exist to ensure procedural fairness and accountability; SC and TP are operationally independent; RC expected to exercise decision-making powers independently. - Regulators do not have adequate powers to fully implement all IOSCO Principles but generally fulfill existing mandates; Government willing to provide requested funding (para. 119). - Principles of Self-Regulation (6–7): - System places substantial reliance on SRO-type functions performed by exchanges. - Since demutualization, NZX management has been investing more in regulatory functions. - SC and Minister assess exchange willingness and legal capacity to carry out SRO functions but do not assess adequacy of resources or operators’ integrity and fitness; no formal oversight plan for NZX (para. 120). - Principles for Enforcement (8–10): - SC, TP, and NZX have very broad inspection, investigation and surveillance powers and a relatively wide and flexible range of enforcement tools; regulators have shown willingness to respond promptly (para. 121). - Principles for Cooperation (11–13): - SC can share information with other domestic authorities without external approval; various information-sharing agreements exist or are being executed. - SC signed the IOSCO Multilateral Memorandum of Understanding in October 2003 (para. 122). - Principles for Issuers (14–17): - Comprehensive disclosure requirements for public issuers’ offer documents; RC reviews offer documents and NZX reviews NZX-listed companies. - SC can prevent misleading offerings from continuing; Government funded SC to develop criteria for risk-based reviews and intends to introduce legislation in 2004 to enhance enforcement of disclosure standards for offerings. - Continuous disclosure for listed companies is sufficient and timely; unlisted issuers required to report financial results only once a year and do not have to submit audited annual financial statements to the RC until almost six months after year-end (para. 123). - Accounting and auditing: - Accounting standards are of a high and internationally acceptable quality; ASRB recommended adoption of International Financial Reporting Standards commencing in January 2007 (para. 124). - ICANZ develops and enforces auditing standards; ICANZ interpretation processes lack oversight by a regulator acting in the public interest (para. 124). - Collective Investment Schemes (17–20): - Marketing of CIS subject to comprehensive disclosure; CIS must file audited annual financial statements; trust law framework applies. - Significant variations in investor protections across schemes; no program for ongoing regulatory oversight of CIS operators though SC exercises inspection and enforcement powers as needed (para. 125). - Market Intermediaries (21–24): - Firms and brokers in regulated markets subject to comprehensive entry standards assessed by relevant exchange; NZX implemented pro-active compliance program for NZX firms. - Most other market intermediaries subject to few entry standards or ongoing standards of conduct and lack regular supervisory oversight; securities law reform commencing in 2004 expected to involve comprehensive review (para. 126). - Secondary Markets (25–29): - A market cannot hold itself out as a securities exchange (or futures exchange) unless it obtains registration from the Minister or SC; otherwise markets can operate without registration unless required to register or cease. - Registration process does not assess market operator’s competence, sufficiency of resources or integrity; SC has broad powers to inquire into regulated and unregulated markets (para. 127). - Market misconduct and criminalization: - Securities legislation does not expressly prohibit market manipulation, dissemination of misleading information (except in respect of offers) or front running, and provides only for a civil cause of action and a civil penalty for insider trading. - NZX and NZFOE have rules prohibiting illegal, manipulative and deceptive conduct and systems to detect such conduct; Government intends to introduce legislation in 2004 providing for reform of securities trading law, including establishment of criminal and civil penalties for these activities (para. 128). - Market risk and continuity: - NZX has procedures to monitor and address large exposures, default risk and market disruption; formal and informal arrangements exist to share information domestically and with overseas authorities on large exposures (para. 129). ### Recommended Action Plan (Table 5—selected recommendations) - Principles 7, 8, 25 and 26: - Amend legislation to include comprehensive, high level entry and ongoing standards for regulated exchanges' integrity, competence, financial capacity, internal controls, powers and duties. - The SC should develop a formalized oversight plan for regulated exchanges. - Amend legislation to enable the SC or the Minister to require a registered exchange to amend any or all of its conduct rules. - The NZX should adopt a broader definition of "independence" (applicable to individuals constituting the Special Division of its disciplinary body), or transfer disciplinary functions in respect of NZX to an independent body, such as the SC. - Principle 9: - Implement the reforms in the remedies and penalties section of the Cabinet Paper, Investment Advisers. - Principle 14: - Devote more resources to review of disclosure documents to enable comprehensive, risk-based reviews of issuers’ disclosure records. - Require NZX-listed companies to notify NZX (in confidence) when they rely on the exemption to make timely disclosure of material developments to enable spot-checking. - Amend the Financial Reporting Act to provide for more timely disclosure of annual financial information by unlisted public issuers. - Principle 15 (and 9): - Amend companies legislation to supplement existing self-help remedies. - Amend securities legislation to require substantial security holders, directors and officers to file notices of transactions in a central, public, easily accessible electronic register. - Principle 16: - ICANZ’s interpretation process should be overseen by a regulator or other body acting in the public interest. - Amend the NZX Listing Rules to require immediate disclosure of the resignation, removal or replacement of an external auditor. - Principles 17–20: - Amend securities legislation to provide for: (1) greater oversight of contributory mortgage brokers; (2) high level entry and ongoing standards concerning CIS operators' honesty and integrity, competence, financial capacity, internal controls, powers and duties; (3) general conflict of interest standards for CIS operators and their trustees or supervisors; (4) minimum standards for CIS operators to provide periodic and timely reports to trustees or supervisors (or to the appropriate regulator); (5) minimum requirements for trustees or statutory supervisors to conduct periodic inspections of CIS operators and make timely reports to the SC of any material contraventions by CIS operators. - Principles 21–24: - Enact legislation providing for more comprehensive oversight of market intermediaries that: (1) requires minimum entry standards relating to integrity, financial capacity, competence, operational capability, internal controls; (2) requires periodic reports to the regulator or SRO; and (3) enables the regulator to take effective enforcement action if these standards are not met. - Principle 24: - Securities regulators and SROs should develop a comprehensive crisis management plan for dealing with the potential failure of market intermediaries. - Principles 27–29: - Amend securities legislation to specify high level standards for regulated exchanges' trading systems and rules with respect to trade transparency, unfair trading practices, management of large exposures, default risk and market disruption. - Principles 28 (and 9): - Implement the Government’s proposed reforms to the securities trading law. ### Authorities’ response (paras. 114, 130–133) - The relevant agencies provided comments that have been incorporated and are in agreement with the overall assessment (para. 114). - The New Zealand authorities consider the FSAP mission’s findings and recommendations helpful and note that, in many areas, work is already underway to improve observance of the IOSCO Principles (para. 130). - Authorities endorse forthcoming law reforms introducing comprehensive prohibitions on market manipulation, insider trading and enhanced penalties and enforcement powers, and will consider the technical recommendations (para. 131). - Authorities will consider recommendations regarding regulatory oversight of market intermediaries and collective investment schemes in proposed legislative reviews (para. 131). - Authorities consider that the broad public interest test in current legislation provides flexibility for considering exchange rules and prefer it to a prescriptive approach, in response to recommendation to specify standards for exchange rules (para. 132). - The Securities Commission has decided to develop a formal oversight plan for regulated exchanges in the year of the report, has informed NZX, and expects to report on its oversight actions; details are most likely to be published once settled (para. 133). *Source: Excerpt from IMF FSAP assessment document (paras. 110–133).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04126.pdf_