Cash system participants and the wider public are being
asked for their views about the Reserve Bank of New Zealand taking a more
active role in the cash system.
A consultation paper has been released today as part of the
Bank’s ongoing Future of Cash – Te Moni Anamata programme which is considering
the implications for New Zealanders of falling cash use for every-day
transactions, including the impacts on the system that supplies, moves and
stores it.
Assistant Governor Christian Hawkesby says the Reserve Bank
is just one cog in a cash system machine which includes the banking system,
armoured truck companies, retailers, and independent ATM providers. “We see
roles for all parts of the system – along with interest groups, whānau and
individuals – in ensuring people who want or need to access or use cash can do
so.”
The consultation paper proposes that the Reserve Bank take
on a stewardship role in the cash system, providing system-wide oversight and
coordination. It also proposes two tools which, though not currently required,
may be needed in the future to respond flexibly to changes in the cash industry
and the evolving needs of the public:
The Reserve Bank be given the power to set standards for machines that process and dispense cash.
The Reserve Bank Act set out regulation-making powers that enable the government and the Reserve Bank to require banks to provide access to cash deposits and withdrawals.
“These proposals are not the complete answer, but they would
help create a foundation for the Reserve Bank to be more than the issuer of
notes and coins when it comes to how we use cash which is an important
component of our social and economic activity,” Mr Hawkesby says.
Mr Hawkesby says the Reserve Bank is grateful to the large
numbers of individuals, groups, banks and other cash system providers, business
and community organisations, and public sector agencies who are participating
in the Future of Cash programme and sharing their views.
“Nearly 2400 individuals and groups gave feedback on our
earlier issues paper discussing the potential impacts from a fall in cash use,
particularly for people who are already financially or digitally excluded for
whatever reasons. Meanwhile 3100 people randomly selected from the electoral
roll have responded to a scientific survey updating our understanding of how New
Zealanders are using cash and how this use is changing. We expect to publish
results from both these efforts in November, and these will also feed into
final recommendations in respect of the proposals released today.
”The changes in our latest consultation document would have
significant consequences for all participants in the cash system. Banks,
cash-in-transit providers, independent ATM operators, and the broader retail
sector would likely be particularly affected. We want to continue to hear views
and feedback from everyone about the purpose and desired attributes for the
mechanics of the cash system, and how we could collectively improve it,” says
Mr Hawkesby.
The paper is published on the The Future of the Cash System – Te Pūnaha Moni Anamata page, and feedback closes on 6 November 2019.
The Official Cash Rate (OCR) remains at 1.0 percent. The Monetary Policy Committee agreed that new information since the August Monetary Policy Statement did not warrant a significant change to the monetary policy outlook.
Employment is around its
maximum sustainable level, and inflation remains within our target range but
below the 2 percent mid-point.
Global trade and other
political tensions remain elevated and continue to subdue the global growth
outlook, dampening demand for New Zealand’s goods and services. Business
confidence remains low in New Zealand, partly reflecting policy uncertainty and
low profitability in some sectors, and is impacting investment decisions.
Global long-term interest
rates remain near historically low levels, consistent with low expected
inflation and growth rates into the future. Consequently, New Zealand interest
rates can be expected to be low for longer.
The reduction in the OCR
this year has reduced retail lending rates for households and businesses, and
eased the New Zealand dollar exchange rate.
Low interest rates and
increased government spending are expected to support a pick-up in domestic
demand over the coming year. Household spending and construction activity are
supported by low interest rates, while the incentive for businesses to invest
will grow in response to demand pressures.
Keeping the OCR at low
levels is needed to ensure inflation increases to the mid-point of the target
range, and employment remains around its maximum sustainable level. There
remains scope for more fiscal and monetary stimulus, if necessary, to support
the economy and maintain our inflation and employment objectives.
Summary record of
meeting
The Monetary Policy
Committee agreed the new information since the August Monetary Policy Statement
did not warrant a significant change to the monetary policy outlook.
The Committee noted that
employment remains close to its maximum sustainable level but consumer price
inflation remains below the 2 percent target mid-point.
The Committee members
discussed the initial impacts of reducing the OCR to 1.0 percent in August.
They were pleased to see retail lending interest rates decline, along with a
depreciation of the exchange rate.
The members anticipated a
positive impulse to economic activity over the coming year from monetary and
fiscal stimulus. The members noted that there remains scope for more fiscal and
monetary stimulus if necessary, to support the economy and our inflation and
employment objectives.
The Committee noted that,
while GDP growth had slowed over the first half of 2019, impetus to domestic
demand is expected to increase. Household spending and construction activity
are supported by low interest rates, while business investment should lift in
response to demand pressures.
The Committee expected
increasing demand to keep employment near its maximum sustainable level. Rising
capacity pressures and increasing import costs, higher wages, and pressure on
margins are expected to lift inflation gradually to 2 percent.
The Committee discussed the
long and variable lags between monetary policy decisions and outcomes.
The members noted several
key uncertainties affecting the outlook for monetary policy, where there was a
range of possible outcomes.
Global trade and other geopolitical
tensions remain elevated and continue to subdue the global growth outlook,
dampening demand for New Zealand’s goods and services.
Business confidence remains
low in New Zealand, partly reflecting policy uncertainty and low profitability
in some sectors, and is affecting investment decisions.
Fiscal policy is expected to
lift domestic demand over the coming year. However, any increase in government
spending could be delayed or it could have a smaller impact on domestic demand
than assumed.
Some members noted that
ongoing low inflation could cause inflation expectations to fall. Others noted
that this risk was balanced by the potential for rising labour and import costs
to pass through to inflation more substantially over the medium term.
The Committee discussed the
secondary objectives from the remit and remained comfortable with the monetary
policy stance.
The Committee agreed that
developments since the August Statement had not significantly changed the
outlook for monetary policy. They reached a consensus to keep the OCR at 1.0
percent and that, if necessary, there remains scope for more fiscal and
monetary stimulus.
The New Zealand Reserve Bank will be reporting material breaches from banks on its website from next year, in an effort to improve transparency and market discipline.
The decision follows a public consultation on the matter late last year, and ongoing discussion with stakeholders on a new framework for the reporting of banks’ breaches. The Reserve Bank today published a summary of submissions and final policy decisions on the reporting and publication of breaches by banks.
The new policy will require a bank to report promptly to the Reserve Bank when there is a breach or possible breach of a requirement in a material manner, and report all minor breaches every six months. Only actual material breaches will then be published on the Reserve Bank’s website.
“The policy aims to enhance market discipline by ensuring prompt breach reporting and publication, and by making it easier to find and compare information about banks’ compliance history,” says Geoff Bascand, Deputy Governor and General Manager Financial Stability. “It also encourages bank directors to focus on materially significant issues and the management of key risks rather than concern themselves with relatively minor issues.
“We will be further discussing the implementation of this policy directly with banks, and at this stage we expect it will take effect from 1 January 2020,” Mr Bascand says.
We look at the future of cash in the light of the emergence of a global digital currency, and the paper released for discussion by the Reserve Bank of New Zealand.
The New Zealand Central Bank is steering a path quite different from the RBA with a move to lift bank capital to much higher levels, in the interests of protecting households and businesses in New Zealand.
The costs, they say, are worth the benefits! Indeed the recent IMF report on NZ endorsed their approach.
Australian Banks operating in New Zealand are resisting according to the AFR – “Australia’s banks would have to raise at least $NZ20 billion ($19.1 billion) to satisfy New Zealand capital requirements, leading the big four to threaten a rethink of their business models if the proposals get the green light”.
But of course banks in Australia need higher capital buffers despite what the local regulators may say. NZ is on the better path.
As part of this journey, the New Zealand Reserve Bank released submissions along with a Summary of Submissions (PDF 399 KB) on the latest consultation paper in its Capital Review, which proposes several measures to ensure a safer banking system for New Zealanders.
There was significant and wide-ranging media and public interest in the How much capital is enough? (PDF 545 KB)paper, with written feedback from 161 submitters. Feedback has also been received from analysts and other interested parties who did not make a formal submission.
“The Reserve Bank welcomes the large number of submissions on this consultation, as well as the effort and consideration that has gone into them,” Deputy Governor Geoff Bascand says. “We believe this shows how important this issue is for everyone, and we are pleased that a broader set of stakeholders has taken an interest in the Capital Review.”
In general, submitters support the Reserve Bank’s objective to ensure that New Zealand’s financial system is safe, acknowledging the economic and well-being impacts of banking crises. Many submitters, particularly from the general public, support the proposed higher capital requirements for banks. A number of submitters observe that higher capital requirements could lead to higher borrowing costs for New Zealanders. Some submitters, in particular banks and business groups, question whether the proposed increases are too large and too costly.
Central to the measures proposed in the consultation paper are increases in regulatory capital buffers for locally incorporated banks. The changes include requiring bank shareholders to increase their stake so that they absorb a greater share of losses should their bank fail, improving the quality of capital, and ensuring banks more accurately measure their risk.
Increasing the amount and quality of capital can be reasonably expected to mean that banks can survive all but the most exceptional shocks, Mr Bascand says. “We think the costs of doing so are outweighed by the benefits – someone’s cost is for society’s broader benefit.”
The Reserve Bank is also consulting on changes to the quality of capital, constraints on modelling capital requirements, and the implementation timeline.
It is continuing its stakeholder outreach programme, which includes conducting focus groups to understand the public’s risk appetite, and engagement with iwi, social sector and industry groups, financial institutions and investors. It has also engaged three external experts for an independent review of its proposals.
“The submissions on the proposals are just one part of the review,” Mr Bascand says. “All these inputs will help us to make robust and well-calibrated policies and decisions that best represent society’s interests.”
In this context, Mr Bascand welcomed reports by two key international financial institutions and a major rating agency last week that support the proposals to increase bank capital ratios.
Following its recent mission to New Zealand, the International Monetary Fund has released a Concluding Statement that highlights the need for strengthening bank capital levels and that the proposals appear commensurate with the systemic financial risks facing New Zealand. The Organisation for Economic Co-operation and Development’s latest Economic Survey of New Zealand expects increases in capital will likely have net benefits for New Zealand. And Standard and Poor’s says that the proposals should not have material impacts on overall credit availability.
The Capital Review began more than two years ago, when the Reserve Bank published an issues paper and opened the first of four public consultations. It will publish its response to the submissions alongside final decisions, expected in November 2019.
Implementation of any new rules will start from April next year. There will be a transition period of a number of years before banks are required to meet the new requirements
In the Phase 2 document released today, Deposit Insurance, funded by a bank levy is proposed. Unlike the Australian $250k scheme (which is not activated until the Government says so, and is taxpayer funded initially), the NZ scheme is for a lower amount with a protection limit in the range of $30,000 – $50,000. Implementation will probably take at least two years.
One question so far not answered is the interaction with the deposit bail-in. Generally bail-in stops a failing bank from failing, whereas deposit guarantees are activated on failure. So bail-in might stop deposit guarantees even being called on…
Depositor Protection
Why is a range of $30,000 – $50,000 for the proposed depositor protection scheme proposed?
Available data suggests that a protection limit in the range of
$30,000 – $50,000 could fully protect from loss more than 90 percent of
individual bank depositors in New Zealand, while leaving the majority of
banks’ deposit funding exposed to risk. This would strike the right
balance between protecting small depositors from loss and enhancing
public confidence in the banking system on the one hand, while
maintaining private incentives to monitor bank risk taking on the other.
It would also be broadly consistent with international schemes in terms
of the share of deposits and depositors that would be fully protected
(albeit relatively low in terms of the absolute dollar value of
protections).
More work will be required to choose the limit within this range that
is the best for advancing the public policy objectives chosen for the
protection scheme. The consultation seeks feedback on these choices.
The Reserve Bank is proposing high capital requirements for
banks which should reduce the risk of bank failure. Why is depositor
protection required if the risk of bank failure is small?
Even with high capital requirements, banks can still fail for a
variety of reasons. Regulation, supervision, resolution, and deposit
protection all make up a ‘financial safety net’ that supports a stable
and resilient financial system and protects society from the damage
caused by bank failures. The safety net tools interact and overlap,
which can make it seem that not all of the tools are necessary. However,
if the safety net is incomplete, it will be difficult to find effective
solutions for dealing with serious problems in the banking system. This
means that capital tools that help to keep banks safe and sound at the
‘top of the cliff’, must be complemented by robust tools to deal with
banks that may still fall to the bottom.
The OECD and IMF have warned that, without depositor protection, New
Zealand is vulnerable to contagious bank runs. Bank runs can escalate
into banking crises that destroy social and financial capital. For New
Zealand’s safety net to be effective in good times and bad, the tools
within the net must each be strong in its own right, and work well
together.
How will the risks associated with moral hazard be addressed in the proposed depositor protection scheme?
Moral hazard arises when people are protected from the consequences
of their risky behaviour. If deposit protection is introduced,
depositors may take less care when assessing the risks associated with
their banks, and banks may take less care with depositors’ money. Moral
hazard costs are part of the reason why New Zealand has until now chosen
not to have a depositor protection regime.
There is considerable international experience on how to design an
effective deposit protection scheme, within the broader financial safety
net, that mitigates moral hazard. International experience demonstrates
that strong regulatory monitoring of deposit-takers’ corporate
governance and risk management systems goes a long way to addressing the
moral hazard of depositor protection. Maintaining private monitoring
incentives is also important, and can be achieved through carefully
calibrating the protection scheme’s scope of coverage. For example,
setting the protection limit at a level that fully covers most household
and small business depositors, but leaves large institutional
depositors exposed to risk, will support private monitoring incentives.
In conjunction, having effective resolution tools (that make it more
credible investors’ money is at risk should their institution fail) can
sharpen monitoring by institutional investors.
International practice and guidance, as well as the views of experts
and the public, will inform the design of New Zealand’s depositor
protection scheme.
What are the costs of funding the proposed depositor protection scheme and who will bear these costs?
A primary tool of the protection scheme will be insurance. Deposit
insurance transfers the risks and costs of bank failures away from
depositors onto an insurance scheme. This will come with upfront costs
of establishing a deposit insurer, and ongoing operational costs.
Modern deposit insurance schemes are normally funded by levies on
member banks, supported (where necessary) by temporary lending paid for
by taxpayers. If the insurance scheme is accompanied by a depositor
preference, this might also increase banks’ non-deposit funding costs as
risks are transferred from depositors onto institutional investors.
Details of the scheme, including costs, are still to be worked out in
the next phase of the work programme. To the extent that depositor
protection increases banks’ average costs, this might be passed on to
customers through higher mortgage rates or lower deposit rates.
Alternatively, costs might be absorbed by banks’ own margins and
retained earnings. The extent to which costs are shared between banks
and their customers depends on competition and contestability in the
sector.
A fuller cost-benefit analysis will follow as we learn more about the
specific design features of New Zealand’s depositor protection scheme.
When will the depositor protection scheme be introduced?
A work programme running alongside the Reserve Bank Review process
will develop a depositor protection scheme that is best for New Zealand.
The work programme will be guided by a framework setting out some key
design principles for an effective scheme, and will draw (where
relevant) on international standards and best practice. The work
programme will determine the:
mandates and powers
governance and decision making structure
coordination arrangements with other safety net providers
membership and coverage arrangements
funding and pay-out mechanics, and
design features to mitigate moral hazard
that are appropriate for New Zealand’s protection scheme. The Review
Team’s discussions with the global coordinating body for deposit
insurers indicates that the path from policy recommendations to scheme
implementation will probably take at least two years.
The New Zealand Reserve Bank is requesting two reports from ANZ New Zealand to provide assurance it is operating in a prudent manner.
They say, that section 95 of the Reserve Bank of New Zealand Act 1989 gives the Reserve Bank the power to require a bank to provide a report by a Reserve Bank-approved, independent person. These reviews can investigate such issues as risk management, corporate or financial matters, and operational systems.
The first report will cover ANZ New Zealand’s
compliance with the Reserve Bank’s current and historic capital adequacy
requirements.
The second report will assess the
effectiveness of ANZ New Zealand’s Director’s Attestation and Assurance
framework, focussing on internal governance, risk management and internal
controls.
Reserve Bank Governor Adrian Orr said ANZ
remains sound and well capitalised.
“We continue to engage constructively with
ANZ New Zealand’s board, and they remain focussed on these important issues.
These formal reviews will allow us to work with the bank to ensure the public,
and we as regulator, can have continued confidence in the bank and that it is
operating in a prudent manner.”
“Section 95 reports are part of our
supervisory toolkit and provide independent assurance and insight about banks’
systems and practices. We have used them effectively in the past, and we will
continue to do so.”
The
Reserve Bank has revoked ANZ Bank New Zealand Limited’s (ANZ) accreditation to
model its own operational risk capital requirement due to a persistent failure
in its controls and attestation process.
ANZ
is now required to use the standardised approach for calculating appropriate
operational risk capital. From March 2019, this will increase its minimum
capital held for operational risk by around 60%, to $760 million.
The
Reserve Bank requires banks to maintain a minimum amount of capital, which is
determined relative to the risk of each bank’s business. The way that risk is
measured is important for ensuring that each bank has an appropriate level of
capital to absorb large and unexpected losses.
“Accreditation
is earned through maintaining high risk management standards, and comes with
stringent responsibilities for the bank’s directors and management,” says
Deputy Governor Geoff Bascand.
“The
Reserve Bank’s role is to review and approve internal models. The onus is then
on bank directors to ensure, and attest, that their bank is compliant with the
Reserve Bank’s regulatory requirements. To do that, bank directors need to be
satisfied that the internal assurance processes that sit behind the
attestations are being adhered to.
“ANZ’s
directors have attested to compliance despite the approved model not being used
since 2014. The fact that this issue was not identified for so long highlights
a persistent weakness with ANZ’s assurance process.”
The
Reserve Bank had encouraged ANZ to undertake a full review of its attestation
process, and assess its compliance with capital regulations, Mr Bascand
says. ANZ’s failure to use an approved model was revealed through that
review.
“A
bank’s disclosure statement is required to contain certain statements signed by
each director of the bank. These must state, among other things: whether the
bank has systems in place to monitor and control adequately the banking group’s
material risks and whether those systems are being properly applied; and
whether the bank has complied with its conditions of registration over the period
covered by the disclosure statement.
“These
directors’ attestations are important because they strengthen the incentives
for directors to oversee, and take ultimate responsibility for, the sound
management of their bank.
“We
continue to work with ANZ in assessing its systems controls before determining
any further action.”
ANZ
is one of four big banks in New Zealand that are accredited by the Reserve Bank
to use their own risk models – the internal models approach – in calculating
their regulatory capital requirements.
The
Reserve Bank is currently consulting on its capital framework for banks. Among
the many decisions to be made, and in part due to proven weaknesses with the
internal models approach, it is proposing that all banks adopt a new
standardised approach for calculating operational risk capital.
Note to editors:
Attestation
regime
A
bank’s disclosure statement is required to contain certain statements signed by
each director of the bank. These must state, among other things: whether the
bank has systems in place to monitor and control adequately the banking group’s
material risks and whether those systems are being properly applied; and
whether the bank has complied with its conditions of registration over the
period covered by the disclosure statement.
These
directors’ attestations are important because they strengthen the incentives
for directors to oversee, and take ultimate responsibility for, the sound
management of their bank.
What are
capital requirements?
Bank
capital is a source of funding that banks use that stand first in line to
absorb financial losses they might make. The Reserve Bank, like other
regulators around the world, sets the minimum level of capital a bank must use
to fund its operations. The more capital a bank has, the less likely it is to
fail.
There
are three broad types of risks that banks are required to have capital for:
Credit risk – the risk that
borrowers will be unable to pay back their loans
Market risk – the risk that
a change in market conditions, such as changes in the exchange rate, will cause
losses for banks
Operational risk – other risks
that relate largely to the systems of a bank, such as a computer systems
failure
What is
internal modelling?
Locally
incorporated banks in New Zealand can calculate their capital requirements in
two ways: the internal models approach or the standardised approach.
Under
the internal models approach a bank is able to use statistical models to assess
the riskiness of its business such as the risk of its mortgage loans, or its
level of operational risk. The bank’s internal models need to be approved by
the Reserve Bank to ensure they are conservatively designed. Banks also need to
meet several qualitative criteria to use this approach, such as proper
governance and validation of these internal models. The banks in New Zealand
that are accredited to use the internal models approach are ANZ, ASB, BNZ, and
Westpac.
Under
the standardised approach, the amount of capital that is required is prescribed
in a set of formulae by the Reserve Bank. This approach is simpler for
banks to use than the internal models approach and easier to implement.
What is an
operational risk model?
Operational risk capital requirements are designed to
provide banks with sufficient capacity to absorb a wide range and magnitude of
operational risk-related losses (from, for example: inadequate or failed
internal processes, people or systems; or from external events, including legal
risks). Underestimation of the amount of operational risk capital that a bank
needs can undermine a bank’s financial soundness and could make it more likely
to fail.
What is the
Capital Review?
The Capital Review is a review of the capital
requirements that the Reserve Bank sets for locally incorporated banks. It
seeks to address several questions about New Zealand’s current framework: What
should New Zealand’s risk tolerance be for banking crises? Do banks have sufficient
levels of capital? What should the quality of capital be in New Zealand? Should
we allow internal modelling for capital requirements? Should there be a
significant difference between internal modelling and standardised approaches?
As part of its current Capital Review, the Reserve
Bank is reviewing its capital framework for banks. Due in part to proven
weaknesses with the internal models approach and in line with moves by other
supervisor banks around the world, the review proposes that all banks adopt a
new standardised approach for calculating operational risk capital.
