While no monetary agency or central bank authority can protect people from failures, the Reserve Bank of New Zealand (RBNZ) remains vigilant and has in place sound systems and practices, a top official has said.
According to Head of Prudential Supervision Toby Fiennes, the supervisory approach of RBNZ rests on three main pillars, namely, self-discipline, market discipline and regulatory discipline.
Speaking at a meeting of the Law and Economic Association of New Zealand in Wellington on June 19, 2013, he said that self-discipline is closely linked to sound governance.
Heavy penalties
“We have a strong tradition of director attestations, coupled with heavy penalties for non-compliance. For example, bank directors who fail to comply with disclosure obligations face fines up to $200,000 or 18 months in prison,” he said.
Mr Fiennes said that governance requirements enhance self-discipline and that the Banking, Non-Bank Deposit Takers (NBDTs) and Insurance regimes placed obligations on companies to have robust governance frameworks with independent directors.
“Market discipline reduces the information symmetries. We pioneered disclosure requirements for banks in the 1990s; other countries have followed and indeed disclosure is now widely recognised as a key plank of Basel III,” he said.
Effective prudential regulation is a crucial component of a sound and efficient financial system, he said.
The global financial crisis has led banking regulators around the world to revisit their approach. In New Zealand, finance company failures and the repercussions from the Canterbury earthquakes have underlined the importance of sound regulation that can help prevent failures,” he said.
According to him, legislation does not require RBNZ to protect against every failure.
“No regulatory regime could realistically achieve this or protect consumers from the direct effects of failure. However, the regulation and supervisory regime does provide significant safeguards to reduce the likelihood and impact of failures. Although failures are unlikely, we will remain prepared and will continue to develop our response toolkit, drawing on insights from international experience,” he said.
Strengthened regime
Mr Fiennes said that New Zealand has responded to the international regulatory framework that has developed rapidly in recent years.
“We have strengthened and built on the key features of our regime, including an early tightening of liquidity standards, reflecting the adverse liquidity shock experienced during the global financial crisis. We have been fast adopters of the tougher Basel III Capital Standards, with some tailoring to New Zealand conditions. We have also extended our prudential oversight regime to cover insurers and NBDTs,” he said.
New Zealand places significant emphasis on self-discipline, he said and added that RBNZ tried to minimise complexity while ensuring strong capital and liquidity buffers.
“This approach works well for us. We have a relatively simple financial system, for which a straightforward, conservative approach is well-suited,” he said.
Stating that the country’s financial system remained in good shape, he said that the core payments systems are generally operating smoothly and that the insurance sector has positioned itself well for future shocks, he said.
No complacency
However, there was no room for complacency, he warned.
Mr Fiennes said that RBNZ will continue to be vigilant and forward-looking in its supervision with a focus on key risks, main business drivers and board accountability.
“As well as strengthening the oversight of systemically important payment and settlement systems, we will also look for opportunities to simplify regulatory regimes and harmonise them across sectors,” he said.
He said that there were two reasons that made intervention inevitable – existence of externalities and information asymmetries.
