Bank supervision, deposit insurance feature in next phase of RBNZ review

Thursday 1st November 2018

The next stage of the Reserve Bank Act review has kicked off and will focus on whether New Zealand needs depositor protection and if the central bank should still be the prudential supervisor.

The Labour-led coalition government announced the two-phase review of the 1989 legislation shortly after taking office to modernise the policy frameworks, governance, and accountability arrangements.

“The Reserve Bank Act has been in place for nearly 30 years. Over that time, the scope, focus and intensity of regulation and supervision has evolved," Finance Minister Grant Robertson said.

The first phase involved implementing changes to the objectives of monetary policy to give due consideration to maximising employment alongside price stability. It also made provision for a committee decision-making model for monetary policy. Legislation enabling that change is still before Parliament.

The second phase will focus on the role the Reserve Bank should have in safeguarding the financial system, and how it should be governed.

Treasury and the RBNZ are jointly carrying out that work in conjunction with an Independent Expert Advisory Panel chaired by Suzanne Snively. A series of background papers have been published by Treasury to help drive the consultation.

Unlike almost all other advanced countries, New Zealand does not have a formal system for protecting depositors against the risk of losing their deposits if a registered bank or non-bank deposit taker fails.

The background papers look at three different options: the status quo – this would leave New Zealand with no formal depositor protection mechanism; depositor preference, which ranks the claims of ordinary depositors within the legal framework ahead of other general creditors if a deposit-taking institution is liquidated; or a deposit insurance scheme that would pay eligible depositors up to a pre-set maximum amount or ‘coverage limit’.

A separate paper was prepared on whether prudential regulation and supervision should remain under the central bank's umbrella. Carving out the prudential supervision was added to the work programme following a number of submissions on the issue.

"There has been much debate on the pros and cons of assigning additional financial system functions to a central bank, such as a responsibility for the prudential regulation and supervision of the banking sector and other financial institutions," the background paper noted.

The arguments in favour of the RBNZ retaining its supervision function include having complementary functions in one place; the arguments against relate to the tensions or trade-offs between monetary policy and those other financial system functions.

Treasury discusses three possible models including an enhanced status quo based on potential changes to the Reserve Bank’s objectives, governance, or funding as a result of the review. A second option would be a separate New Zealand prudential regulation authority, while a third would be a separate institution which would be responsible for prudential regulation and financial market conduct regulation.

The review will also look at how the Reserve Bank should be governed. Currently, the ‘governing body’ of the Reserve Bank is the governor, but this will change as a result of the phase one review establishing a Monetary Policy Committee. The group of four internal Reserve Bank officials, one of whom is the governor, and three external members will now take responsibility for monetary policy decisions.

Phase two will examine whether the scope of the Reserve Bank’s operational independence in financial policy needs to be defined more clearly, and whether further changes to the Reserve Bank’s governance arrangements are desirable.

"There may be a case to create a committee or group structure for financial policy decisions too," Treasury said in a review booklet published alongside the background papers.

It will also look at the minister's role in clarifying the Reserve Bank's financial objectives, the minister's role in approving various policies and decision and who should be the steward of primary legislation.

Submissions close on Jan. 25. Further consultation will be carried out next year.

(BusinessDesk)

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