Regulation of financial institutions doesn't absolve them from managing risk, RBNZ says

Thursday 1st September 2016

The Reserve Bank's regulation and supervision of financial institutions doesn't absolve their boards and managers from their responsibility to manage risks, the bank's head of prudential supervision Toby Fiennes has argued in a speech to the NZ Bankers Association in Auckland.

Regulation didn't mean companies could ignore their responsibilities and no institution should think there is a government guarantee they can fall back on, he said.

"While the New Zealand financial system is sound, history tells us that banks, NBDTs (non-bank deposit-takers) and insurers can, and do fail," Fiennes told the audience. "Our mandate is soundness and efficiency of the financial system as a whole. The growth and demise of individual institutions in accordance with the competence of their management and demand for their services are a natural part of a competitive and efficient economy."

"Since no financial institution is guaranteed by the government, there is more market pressure on institutions to compete on safety than there would be in a system with guarantees," he said. International evidence showed that the absence of guarantees actually improves the overall stability of the financial system.

Oversight of financial institutions and markets has been transformed in the wake of the global financial crisis, and the ensuing collapse of many New Zealand finance companies. The government operated the Crown Retail Deposit Guarantee Scheme between late 2008 and 2011 and ended up paying out more than $2 billion to investors in finance companies that were accepted into the scheme and subsequently collapsed, including South Canterbury Finance.

At its height, the scheme saw the Crown guaranteeing up to $133 billion of investor funds in what it saw as a necessary step to maintain depositor and public confidence in financial markets.

Fiennes said the collapse of the finance companies between 2006 and 2009 and the failure of AMI Insurance in 2011, "underscored the need for direct regulatory discipline" but the central bank had to be "pragmatic and realistic" about what regulations would be useful in a small country such as New Zealand.

He said the central bank's framework was currently in sharper focus because the International Monetary Fund is currently visiting to assess New Zealand's financial system and regulatory settings, the first such visit in 13 years.

"A recent internal review of our regulatory framework confirmed the philosophy remains broadly fit for purpose in New Zealand," Fiennes said. "However, the review also highlighted areas where we can better align our supervisory practices with our philosophy, such as the potential for an attestation regime and stronger disclosure requirements for insurers.

BusinessDesk.co.nz

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