NZ finance failures highlight poor governance

Friday 3rd October 2008

The failure of finance companies in New Zealand over the past two years highlights fragile business structures, inadequate governance and poor risk management, Reserve Bank Governor Alan Bollard said.

"Investors have been exposed to significant risks in exchange for a relatively small margin over bank deposit rates," Bollard told a business audience in Auckland today.

More than 20 finance companies have either failed or negotiated to drip feed money owed to investors after re-investment rates slumped and the availability of credit dissipated. Some NZ$5 billion of investors' funds held by non-bank finance firms has been frozen in the past 12 months.

The passing of the Reserve Bank Amendment Act, making the Reserve Bank the regulator for non-bank deposit takers, will help address concerns about oversight of the sector, Bollard said today.

He described the strife among finance companies as a "slow-burn contagion" driven by a slump in property development, the international credit crisis and a trend for investors to switch their funds to less risky institutions such as banks.

"Despite the crisis on Wall Street, they (the banks) have continued to operate strongly in New Zealand," he said. "These institutions are well capitalised businesses and give no current reason for concern."

Under the new legislation, passed last month, the central bank will require information from trustees of deposit takers, to develop and enforce minimum prudential and governance standards. The central bank will also take into account credit ratings from reputable rating agencies.

By Jonathan Underhill

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