Wednesday 28th February 2018
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The Reserve Bank wants bank directors and auditors to take ownership in signing off on disclosure statements and is weighing up options to beef up the attestation regime that copped some flak from an International Monetary Fund review last year.
In a speech to the Bankers' Association, deputy governor Geoff Bascand said the central bank took on board criticism in the IMF's 2017 financial sector assessment programme review urging greater rigour in testing director sign-off and expressing concern at the lack of independent verification of lenders' internal risk management practices or board effectiveness.
In response, the RBNZ commissioned Deloitte to hold a thematic review of the attestation process across 15 locally incorporated banks, which raised a number of issues about its effectiveness, including a reliance on high-quality directors to make it work, the need for open and honest banking cultures to send bad news up the line, and an absence of guidance from the RBNZ to ensure standardised processes and responses.
Bascand said no final decisions have been made on how to "better support banks' internal governance processes", but the RBNZ continues to "see directors and auditors owning the primary verification role."
Options on the table include more frequent engagement with bank directors to "provide a greater opportunity for the Reserve Bank to communicate any concerns with directors and help address the information asymmetry between senior management and directors", induction sessions for new independent bank directors, guidance setting out the central bank's expectations around risk management, and embedding a 'positive assurance' process for sign-off as opposed to the existing 'negative' process where management tell directors they're not away of any breaches.
"The Reserve Bank would prefer to see senior management actively demonstrating or providing evidence of compliance to directors," Bascand said.
The speech, entitled 'The effect of daylight: disclosure and market discipline', comes as the Reserve Bank's quarterly disclosure requirements for licensed banks shifts to an online dashboard providing key metrics for locally incorporated banks in a more timely manner than the current quarterly statements. The RBNZ aims to publish the first dashboard in late May.
Bascand today said the set of metrics will likely include credit ratings, capital adequacy, asset quality, profitability, the balance sheet, and liquidity, which should improve accessibility and comparability of information.
The Reserve Bank also expects to start reporting regulatory breaches on a separate page of its website to "provide greater transparency" than current practices.
"In this context, we will also be considering whether requiring information to be published on very minor or inconsequential breaches may be disproportionate," he said. "We are aware that directors are concerned that undue focus is being given to immaterial matters."
Bascand said the insurance sector also has scope to improve its disclosure performance and the Reserve Bank will look at regulatory initiatives in its review of the sector's prudential supervision law review.
The Reserve Bank used its prudential supervision powers this month to successfully seek a High Court order appointing an interim liquidator to CBL Insurance, the subsidiary of CBL Corp, after a long-running investigation into the adequacy of the NZX-listed insurer's reserving for a French business. CBL had said it would need to make a $100 million adjustment to strengthen the future claims reserve, but has since appointed voluntary administrators in a bid to preserve value while the RBNZ and Central Bank of Ireland act in their respective jurisdictions.
Trading in CBL shares was suspended by NZX Regulation over fears the insurer failed to meet continuous disclosure obligations, and would need a Reserve Bank-commissioned review and an assessment of that report to be released.
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