Wednesday 26th June 2019
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Banks and insurance companies regulated by the Reserve Bank can expect the central bank to be more "intrusive" as institutional self-discipline has been lacking, says the central bank's deputy governor Geoff Bascand.
"Regulated entities can expect our supervision to be more intrusive, in seeking evidence that attestations are merited and verifying compliance, and that we will intervene and enforce our requirements," Bascand said in a speech on renewing the Reserve Bank's approach to financial stability.
"We will be more pro-active in holding directors and managers to account, particularly in areas where we have already identified shortcomings."
His comments come after a panel set up to review the Reserve Bank's governing legislation this week said it wants broad public input on questions including the intensity of bank supervision.
A specific area it wants feedback on is the level of bank supervision and what regulatory tools and powers the Reserve Bank should have. That includes questions of broadening out the attestation regime - essentially an honour system in which directors say their bank is complying with the rules under threat of criminal sanction, something that hasn't been pursued before.
The review also wants to know whether the Reserve Bank should adopt more intensive supervision.
RBNZ governor Adrian Orr is scheduled to speak on July 11 about the government's review and what it means for the future of the Reserve Bank.
Bascand today said the bank's experience over the past decade has been that regulations have not always been well applied or complied with "and that tells us that we cannot rely solely on self-discipline."
He underscored that it is not just the fact of non-compliance that concerns the central bank but "regulated entities have not been as proactive as we would have liked in identifying and remedying issues before the risks become more significant".
The review panel highlighted an example of that failure in the discussion document, when a 2014 stocktake of the Reserve Bank's outsourcing policy found compliance among the five banks that are subject to the regime ranged from 65 percent to 90 percent effectiveness for practical and legal controls, despite the fact that directors of each bank had attested that their bank was fully compliant. That led to a revision of the outsourcing policy.
Bascand said last year's conduct and culture review highlighted specific shortcomings in governance and risk management at banks and insurers, notably in relation to sales incentives. The court judgment on CBL Insurance’s liquidation stated that “aspects of CBLI’s management had indicated a lack of commercial probity” and “a lack of candour in dealing with the company’s auditors and the regulator”.
CBL Insurance, a subsidiary of CBL Corp, was placed in liquidation by the Auckland High Court in November last year when the directors withdrew their opposition to the RBNZ’s application. The central bank had applied for the interim liquidation of CBLI in February based on the insurer's failure to meet solvency conditions, breaches of direction, and ongoing misreporting to the central bank.
In May, the RBNZ revoked ANZ Bank New Zealand's accreditation to model its own operational risk capital requirement due to a "persistent failure" in its controls and attestation process. From March 2019, this will increase its minimum capital held for operational risk by around 60 percent, to $760 million, the RBNZ said.
After the May decision, ANZ is now required to use the standardised approach for calculating appropriate operational risk capital. It can still use 44 other internal models to calculate capital requirements.
Earlier this week, the central bank demanded ANZ Bank New Zealand provide assurance it is operating in a prudent manner after it was censured in May and the bank says it will work with the regulator. The bank has also faced intense public criticism since the sudden exit of its local ceo, David Hisco, over hundreds of thousands of dollars worth of expenses claims that the local board only recently became aware of.
"It is clear that institutional self-discipline has been lacking," Bascand said.
"There is therefore a strong case for further increasing the intensity of our supervisory model in line with the recommendations from the IMF’s 2017 Financial Sector Assessment Program assessment of New Zealand," he said.
The government's review panel is considering expanding that regime to include executives, and also whether the central bank should undertake more intense on-site monitoring of the banks.
Bascand underscored that banks should expect more intense scrutiny, even if capital requirements are increased as a result of the ongoing capital review.
The central bank's regulated entities should expect more thematic reviews in order to enhance self-discipline and the RBNZ's own understanding of risks, he said. In the near future, there will be a thematic review on banks’ liquidity standards and another on the appointed actuary regime in the insurance sector.
"We will continue to periodically stress test the banking system," he said.
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