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Consistent approach has promoted robust banking system

Press Release – Reserve Bank

The Reserve Bank says that its consistent principles and approach to banking supervision have helped create a strong, robust banking system. 1 September 2016

Consistent approach to regulations and supervision has promoted robust banking system

The Reserve Bank says that its consistent principles and approach to banking supervision have helped create a strong, robust banking system.

“Our supervisory philosophy is to implement cost-effective regulations to mitigate market failures and thereby promote a sound and efficient financial sector for New Zealand,” said Head of Prudential Supervision Toby Fiennes in a speech today to the New Zealand Bankers’ Association.

“One market failure we focus on is externalities – the costs to wider society that financial institutions have little incentive to take account of when they make commercial decisions. An example would be a financial institution failing in a disorderly way that results in the public losing access to funds that they rely on to do basic transactions,” he said.

“The other market failure we focus on is asymmetric information – where one party to a transaction has better information than the other, and can use that to their advantage.” Our way to address these market failures is to take regulatory actions that help realign the interests of financial institutions, their customers and wider society, Mr Fiennes said.

He said that the Reserve Bank took care to ensure that its regulations didn’t absolve boards and senior managers from their responsibility to manage risks.

“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. There is solid international evidence showing that, on balance, the absence of guarantees improves the overall stability of the financial system,” he said.

We take international standards as an important benchmark for our policy development, but don’t adopt them if they are going to be inappropriate for New Zealand.

A recent internal review of our regulatory framework confirmed that the philosophy remains broadly fit-for-purpose for New Zealand. 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.

Speech text: Consistent approach to regulations and supervision has promoted robust banking system

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