The New Zealand banking environment is characterised by a high level of ownership by foreign banks. Of the 27 banks currently registered in New Zealand, 12 operate as branches of overseas-incorporated banks. Of the 15 New Zealand-incorporated banks, 10 are foreign owned. Australian ownership is dominant, with the four major retail banks having the greatest market share (that is, the assets of each bank as a proportion of the total assets of the banking system) being ANZ Bank New Zealand Limited, ASB Bank Limited, Bank of New Zealand and Westpac New Zealand Limited, all operated as New Zealand subsidiaries of Australian banks.
The regulatory regime applicable to banks
New Zealand has a twin peaks approach to the regulation of its financial system. The Reserve Bank of New Zealand has responsibility for prudential regulation of financial institutions (including banks). The Financial Markets Authority (FMA) has responsibility for the regulation of financial products (including securities and derivatives issued by financial institutions regulated by the Reserve Bank). NZX Limited operates the principal securities exchange in New Zealand, and regulates issuers and securities listed on its markets.
In New Zealand, banks are regulated in the following ways:
- if an entity wishes to use the words 'bank', 'banker' or 'banking' in its name, title or (in some situations) advertisements, the entity must be registered by the Reserve Bank under the Reserve Bank of New Zealand Act 1989 (the RBNZ Act) and will be subject to ongoing prudential supervision by the Reserve Bank. Importantly, an entity is not required to be registered solely because it carries on banking activities; and
- a bank will be regulated in relation to the activities that it undertakes and the services that it provides. The provision of particular services may be subject to specific regulation, particularly where services are provided to consumers. For example, issuing financial products (including securities and derivatives), providing financial adviser services to retail investors and providing credit to consumers are all subject to prescriptive regulatory regimes. The activities carried on by banks also make them subject to more general laws, such as anti-money laundering laws and laws countering the financing of terrorism, privacy laws and general fair trading laws.
The Reserve Bank's powers are conferred for the purposes of promoting the maintenance of a sound and efficient financial system and avoiding the significant damage that could result from the failure of a registered bank. Accordingly, when considering an application for registration, the Reserve Bank is concerned with ensuring that only financial institutions of appropriate standing and repute, and which will comply with the prudential requirements imposed on them, are able to become registered banks. In particular, the RBNZ Act requires the Reserve Bank to have regard to:
- the incorporation and ownership structure of the applicant;
- the size and nature of the applicant's business or proposed business, or any part of the applicant's business or proposed business;
- the ability of the applicant to carry on its business or proposed business in a prudent manner;
- the standing of the applicant in the financial markets;
- the suitability of the directors and senior managers of the applicant for their respective positions;
- the standing of the owner of the applicant in the financial markets; and
- any other matters that may be prescribed in regulations.
If the application is by an overseas person or a subsidiary of an overseas person, the RBNZ Act also requires the Reserve Bank to have regard to:
- the law and regulatory requirements of the applicant's home jurisdiction that relate to:
- the disclosure by the applicant of financial and other information of the kind that a registered bank must disclose under the RBNZ Act;
- the accounting and auditing standards applicable to the applicant;
- the duties and powers of the directors of the applicant;
- the licensing, registration, authorisation and supervision of the applicant; and
- in the case of an application from an overseas person only, the recognition and priorities of claims of creditors or classes of creditors in the event of the insolvency of the applicant; and
- the nature and extent of the financial and other information disclosed to the public by the applicant.
Registered banks currently operate in New Zealand as New Zealand-incorporated companies (often as subsidiaries of non-New Zealand banks or, in the case of The Co-operative Bank Limited, as a New Zealand-incorporated cooperative company) and as branches of non-New Zealand banks. Although the Reserve Bank must have regard to the ownership and incorporation structure of an applicant for registration, the Reserve Bank does not ordinarily prescribe the legal form that the bank must take. Rather, the Reserve Bank is concerned with ensuring that the owners are incentivised to monitor the bank's activities closely, and to influence its behaviour in a way that will maintain or improve the bank's soundness, but that still retains sufficient separation between the board and its owners to ensure that, where the interests of the bank and its owners diverge, the directors of the bank act in the best interests of the bank.
In certain circumstances, however, the Reserve Bank will require a bank to operate through a New Zealand-incorporated company rather than a branch of an overseas bank. Those circumstances are where a bank is systemically important to New Zealand's economy, where the bank is proposing to take retail deposits in New Zealand and there is depositor protection in the bank's home jurisdiction, or where the Reserve Bank considers that the disclosure or supervisory requirements in the bank's home jurisdiction are inadequate.
The Reserve Bank itself is a statutory corporation, and it performs a number of roles in the New Zealand financial system in addition to the registration and prudential supervision of banks. The Reserve Bank:
- formulates and implements monetary policy (its primary statutory purpose);
- operates as the central bank of New Zealand and issues New Zealand currency;
- has oversight of certain payment and settlement systems;
- is the prudential regulator of non-bank deposit takers under the Non-Bank Deposit Takers Act 2013, including responsibility for granting licences to non-bank deposit takers;
- is the prudential regulator of licensed insurers under the Insurance (Prudential Supervision) Act 2010;
- is responsible for supervising banks, life insurers and non-bank deposit takers under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009; and
- operates high-value payment and settlement and clearing systems.
As part of its prudential function, the Reserve Bank has a number of macro-prudential tools at its disposal to manage the system-wide risks that can develop during boom–bust financial cycles. These tools include the ability to require banks to hold additional buffer regulatory capital and to limit high loan-to-value residential (LVR) mortgage lending.
The Reserve Bank maintains relationships with other banking and financial system regulators, particularly in Australia. The Trans-Tasman Council on Banking Supervision (TTC), comprising representatives of the Australian and New Zealand Treasuries, the Reserve Banks of Australia and New Zealand and the Australian Prudential Regulation Authority (APRA), supports the development of a single trans-Tasman economic market in banking services. In particular, the TTC is mandated to develop and promote measures that enhance trans-Tasman policy harmonisation, mutual recognition, information sharing and cooperation. The TTC's work resulted in legislation in New Zealand and Australia requiring the Reserve Bank and APRA to support each other in meeting their statutory responsibilities relating to prudential regulation and financial system stability and, where reasonably practicable, to avoid actions likely to have a detrimental effect on the stability of the other country's financial system. The TTC members are signatories to a memorandum of cooperation setting out high-level principles that they will have regard to when dealing with trans-Tasman banking groups facing financial distress.