Promoting Strong Corporate Governance in New Zealand Banks: The Reserve Bank of New Zealand Views Corporate Governance as the Foundation for Sound Risk Management in Banks. It Is Currently Reviewing Aspects of Bank Governance Arrangements to Determine the Scope for Further Improvements

By Bollard, Alan | Journal of Banking and Financial Services, August-September 2004 | Go to article overview

Promoting Strong Corporate Governance in New Zealand Banks: The Reserve Bank of New Zealand Views Corporate Governance as the Foundation for Sound Risk Management in Banks. It Is Currently Reviewing Aspects of Bank Governance Arrangements to Determine the Scope for Further Improvements


Bollard, Alan, Journal of Banking and Financial Services


The Reserve Bank of New Zealand has responsibility for registering and supervising all banks in New Zealand. We do this for the purpose of promoting a sound and efficient financial system and to avoid the significant damage to the financial system that could result from the failure of a bank, as required by the Reserve Bank of New Zealand Act 1989.

The three pillar approach

The Bank's approach to banking supervision rests on three main pillars:

* A 'self-discipline' pillar, whereby we encourage sound corporate governance and risk management practices in banks;

* A 'market discipline' pillar, whereby we seek to reinforce the incentives for depositors and other creditors of banks, and the market generally, to exercise scrutiny of banks and reinforce bank self-discipline; and

* A 'regulatory discipline' pillar, whereby we apply some prudential requirements on banks, such as minimum capital ratio requirements and limits on lending to related parties, to further encourage sound risk management. We also monitor banks on a continuous basis, meet with the senior management of banks annually and have extensive powers to deal with bank distress or failure events.

We have been reviewing each of these pillars in the past year or so, taking into account international and national developments in banking and changes to the structure of the New Zealand banking system.

In this context, we are reviewing the self-discipline pillar, by looking at whether corporate governance arrangements in banks continue to be sufficient to ensure a strong level of risk management. We want to ensure that corporate governance arrangements are effective - not just for the benefit of shareholders, but also for the benefit of bank depositors and other creditors, and for the ultimate benefit of the New Zealand banking system.

This recognises the fundamental role that governance plays in a bank--and in any organisation for that matter. Sound governance provides the foundation for everything else, including maintaining systems and controls for identifying, monitoring and managing business risks effectively. Conversely, poor corporate governance tends to undermine any other efforts to promote a strong risk management culture in a company, including a bank.

Promoting sound corporate governance and risk management

The Reserve Bank has a number of policies that seek to promote sound corporate governance and risk management in banks:

* All banks incorporated in New Zealand must have a nonexecutive chairman and at least two non-executive and independent directors, who must be unconnected with any parent company.

* Although the responsibility for assessing the suitability of a senior manager or director of a bank rests with each bank and its shareholders, the appointments are subject to the Reserve Bank's approval. The Bank's approval is based on a 'negative assurance' test, whereby we check with other regulators and other sources to ensure that the appointee does not have a criminal record or any other attributes that would be of concern.

* All banks are required to publish quarterly financial and risk-related disclosures, including information on each bank's and banking group's capital position, concentration of credit exposures to individual counterparties, related party exposures, asset quality, provisioning, and market risks. Banks must also maintain and disclose a credit rating. These disclosures are intended to strengthen the incentives for the prudent management of risks and assist depositors, among others, to make well-informed banking decisions.

* Each disclosure statement is required to include attestations, signed by a bank's directors, stating whether or not the bank has adequate systems in place to monitor and control risks and whether those systems are being properly applied at all times. The directors are also required to attest that prudential requirements are being complied with and that exposures to related parties (such as a parent bank) are not contrary to the interests of the local bank.

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Promoting Strong Corporate Governance in New Zealand Banks: The Reserve Bank of New Zealand Views Corporate Governance as the Foundation for Sound Risk Management in Banks. It Is Currently Reviewing Aspects of Bank Governance Arrangements to Determine the Scope for Further Improvements
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