Developments in the New Zealand Banking Industry
DeSourdy, Loretta, The Reserve Bank of New Zealand Bulletin
This article reviews developments in the New Zealand banking system over the year to December 2000. Financial information extracted from banks' disclosure statements indicates a strong banking system with good asset quality.
This article discusses recent developments in the New Zealand banking industry. It also looks at some of the current policy and structural issues affecting the industry. It then comments briefly on the financial performance of the industry, using financial data for the year 2000 published in registered banks' disclosure statements. That information shows that the New Zealand banking sector performed solidly during the year to December 2000. Profits and assets grew in a market that continues to be highly competitive. This competition led to a further narrowing of interest margins, but this narrowing was offset by growth in both interest and non-interest income. Asset quality remains very sound.
2 Policy developments
In past articles we have discussed trends in international banking, an important one of which has been the establishment of financial conglomerates that operate in all spheres of the financial system, and the challenges that this trend presents for regulators. Until recently the Reserve Bank has been able to take a permissive approach to the activities that banks can conduct, because banks have substantially restricted themselves to traditional banking business. The financial landscape in New Zealand is now changing, with the boundaries between banking and particularly insurance beginning to be blurred. A major banking group has acquired a large insurance operation, an insurance company has become involved in banking and there is the prospect of further financial conglomerates emerging. There has also been a good deal of discussion amongst the international supervisory community on the issue of supervision of financial conglomerates.
These developments have motivated a review of what kind of supervisory approach is appropriate for financial conglomerates operating in New Zealand. The outcome of this review has been a set of policy proposals from the Bank dealing with financial conglomerates and lending by banks to connected parties. In essence we are proposing a framework that separates banking from non-banking activity, with Reserve Bank supervision focused on banking, and affiliated non-banking activities being subject to disclosure requirements. At the same time we are seeking to ensure that connected lending does not undermine the capital buffer of banks, but to do so in a way that provides more flexibility to banks. We are currently in consultation with the industry on these proposals.
Another major development in international banking that has implications for banking in New Zealand has been the review of the 1988 Capital Accord by the Basel Committee on Banking Supervision. The Committee released its first consultative package in June 1999, with a second round of consultation documents published in January of this year. The aim of the revision is to improve safety and soundness in the banking system. The Committee's proposals are built around three pillars -- minimum capital requirements, a supervisory review process and market discipline. In our submission to the Committee we indicated broad support for the proposals in the minimum capital requirements and market discipline pillars, but expressed concern about the proposed supervisory review process, which envisages the supervisor being directly and explicitly involved in validating a bank's measurement of risk and assignment of capital. We see this undermining a regulatory approach aimed at strengthening the incentives on the private se ctor (directors, management, and the creditors of a bank) to promote prudent bank behaviour, and have recommended that the Committee allow for a review process that places primary responsibility on bank directors, with supporting independent expert advice from the private sector. …