Banks, insurers should expect more intrusive RBNZ - Bascand
By Rebecca Howard
June 26 (BusinessDesk) - 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.
(BusinessDesk)