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New Zealand central bank plans to ramp up oversight of banks

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New Zealand's central bank said on Wednesday it was ramping up its scrutiny of banks and insurers ahead of its highly anticipated decision on raising bank capital requirements.

[WELLINGTON] New Zealand's central bank said on Wednesday it was ramping up its scrutiny of banks and insurers ahead of its highly anticipated decision on raising bank capital requirements.

The Reserve Bank of New Zealand's decision to increase oversight on financial institutions comes after a number of high-profile censures of Australian institutions, many of which are the parent companies of New Zealand's top banks.

RBNZ Governor Adrian Orr said he was "very concerned" about Australian regulator AUSTRAC's allegations last week of millions of anti-money laundering law breaches by No.2 Australian lender Westpac Banking.

The RBNZ had contacted all banks to ask for additional assurance they were meeting their regulatory requirements, and was working closely with Westpac's New Zealand subsidiary on the issues that had arisen in Australia, he told a media conference.

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The RBNZ has been undertaking reviews which showed shortcomings around governance and risk management among New Zealand institutions.

"Our recent reviews of banks and life insurers, and the number of recent breaches in key regulatory requirements, reinforces the need for financial institutions to improve their behaviour," said RBNZ deputy governor Geoff Bascand in a statement accompanying the bank's financial stability report, which is released twice a year.

"We have also reviewed our own supervisory strategy and will be taking a more intensive approach, which will involve greater scrutiny of institutions' compliance." The RBNZ this year revoked Australia and New Zealand Banking Group's local licence to calculate its own operational risk capital due to persistent control failures.

It has also stepped up monitoring of National Australia Bank (NAB) subsidiary Bank of New Zealand (BNZ) after identifying errors in the lender's risk capital calculation process.

Mr Orr said the central bank was hoping to increase staff on its supervisory team and was focussing on ensuring bank boards and senior managers proved how they were meeting regulations. Mr Orr also said the heightened approach to financial supervision would include the increase in bank capital requirements, set to be unveiled on Dec 5.

He declined to comment on the level or timeframe of an increase in capital requirements. The central bank has proposed doubling the top banks' capital ratio to 16 per cent to reduce risks in case of a major financial shock but has not yet made a final decision.

The RBNZ noted risks to New Zealand's financial system were elevated, largely due to global economic risks and low interest rates, which could spark excessive debt.

The bank shocked markets with its 50 basis points cut to take to the official cash rate to a record low of 1% in August as it raised concerned over easing growth, gloomy business sentiment and risks in the global economy.

It has since said there was no urgency to ease policy further, but it remained ready to do so if necessary, leaving rates on hold in a decision this month.

The bank decided to hold off on further unwinding its loan-to-value ratio (LVR) restrictions on mortgage lending after loosening them in late 2018, noting prolonged low interest rates could result in a rise in high-risk lending.

"We need to get more confident around bank lending behaviour ... it's about how are banks managing their higher risk lending behaviour," Mr Orr said.

REUTERS