Kiwibank reaches RBNZ's 'systemically important bank' threshold but nothing changes for the state owned bank

By Gareth Vaughan

New Zealand now has a fifth systemically important bank.

Kiwibank's half-year financial statements show it has met the Reserve Bank "systemically important" threshold. That is its New Zealand liabilities, net of amounts due to related parties, have topped $15 billion. Kiwibank's financial statements show total liabilities at December 31 of just under $15.2 billion with $14 million owed to parties related to its parent NZ Post.

This sees it join the big four Australian owned banks - ANZ, ASB, BNZ and Westpac - as systemically important. But despite this new status nothing changes for Kiwibank, which opened for business in 2002.

The key criteria the Reserve Bank sets for systemically important banks is that they be locally incorporated, which of course Kiwibank already is.

The Reserve Bank describes systemically important banks as those that are so large their failure could have flow on effects to the banking system as a whole and the wider economy. Making sure such banks are locally incorporated provides a "degree of assurance" the Reserve Bank would have the ability to manage a failure affecting one of these banks.

The central bank and prudential regulator made Westpac change its operating model to comply with this local incorporation rule in 2004. Up to that point Westpac had been operating in New Zealand solely as a branch of its Australian parent. Westpac also transferred NZ$6 billion worth of assets and over NZ$5 billion of liabilities across from its parent in 2011 to bring it in line with Reserve Bank rules.

'The Reserve Bank doesn’t operate a zero-failure regime'

In terms of the Reserve Bank's systemically important bank policy, a Reserve Bank spokesman told interest.co.nz it was important not to confuse this with the concept of Systemically Important Financial Institutions promoted by the Basel Committee on Banking Supervision, which is targeted at banks and other financial institutions deemed too-big-to-fail. See more on this here.

"Here in New Zealand the Reserve Bank doesn’t operate a zero-failure regime. None of our banks are too-big-to-fail. We have the Open Bank Resolution rules in place specifically to manage a bank failure, if such an unlikely event were to happen," the Reserve Bank spokesman said.

These comments come after Toby Fiennes, the Reserve Bank's head of prudential supervision, last year said the Reserve Bank didn't believe a global regulatory "too big to fail" framework being established for an individual country's domestic banks was relevant to New Zealand. Fiennes said the Reserve Bank already had a system-wide focus, and calibrates regulatory settings such as capital and solvency requirements, and its supervisory programme, to protect against system-wide risk.

This Reserve Bank stance comes despite the Australian Prudential Regulation Authority implementing the so-called D-SIFI (Domestic Systemically Important Financial Institution) framework in Australia. This sees the parents of New Zealand's big four banks - ANZ Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation, deemed to be D-SIFIs meaning they will have to hold more capital than other Australian banks.

And the Reserve Bank also played down an International Monetary Fund (IMF) working paper released in January last year. The IMF paper suggested given the scale of New Zealand's big four banks, and the fact they all have basically the same business model, careful attention should be paid to their vulnerabilities and resilience to shocks. Combined shocks to their residential mortgage and corporate lending portfolios would put pressure on their capital meaning there's merit in them holding more capital, the IMF paper said.

However, at the time a Reserve Bank spokeswoman told interest.co.nz the Reserve Bank "actively and continuously" monitors areas such as bank capital requirements, the composition of bank funding and stress-testing in the context of local and global developments.

The Basel Committee, the key global standard-setter for bank prudential regulation, has four key indicators of systemic importance being size, interconnectedness, substitutability and complexity.

This article was first published in our email for paying subscribers on Thursday morning. See here for more details and to subscribe.