Could changes to the Reserve Bank's non-bank deposit taker regime drag GE Capital into the regulatory net?

By Gareth Vaughan

Potential changes to the Reserve Bank's non-bank deposit taker (NBDT) regime could see GE Capital, the country's biggest finance company, dragged under the regulatory umbrella even though it doesn't borrow money off the public.

One of the issues under consideration in a Reserve Bank consultation paper released yesterday entitled Review of the Prudential Regime for Non-bank Deposit Takers is the very definition of a NBDT. The central bank is looking to adjust the definition of NBDT to ensure it better catches those entities that are likely to raise systemic risks in the NBDT sector. A licensing regime will also be introduced. Existing NBDT prudential requirements include a capital ratio, liquidity policy and limit on related party exposures.

A NBDT is currently defined as a person that offers debt securities to the New Zealand public, and carries on the business of borrowing and lending money, or providing financial services, or both. However, the third of three proposed definitions of NBDTs listed in the consultation paper is; "Defining NBDTs as entities that carry on the business of borrowing and lending, and/or providing financial services, with greater use of statutory carve outs." This option makes no specific mention of whether to be a NBDT an entity must take deposits from the public or not.

The first two proposed definitions are the status quo, and the status quo with greater use of "regulatory carve outs" in the legislation.

The Reserve Bank paper notes that as a starting point entities carrying on the business of borrowing and lending should be treated as NBDTs where they are not already registered banks.

"Entities carrying on the business of borrowing and lending will inevitably have a high degree of interconnectedness with other participants in the economy, and will often offer essential transactional accounts to unsophisticated investors. Taken together, we consider that these are the fundamental reasons why NBDTs should be prudentially regulated."

GE Capital incorporates GE Finance & Insurance (GE Money), Custom Fleet, GE Commercial Finance NZ and GE Commercial Finance (USD) New Zealand, and is a subsidiary of US conglomerate General Electric, through whom it sources its funding. KPMG's 2012 Financial Institutions Performance Survey notes that with total assets of NZ$2.5 billion, GE Capital is New Zealand's biggest finance company by assets, ahead of ANZ's UDC Finance which is already a NBDT.

Asked by interest.co.nz about the potential for GE Capital to be pulled under the Reserve Bank's NBDT regulatory umbrella a GE Capital spokeswoman said: “GE is aware of the RBNZ consultation paper and is currently reviewing the proposals outlined in the paper.”

The Reserve Bank paper outlines that it favours either the second or third option as the definition of what a NBDT is. The "carve outs" suggested for option two include intergroup borrowing and lending, acting as a payment facility provider, borrowing and lending activity with transacting shareholders, and peer to peer lending.

"We are currently neutral on which of these (two) options would be preferable, and are seeking views on this issue," the Reserve Bank says.

The Reserve Bank also notes that it doesn't believe there are grounds for including all wholesale funded entities in the business of borrowing and lending within the NBDT definition.

"Many of the potential changes to the regime discussed in this paper would have the effect of making the NBDT regime more similar to the prudential regime for registered banks. This has some advantages in increasing the level of competitive neutrality with the banking sector, and leveraging off the Reserve Bank’s experience with the prudential regime for registered banks," the Reserve Bank says.

Submissions close on May 17.

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