RBNZ wants new liquidity regime for non-bank deposit takers (Update 2)

The Reserve Bank of New Zealand has released a discussion document proposing options for new liquidity requirements for non-bank deposit takers (NBDTs), which include finance companies, credit unions and building societies. (Updated with other options, details) One option was to keep the status quo where trustees set liquidity requirements on a case-by-case basis in trust deeds, it said. Another option was to prescribe quantitative requirements for liquidity and mismatch ratios to be monitored either by trustees for the Reserve Bank. These prescribed requirements could be the same as for banks, with zero% one week and one month mis-match ratios, and a 65% core funding ratio, rising to 75% in stages over time. Or they could be adjusted, it said. A funding mis-match refers to a bank where more deposits are due at any one time than loans, creating the risk that the deposit take runs out of cash when depositors want their money, as happened through 2007 and 2008 to many finance companies. "Under a sophisticated approach, this could be achieved through recalibrating the liquidity policy for locally incorporated banks to address liquidity risk specific to NBDTs," the Reserve Bank said. "Our preliminary analysis suggests that many of the larger NBDTs would easily exceed the ratio requirements calibrated for locally incorporated banks. This result is unsurprising given NBDTs' reliance on retail funding compared with banks. Other obvious differences between NBDTs and banks which would require different calibrations in the policy are the assumptions around reinvestment rates of retail term funding and the accessibility of committed lines." The new requirements were aimed at decreasing liquidity risk for the sector, the Reserve Bank said.

Liquidity requirements (ability of an NBDT to meet its financial obligations) form part of the NBDT prudential regulatory regime that the Reserve Bank is progressively introducing to help improve the future resilience of New Zealand's NBDT sector. The regime also includes capital adequacy requirements, related party restrictions, risk management requirements, and credit rating requirements. Comments and responses to the questions raised in the Consultation Paper should be submitted to the Bank by 15 March 2010. The intention is to make policy recommendations to Cabinet in the second quarter of 2010.