Plug pulled on single Tasman regulator

The plan for a single regulator to supervise banks on both sides of the Tasman has fallen prey to New Zealand national interest sensitivities.

Australian Treasurer Peter Costello and Finance Minister Michael Cullen have instead announced both Governments will legislate to ensure their nations' banking supervisors collaborate on regulatory issues and avoid actions that could affect the financial stability of either country.

Transtasman capital raisings will also be possible using a single prospectus in agreements announced in Melbourne yesterday after the two treasurers' annual CER talks.

The pair, clearly buoyed by finally getting a resolution to the emotionally charged banking issue, professed delight in the "tremendous achievements".

"They are the first two deliverables in the single economic market agenda," Cullen said.

Although the solution falls way short of the "single regulator" objective Costello set for an ambitious single market outcome, he described the result as "optimal" given the obvious sovereignty concerns on the New Zealand side.

The New Zealand Reserve Bank had campaigned against Costello's ambition arguing that the New Zealand economy could be at risk from financial contagion in the event of an Australian banking collapse if it did not have full control over prudential supervision in its own jurisdiction.

The Treasurer shocked Wellington when he suggested Australia would look elsewhere to fulfil its single market ambitions if New Zealand did not play ball.

A joint transtasman council on banking supervision was set up to break an officials' stalemate. The council - which comprises officials from the two nations' treasuries, reserve banks and the Australian Prudential Regulation Authority - will continue to supervise progress as the new regime is introduced.

The Australian banks are relieved that the New Zealand Reserve Bank will also relax restrictions preventing them from outsourcing back office functions.

A Boston Consulting Group report estimated that could cost the banks A$200 million ($223 million) to A$300 million across the system.

Westpac chief executive David Morgan, who led the charge on behalf of the Australian banks, was vocal about the cost of duplicating back office systems in New Zealand.

But ANZ Banking Group chief John McFarlane, who was among a group of bankers at yesterday's lunch after the bilateral talks, is understood to be concerned that ANZ has been left holding the baby after it was forced to outlay about A$36 million on this score to accommodate Reserve Bank concerns over its National Bank takeover.

The joint council has also been asked to examine whether supervision of the non-banking component of the financial sector, including the insurance industry, should be subject to similar oversight.

Cullen said he would seek support from National leader Don Brash - a former Reserve Bank Governor - for the upcoming legislation.