Riding shotgun on banks

Finance Minister Michael Cullen has given a clear steer that he favours a joint Australia-New Zealand regulator to oversee "transtasman banking issues".

In an interview with the Herald, Cullen ruled out any proposal for the Australian Prudential Regulatory Authority to "become the regulator for New Zealand".

"What we are talking about is how you mesh the two regulators when there are transtasman dimensions," he said.

A transtasman council was set up after the recent meeting between Cullen and Australian Treasurer Peter Costello to report on mechanisms to ensure robust banking supervision across the Tasman.

The Reserve Bank is strongly opposed to a joint regulator for transtasman banking supervision, as official papers released to the Herald yesterday show.

But Cullen said it was important to quickly find a way to meet the Reserve Bank's needs to satisfy itself that it could fulfil its statutory responsibilities while not adding additional costs to the banking system on both sides of the Tasman.

"It's sensitive. The Reserve Bank is acutely aware of its responsibilities in that respect,"Cullen said.

"It's important that the Reserve Bank has some comfort that the Government still understands the outcomes they seek in terms of systemic stability and that we make sure the mechanisms are in place which enable those outcomes to be achieved."

The official papers show that the Reserve Bank, Treasury and the Ministry of Economic Development jointly warned in January that it was "undesirable" to move towards a joint regulator "at this time".

But Treasury subsequently broke ranks, proposing directly to their minister that a joint transtasman committee be set up to progress the integration of banking regulation.

"We suggest you discuss this with Mr Costello as a practical means to make progress on the single economic agenda," the Treasury said.

It also advised that "elements" of a joint approach to transtasman banking regulation were "clearly" desirable.

But it stopped short of recommending that Cullen agree to establish a joint transtasman regulator, instead suggesting the formation of a joint New Zealand-Australian committee for banking regulation. The committee could deal with cross border regulatory issues such as policy harmonisation, information sharing and crisis management without compromising national interests, the Treasury said.

New Zealand's big four banks - ANZ National Bank, Westpac, BNZ and ASB - are all Australian owned. Combined, they hold more than 85 per cent of New Zealand's banking assets.

The Treasury does not support such a joint regulator "at present" because New Zealand would not be able to tailor policy to local conditions and would lose decision-making power in a crisis.

Regulation, it added, was not the key barrier to the "seamless" provision of financial services across New Zealand and Australia. Instead, enforcing loans in jurisdictions outside where they were written, and the countries' separate currencies, were cited as barriers.

"The key difference between the joint committee approach and a fully joint regulator is that under a committee approach, governments would opt in to joint policy initiatives where this was of mutual benefit," the Treasury said.

The Reserve Bank, meanwhile, told Cullen the Australian-owned banks need to spend no more than 0.6 per cent of annual income - between $70 million and $90 million - in New Zealand to meet the central bank's stand-alone requirements.

The Reserve Bank is forcing these banks to transfer systems and infrastructure back to New Zealand to ensure they could operate in New Zealand on a stand-alone basis from their Australian parents in the event of a banking crisis.

Information from the banks and other sources, the Reserve Bank told Cullen, suggested Australian-owned banks were being prompted to overstate the economic impact of the central bank's outsourcing policy.

* The transtasman single market will on the agenda this Thursday at the Gateway to Australia conference in Auckland. For more information call the Auckland Chamber of Commerce on (09) 309 6100.