Regulation talks leave banks up in the air

Finance Minister Michael Cullen and Australian Treasurer Peter Costello might think they shed light on where transtasman banking supervision is heading at last month's Wellington meeting.

But in reality they have muddied the waters, leaving the banking industry uncertain.

Roderick Deane, ANZ National Bank chairman and an ANZ Group board member, says the situation is becoming "rather untidy".

While NZ banks are striving to meet the multimillion-dollar costs of new Reserve Bank "standalone" rules, the two Governments are moving towards harmonising standards.

"We're saying, 'Hang on a minute, what might emerge from these discussions?'," Deane says.

"Should we really know more about where these discussions get to rather than incur a whole lot of costs and then find the regime's going to be somewhat different?"

At their annual bilateral meeting Cullen and Costello announced the formation of a joint council of officials on banking supervision.

The council will initially report to the two ministers by May 31 on legislative changes necessary to ensure the Australian Prudential Regulation Authority (APRA) and NZ Reserve Bank can support each other "in the performance of their current regulatory responsibilities at least regulatory cost".

Cullen said a single transtasman banking regulator was possible.

Deane says the Australian-owned banks are keen on harmonisation, seeing cost savings in dealing with one set of regulations, or regulator.

"They see a lot of efficiency gains for their customers and for themselves in integrated rather than duplicated systems," says Deane.

NZ's big four banks - ANZ National Bank, Bank of New Zealand, Westpac and ASB Bank - are Australian-owned. They hold 85 per cent of NZ's banking assets.

So far officials from the two countries have studied two models of integrating banking regulation.

The first, enhanced home-host supervision, aims to harmonise regulation and improve information sharing. The Reserve Bank supports this model.

The second option, opposed by the Reserve Bank, would have APRA supervising Australian banks operating in New Zealand.

Costello outlined the two possibilities he sees. One set of rules with two regulators. Or one set of rules with one regulator. The latter, Costello said, would include uniform depositor protection.

That means extending the depositor preference provisions of the 1959 Australian Banking Act to give New Zealanders equal treatment to Australians if an Australian bank failed.

Deane describes this as a very sensible "major"concession".

New Zealand is a more important market than ever for the Australian banks. ANZ's $5.5 billion purchase of the National Bank from Britain's Lloyds TSB in December 2003 completed the Australianisation of our major banks. The ANZ Group now makes 30 per cent of its earnings here and Westpac 17 per cent. BNZ's parent, National Australia Bank, and ASB's, Commonwealth Bank of Australia, each make 12 per cent of their group earnings here.

The Reserve Bank has been more active in extending its tentacles into the Aussie-owned banks over the past two years. Through the 1990s the banks centralised much of their back office operations in Australia.

But the 2003 Reserve Bank Amendment Act beefed up the central bank's powers.

And although it cleared ANZ's National Bank takeover, a deal giving the ANZ Group 40 per cent of the NZ banking market, the Reserve Bank slapped on several conditions.

These include ANZ needing Reserve Bank consent for any outsourcing of the National Bank's core banking function and appointments of directors or senior executives to ANZ or the National Bank.

The Reserve Bank wants ANZ National Bank's New Zealand board to have unambiguous legal authority and the practical ability to control all functions, systems and management capacity necessary to operate on a stand-alone basis.

For ANZ this means moving systems and infrastructure back to New Zealand. Deane says it will cost "tens of millions of dollars" annually - "that's a huge inconvenience".

Deane is concerned ANZ National is being moved further, faster by the Reserve Bank potentially placing it at a disadvantage to competitors.

However, Westpac bowed to Reserve Bank pressure in December 2004 and agreed to incorporate in New Zealand after operating here as a branch for 143 years. Westpac was also forced to reverse plans to send its mainframe processing work, which is outsourced to IBM, from Auckland to Sydney. These moves will cost Westpac millions of dollars.

Despite a more hands-on regulator, one bank executive says the NZ banking sector is very efficient and customer focused, with the regulator having "virtually no impact on how we service the customer".

ASB managing director Hugh Burrett says he is unaware of any push from Commonwealth Bank for harmonisation. ASB has its own core IT systems here. Burrett would not like to see the APRA regime adopted here, describing it as "cumbersome".

Sam Knowles, chief executive of Government-owned Kiwibank, is also wary.

"I've worked in Australia. I know the regulatory regime there. It's a lot more onerous in terms of impact on banks than our one," says Knowles.

Last week an example of APRA's "onerous" regulations emerged. APRA's response to Australia's adoption of International Financial Reporting Standards means the four major banks will be forced to deduct about A$4.7 billion from their regulatory capital bases.

APRA is the prudential regulator of the financial services industry overseeing banks, credit unions, building societies, insurance companies and the superannuation industry. APRA, and its 520 staff, are funded by industries it supervises.

Here the Reserve Bank supervises banks through the 55 staff in its financial stability department.

The central bank generates income by investing the proceeds of issuing currency. The Ministry of Economic Development oversees credit unions, building societies, insurers and finance companies.

One supporter of letting APRA supervise Kiwi banks is National Party finance spokesman John Key.

The Reserve Bank ought not be concerned if its supervisory function is "stripped away and effectively outsourced" to APRA, Key said in a recent speech.

Publicly, Finance Minister Michael Cullen says there is no suggestion of Australia "unilaterally" setting the rules for NZ banks. But Wellington circles say Cullen's private views are similar to Key's.

David Tripe, Massey University's senior banking lecturer, suggests, however, there are other approaches to harmonising banking regulation aside from handing control over to the Australians with no questions asked. "And that, in essence, is what we're being asked to swallow."

Tripe believes there is need for regulatory co-ordination with Australia but suggests more discussions.

Deane sees benefits for banks and both their institutional and retail customers.

"Not only do they [customers] get potentially lower prices and lower costs, they get common usability across countries," says Deane.

BNZ chairman Kerry McDonald suggests benefits to customers "are not going to be great".

Meanwhile, the Reserve Bank and Treasury have suggested NZ's tax base could be hit if Australian-owned banks were free to operate here as branches with no constraints on functionality and disclosure.

Deane says the Cullen-Costello talks have left banks up in the air. As they file submissions on the Reserve Bank's proposed outsourcing policy, which emphasises standalone capability, the two finance ministers are discussing harmonising regulations.

Reserve Bank Governor Alan Bollard has told banks the Cabinet backs his policies and there will not be a single transtasman regulator.

Deane says it is now unclear if this is the case. He says Cullen needs to say clearly whether he supports the Reserve Bank's position.