Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1698848147273.pdf (New Zealand)
2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Anand Satyanand, Governor-General Order in Council At Wellington this 21st day of June 2010 Present: His Excellency the Governor-General in Council Pursuant to sections 157B, 157K, 157S, 157V, and 157ZY of the Reserve Bank of New Zealand Act 1989, His Excellency the Gov- ernor-General, acting on the advice and with the consent of the Ex- ecutive Council, and on the advice of the Minister of Finance given in accordance with a recommendation of the Reserve Bank of New Zealand made after consultation in accordance with section 157E and taking into account the principles in section 157F of that Act, makes the following regulations.
Contents 1 2 Title Commencement Page 3 3 1 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 Part 1 Preliminary provisions Interpretation Definition of related party All calculations to be on consolidated basis if deposit taker is member of borrowing group Part 2 Requirements relating to credit ratings Requirements for credit ratings Part 3 Requirements relating to maintenance of minimum capital ratio Overview Trust deed must include minimum capital ratio that deposit taker must maintain How to calculate capital ratio Calculation of capital How to calculate capital Calculation of risk-weighted amount for credit risk Calculation of risk-weighted amount for credit risk Calculation of risk-weighted amount for on-balance sheet exposures Classification of on-balance sheet exposures for purpose of determining applicable risk weight When assets may be classified as rated short-term or long-term claim How to determine applicable rating grade for purpose of classifying rated claims How to determine loan-to-valuation ratio for purpose of classifying residential mortgage loans and certain other loans How to determine loan-to-valuation ratio for purpose of classifying property development loans How to determine loan-to-valuation ratio for purpose of classifying loans secured over qualifying moveable machinery Requirements for transferred loans to be excluded from calculation of risk-weighted amount for on-balance sheet exposures 3 7 9 9 10 10 10 11 13 13 14 15 15 16 17
2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 1 r 3 26 27 Requirements for loans subject to sub-participations to be excluded from calculation of risk-weighted amount for on-balance sheet exposures Calculation of amount for market risk and operational risk How to calculate amount for market risk and operational risk Part 4 Restrictions on related party exposures Overview Trust deed must include maximum limit on aggregate related party exposures of no more than 15% of capital How to calculate maximum limit ratio Identifying related party exposures Measuring related party exposures Measuring related party exposures that are market-related contracts 28 Revocation Part 5 Revocation Schedule Tables 1 to 3 Regulations 19 21 21 21 22 22 23 23 25 25 1 2 Title These regulations are the Deposit Takers (Credit Ratings, Cap- ital Ratios, and Related Party Exposures) Regulations 2010.
Commencement These regulations come into force on 1 December 2010.
Part 1 Preliminary provisions 3 (1) Interpretation In these regulations, unless the context otherwise requires,— Act means the Reserve Bank of New Zealand Act 1989 3 Part 1 r 3 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 asset sale with recourse, in relation to a deposit taker or mem- ber of the borrowing group, means an asset sale where, under the terms of the sale, the deposit taker or member of the bor- rowing group has an obligation to assume or retain a risk in relation to the asset sold book value, in relation to an item, means— (a) the amount shown for that item in the statement of fi- nancial position of a deposit taker; or in a calculation required to be made on a consolidated basis, the amount shown for that item in the consoli- dated statement of financial position for the borrowing group in accordance with regulation 5 (b) consolidated basis means the basis set out in regulation 5 credit rating means a rating of a deposit taker’s creditworthi- ness that complies with section 157I of the Act direct credit substitute, in relation to a deposit taker or mem- ber of the borrowing group,— (a) means an off-balance sheet exposure that carries the same credit risk to the deposit taker or member of the borrowing group as a direct extension of credit by the deposit taker or member of the borrowing group; and includes (without limitation)— (i) (ii) a bill of exchange; and a letter of credit serving as a financial guarantee for a loan; and a guarantee of
 a financial obligation given by the deposit taker or member of the borrowing group; but (iii) (b) does not include a loan commitment (c) exchange rate contract has the meaning set out in regulation 27(3) forward asset purchase, in relation to a deposit taker or mem- ber of the borrowing group, means a commitment by the de- posit taker or member of the borrowing group to purchase on a specified future date a loan, security, or other asset from an- other party generally accepted accounting practice has the
 same mean- ing as in section 3 of the Financial Reporting Act 1993 4 2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 1 r 3 group member has the meaning set out in regulation 4(1)(a) independent valuer means a person who is not associated (whether directly or indirectly) with a person who has an in- terest in the property for which a valuation is made and who is— (a) a registered valuer (as defined in section 2 of the Valuers Act 1948); or another person approved to provide valuation services by rules made under the Rating Valuations Act 1998 (b) interest rate contract has the meaning set out in regulation 27(3) market-related contract has the meaning set out in regulation 27(3) ordinary shares means shares that— (a) (b) have full voting rights; and have no preferential or predetermined rights to distribu- tions of capital or income; and are not redeemable within the meaning of section 68 of the Companies Act 1993 (c) original maturity has the meaning set out in regulation 27(3) personal loan means a loan to an individual not exceeding $40,000 property development loan means a loan made for the pur- pose of financing the development of real property property valuation policy,— (a) in relation to a residential mortgage loan, property de- velopment loan, or other loan secured over land, build- ings (including buildings that are not yet complete), or both, means a policy governing how property value is
 determined for a loan against that type of property that— (i) is approved by the deposit taker’s governing body; and includes guidance on the use of— (A) a valuation produced by an independent valuer; and the purchase price of the property; and (B) (ii) 5 Part 1 r 3 (b) Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 (ii) in relation to a loan secured over qualifying moveable machinery, means a policy governing how the value of the security is determined
 that— (i) is approved by the deposit taker’s governing body; and includes guidance on the appropriate value of the security over the lifetime of the loan public sector entity means a local authority (as defined in section 5 of the Local Government (Rating) Act 2002) qualifying insured residential mortgage loan means a resi- dential mortgage loan that is fully covered by lenders’ mort- gage insurance provided by the Housing New Zealand Cor- poration qualifying moveable machinery— (a) has the same meaning as that given to motor vehicle by section 57 of the Personal Property Securities Act 1999; but includes an aircraft (b) qualifying mutual means— (a) (b) a co-operative company as defined in section 2 of the Co-operative Companies Act 1996: a credit union as defined in section 2 of the Friendly Societies and Credit Unions Act 1982 related party has the meaning set out in regulation 4 residential mortgage loan means a loan secured by a mort- gage over a residential property used primarily for residential purposes either by the mortgagor or by a tenant of the mort- gagor sub-participation has the meaning set out in regulation 20(2) substantial interest has the meaning set out in regulation 4(3).
In these regulations, unless the context otherwise requires, a reference to a financial statement means a financial statement prepared in accordance with generally accepted accounting practice.

(2) (3) Any term or expression that is defined in the Act and used, but not defined, in these regulations has the same meaning as in the Act.
6 2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 1 r 4 (4) Any term or expression that is used in these regulations, but not defined in the Act or these regulations, and that has a meaning according to generally accepted accounting practice has the same meaning in these regulations.
4 (1) (2) (b) Definition of related party The purpose of subclauses (2) and (3) is to restate the statutory definition of related party of a deposit taker in section 157B of the Act, and to declare some additional classes of persons to be related parties for the purposes of Part 5D of the Act with the following effect: (a) if the deposit taker is part of a borrowing group, persons who are related to any member of the borrowing group (a group member) are also treated as related parties of the deposit taker; and the following classes of persons are also related parties: persons in which the deposit taker or a group (i) member has a substantial interest (see subclause (2)(f)): sister entities of the deposit taker or of a group member (see subclause (2)(g)): persons with which the deposit taker or a group member (or a person with a substantial interest in the deposit taker or group member) have inter- locking boards (see subclause (2)(h)).
For the purposes of Part 5D of the Act, a person (A) is a related party of a deposit taker if— (iii) (ii) Directors and senior office holders and their relatives (a) A is a director of the deposit taker or of a group member: (b) A is a senior office holder of the deposit taker or of a (c) group member: A is a relative of a director or senior office holder of the deposit taker or of a group member: Subsidiaries (d) A is a subsidiary of the deposit taker or of a group mem- ber: 7 Part 1 r 4 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 (e) (f) (g) (h) Persons having substantial interest in deposit taker or group member A has a substantial interest in the deposit taker or a group member: Entities in which deposit taker or group member has substantial interest and sister entities the deposit taker or a group member has a substantial interest in A: another person with a substantial interest in the deposit taker or a group member has a substantial interest in A: Example If a company (X co) that owns 10% of the shares in a deposit taker also owns 10% of the shares in another entity (Y co), then X co is a related party of the deposit taker under paragraph (e) and Y co is a related party of the deposit taker under paragraph (g).
Entities with interlocking boards 40% or more of A’s governing body are the same per- sons as 40% or more of the governing body of the de- posit taker or of a group member (or of another person that has a substantial interest in the deposit taker or of a group member).
In this regulation, a person (X) has a substantial interest in another person (an entity) if— (a) the entity is a company and X— (i) owns, or in any way has the power to control (whether directly or indirectly), or has the right to acquire, 10% or more of the ordinary shares of the entity; or owns, or in any way has the power to control (whether directly or indirectly), or has the right to acquire, 10% or more of the voting rights of the entity; or has, by any other means, 10% or more of the control of the entity: (ii) (iii) (b) the entity is not a company and X— (3) 8 2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 2 r 6 (4) 5 (1) (2) (i) (ii) is in a position to control (whether directly or indirectly) 10% or more of the voting rights in relation to the entity; or has, by any other means, 10% or more of the control of the entity: (c) X has control (whether directly or indirectly) or signifi- cant influence over 25% or more of the composition of the governing body of the entity.
Subclause (1) is intended only as a guide to the general scheme and effect of this regulation.

All calculations to be on consolidated basis if deposit taker is member of borrowing group If a deposit taker is a member of a borrowing group, every calculation that these regulations require the deposit taker to make must be made on a consolidated basis for the deposit taker’s borrowing group.
If a calculation is made on a consolidated basis for a borrowing group, then— (a) no member of that borrowing group is a related party of the relevant deposit taker for the purposes of the calcu- lation (despite regulation 4(2)); and the calculation is only required to be made on the con- solidated basis specified in subclause (1) (rather than on a solo basis for the deposit taker as well as on that con- solidated basis).
(b) Part 2 Requirements relating to credit ratings 6 Requirements for credit ratings For the purposes of section 157I(a) of the Act, the current rat- ing of a deposit taker’s creditworthiness given by an approved rating agency must be a local currency (New Zealand dollar), long-term, issuer rating.

9 Part 3 r 7 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 Part 3 Requirements relating to maintenance of minimum capital ratio operational risk.
Overview This regulation is intended only as a guide to the general scheme and effect of this Part.

The capital ratio of a deposit taker is the ratio of the deposit taker’s capital to an amount representing the degree of the fol- lowing types of risk to which the deposit taker is exposed: (a) credit risk: (b) market risk: (c) This Part sets out what a trust deed must include about the capital ratio (see regulation 8) and how the capital ratio must be calculated.
Calculation of the capital ratio requires determination of— (a) (b) the deposit taker’s capital (see regulation 10); and the deposit taker’s risk-weighted amount for credit risk (see regulation 11); and the deposit taker’s aggregate amount for market risk and operational risk (see regulation 21).
(c) Trust deed must include minimum capital ratio that deposit taker must maintain Every deposit taker and trustee must ensure that the trust deed includes the minimum capital ratio that the deposit taker must maintain.

The deposit taker and the trustee must ensure that the min- imum capital ratio that is included in the trust deed is— (a) not less than 8%, if the deposit taker has a credit rating; and not less than 10%, if the deposit taker does not have a credit rating.
(b) How to calculate capital ratio The capital ratio must be calculated as the ratio, expressed as a percentage, of the deposit taker’s capital to the sum of— 7 (1) (2) (3) (4) 8 (1) (2) 9 (1) 10 2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 3 r 10 (2) (3) (4) 10 (1) (2) (a) (b) the deposit taker’s risk-weighted amount for credit risk, calculated in accordance with regulation 11; and the deposit taker’s aggregate amount for market risk and operational risk, calculated in accordance with regula- tion 21.
The deposit taker’s capital, referred to in subclause (1), must be calculated in accordance with regulation 10 using book values as at the date of calculation.

If the deposit taker is part of a borrowing group, the capital ratio must be calculated on a consolidated basis (see regulation 5).
If accounting standards require a securitisation special purpose vehicle to be consolidated for the purposes of group financial statements, the special purpose vehicle must be consolidated with the deposit taker or the borrowing group for the purposes of the calculations under this Part.
Calculation of capital How to calculate capital Capital must be calculated in accordance with the following formula: gross capital – deductions (d) In the formula in subclause (1), gross capital is— (a) (b) (c) issued and fully paid-up ordinary shares: retained earnings: fully paid-up perpetual non-cumulative preference shares that meet the requirements in subclause (4), up to the limits set out in subclause (5): revenue and other reserves, including the following, but not including reserves that are earmarked on account of any assessed likelihood of loss: (i) (ii) capital redemption reserves: other reserves that are created or increased by appropriations of retained earnings net of tax and dividends payable: share premium reserves arising from the issue of ordinary shares: (iii) 11 Part 3 r 10 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 (iv) each of the following types of reserves that are reflected in the statement of financial position: (A) reserves arising from a revaluation of tan- gible fixed assets, including owner-occu- pied property: foreign currency translation reserves: reserves arising from the revaluation of investments: (B) (C) (d) (e) minority interests.
In the formula in subclause (1), deductions are— goodwill and other intangible assets: (a) future tax benefits and deferred tax assets: (b) share capital in, and subordinated loans to, related par- (c) ties: share capital in, and subordinated loans to, other finan- cial institutions or holding companies of other financial institutions (whether held directly or indirectly): unrealised gains and losses on liabilities designated at fair value through profit and loss that arise from changes in the deposit taker’s or member of the bor- rowing group’s own credit risk: any fair value gain that relates to a financial instrument where— (i) (e) (f) fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable cur- rent market transactions in the same instrument; or fair value is not based on observable market data; or fair value is based on prices in a market that is not active: (ii) (iii) (g) any surplus, net of any associated deferred tax liabil- ities, in any defined benefit superannuation fund spon- sored by the deposit taker as employer.
Perpetual non-cumulative preference shares may be included in capital if they meet the following requirements: (a) the payment of dividends on shares is able to be with- held if the financial condition of the deposit taker or (3) (4) 12 2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 3 r 12 (b) (c) (d) borrowing group would not support payment of those dividends; and dividends that are withheld in accordance with para- graph (a) are not cumulative; and the dividend rate for the shares must be set— (i) (ii) as a fixed percentage rate; or as a fixed margin above a benchmark floating rate (for example, a bank bill rate); and the shares are not— (i) subject to any arrangement for resetting the divi- dend rate; or redeemable within the meaning of section 68 of the Companies Act 1993; or repayable or redeemable at the option of the holder.
(ii) (iii) (5) 11 Perpetual non-cumulative preference shares without full vot- ing rights may not constitute more than— (a) 25% of capital, if a deposit taker is not a qualifying mutual; and 50% of capital, if a deposit taker is a qualifying mutual.
(b) Calculation of risk-weighted amount for credit risk (b) Calculation of risk-weighted amount for credit risk A deposit taker must calculate its risk-weighted amount for credit risk by aggregating— (a) its risk-weighted amount for on-balance sheet expos- ures, calculated in accordance with regulation 12; and the following off-balance sheet exposures, measured as the principal or notional principal amount of the expos- ure as at the date of calculation, risk-weighted at 100%: (i) (ii) (iii) direct credit substitutes: asset sales with recourse: forward asset purchases.
12 (1) Calculation of risk-weighted amount for on-balance sheet exposures To calculate its risk-weighted amount for on-balance sheet ex- posures, a deposit taker must— 13 Part 3 r 13 (a) Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 classify each on-balance sheet asset into its appropriate class in table 1 of the Schedule in accordance with regu- lations 13 to 20,— (i) including any transferred loan, unless that loan meets the requirements for exclusion set out in regulation 19; and including any loan or part of a loan in respect of which there is a sub-participation, unless that sub-participation meets the requirements for ex- clusion set out in regulation 20; but excluding any asset that must be deducted from the deposit taker’s capital under regulation 10; and (ii) (iii) (b) multiply the book value of each asset as at the date of calculation (measured net of any allowances for impair- ment loss and unearned income) by the risk weight that applies to that class of asset set out in table 1 of the Schedule; and aggregate the resulting amounts.
(c) (2) However, if the asset is a loan for which the deposit taker holds a deposit as security, the deposit taker may deduct the deposit from the book value of the loan before carrying out the mul- tiplication under subclause (1)(b) if there is a written contrac- tual agreement between the deposit taker and the depositor that provides that the deposit taker has direct, unconditional, and irrevocable recourse to the deposit security.
13 (1) Classification of on-balance sheet exposures for purpose of determining applicable risk weight The deposit taker must classify each on-balance sheet asset according to the first numbered class into which it falls in the first column of table 1 of the Schedule.

(2) However, if a loan is made against more than 1 form of se- curity, it must be classified into the numbered class that refers to one of those forms of security and that has the highest risk weight.
14 2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 3 r 15 14 When assets may be classified as rated short-term or long-term claim (1) An asset may only be classified as— (a) (b) a rated short-term claim if there is a short-term credit as- sessment of that claim and the credit assessment meets the requirements in subclause (3); and a rated long-term claim if there is a long-term credit as- sessment of that claim or a credit assessment of the is- suer or the counterparty and the credit assessment meets the requirements in subclause (3).
(2) However, in the case of a subordinated claim,— (3) (4) (5) 15 (1) (a) (b) subclause (1)(b) does not apply; and the asset may only be classified as a rated long-term claim if there is a long-term credit assessment of that claim and the credit assessment meets the requirements in subclause (3).

The credit assessment must— (a) be solicited from, and issued by, an approved rating agency; and be paid for by the issuer or rated counterparty or a com- mercial associate of the issuer or rated counterparty.
(b) For the purposes of subclause (3)(b), a person is a commercial associate in relation to the issuer or rated counterparty if— (a) the person and the issuer or rated counterparty are in the same group of companies; or the person and the issuer or rated counterparty are di- rectly or indirectly under the control of the same per- sons.

(b) In subclause (4)(a), group of companies means a holding company and its subsidiaries within the meaning of section 5 of the Companies Act 1993.
How to determine applicable rating grade for purpose of classifying rated claims For the purpose of classifying a rated short-term claim, the rat- ing grade that applies to the claim is the rating grade that cor- responds to the rating agency’s assessment according to table 2 of the Schedule.
15 Part 3 r 16 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 (2) (3) 16 (1) (2) For the purpose of classifying a rated long-term claim, the rat- ing grade that applies to the claim is the rating grade that cor- responds to the rating agency’s credit assessment according to table 3 of the Schedule.
If there are different credit assessments for a particular claim, the credit assessment that must be used is the credit assessment that results in the higher (less favourable) rating grade accord- ing to table 2 or 3 of the Schedule (as applicable).
How to determine loan-to-valuation ratio for purpose of classifying residential mortgage loans and certain other loans For the purpose of classifying a residential mortgage loan or other loan secured by first mortgage over land, buildings, or both (to avoid doubt, not including a property development loan, see regulation 17), the loan-to-valuation ratio must be calculated using the formula— loan value property value × 100 In the formula in subclause (1), loan value,— (a) in relation to a residential mortgage loan, is the total amount of— (i) all claims secured by way of first mortgage over the residential property; and subsequent claims of the deposit taker or mem- bers of the borrowing group (if the deposit taker is part of a borrowing group) that are secured over the residential property: (ii) (b) in relation to other loans secured by first mortgage over land, buildings, or both, is the total amount of— (i) all claims secured by way of first mortgage over the land, buildings, or both; and subsequent claims of the deposit taker or mem- bers of the borrowing group (if the deposit taker is part of a borrowing group) that are secured over the same land, buildings, or both.
(ii) (3) In the formula in subclause (1), property value,— 16 2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 3 r 17 (a) (b) in relation to a residential mortgage loan, is the value of the residential property determined under a deposit taker’s property valuation policy: in relation to other loans secured by first mortgage over land, buildings, or both, is the value of the land, build- ings, or both, determined under a deposit taker’s prop- erty valuation policy.
How to determine loan-to-valuation ratio for purpose of classifying property development loans For the purpose of classifying a property development loan, the loan-to-valuation ratio must be calculated using the for- mula— loan value present value of the property × 100 In the formula in subclause (1),— (a) loan value is the total amount of— (i) (ii) all claims secured by way of first mortgage over the land, buildings, or both; and subsequent claims of the deposit taker or mem- bers of the borrowing group (if the deposit taker is part of a borrowing group) that are secured over the same land, buildings, or both: (b) present value of the property is calculated using the formula— value × (1 − time to maturity × 0.12) In the formula in subclause (2)(b),— (a) value is the net realisable value of the land and build- ings at completion as determined by an independent valuer in accordance with the deposit taker’s property valuation policy: time to maturity is the expected time to maturity of the credit exposure, in years (including part-years, ex- pressed as a decimal), as at the date of calculation.
(b) 17 (1) (2) (3) 17 Part 3 r 18 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 18 (1) (2) How to determine loan-to-valuation ratio for purpose of classifying loans secured over qualifying moveable machinery For the purpose of classifying a first ranking loan secured over qualifying moveable machinery in respect of which a finan- cing statement has been registered and perfected under the Per- sonal Property Securities Act 1999, the loan-to-valuation ratio must be calculated using the formula— loan value property value × 100 In the formula in subclause (1),— (a) (b) loan value is the total amount of the first ranking loan secured over the qualifying moveable machinery: property value is the value of the qualifying moveable machinery determined under the deposit taker’s prop- erty valuation policy.
19 Requirements for transferred loans to be excluded from calculation of risk-weighted amount for on-balance sheet exposures (1) A deposit taker may only exclude a transferred loan from the calculation of its amount for risk-weighted on-balance sheet exposures under regulation 12 if the transfer meets the follow- ing requirements: (a) (b) the loan is transferred by novation or assignment; and the transfer does not contravene the terms and condi- tions of the underlying loan agreement and all necessary consents have been obtained; and the seller has no residual beneficial interest in the prin- cipal amount of the loan (or that part which has been transferred), and the buyer has no formal recourse to the seller for losses; and the seller has no obligation to repurchase the loan, or any part of it, at any time; and the seller has given notice to the buyer that it is under no obligation to repurchase the loan or support any losses suffered by the buyer, and the buyer has provided writ- (c) (d) (e) 18 2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 3 r 20 ten acknowledgement of the absence of those obliga- tions; and the documented terms of the transfer are such that if the loan is rescheduled or renegotiated, the buyer, and not the seller, will be subject to the rescheduled or renego- tiated terms; and if payments are routed through the seller, the seller is under no obligation to remit funds to the buyer unless and until they are received from the borrower; and if the buyer is subject to a trust arrangement, the trustees of that trust are independent of the seller or companies related to the seller both during and after the sale nego- tiations; and a clean transfer within the meaning of subclause (2) is achieved.
(f) (g) (h) (i) (2) A clean transfer is achieved if, as a result of the transfer, the deposit taker or member of the borrowing group (as applic- able)— (a) would incur no loss (of interest or principal) in the event of non-performance by the borrower; and reasonably believes that it is not, in any circumstances, required to support the loan.
(b) 20 Requirements for loans subject to sub-participations to be excluded from calculation of risk-weighted amount for on-balance sheet exposures (1) A deposit taker may only exclude a loan, or any part of a loan, in respect of which the deposit taker (or member of the borrow- ing group, as applicable) has entered into a sub-participation from the calculation of its risk-weighted amount for on-bal- ance sheet exposures under regulation 12 if the following re- quirements are met: (a) there are no terms or conditions in the underlying loan agreement that would prevent the deposit taker or mem- ber of the borrowing group from entering into the sub- participation and all necessary consents have been ob- tained; and 19 Part 3 r 20 (b) Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 the deposit taker or member of the borrowing group, whether under the terms of the sub-participation agree- ment or any other agreement or arrangement,— (i) is not under an obligation to assume all or any part of the risk of the sub-participant under the sub-participation in any circumstances; and has no liability for any losses suffered by the sub- participant under the sub-participation as a result of default by the borrower under the underlying loan agreement; and (ii) (c) (d) (e) the sub-participant must have given written acknow- ledgement to the deposit taker or member of the bor- rowing group, confirming the matters in paragraph (b); and the deposit taker or member of the
 borrowing group is not under an obligation to repay any amount to the sub-participant unless and until an equivalent amount is received by the deposit taker or member of the borrow- ing group under the underlying loan agreement, includ- ing if payments under the underlying loan agreement are rescheduled; and if the sub-participation does not apply to the whole of the underlying loan, the parts of the loan that are subject to the sub-participation must rank equally with the parts of the loan that are not subject to the sub-participation in the event of default by the borrower.
In this regulation, sub-participation means a transaction in which a person (the sub-participant) places a deposit with the deposit taker or the member of the borrowing group (A) in the amount of its participation in respect of a loan (the under- lying loan) by A to a third party (the borrower) on terms under which A’s obligation to repay the sub-participant depends on the borrower repaying A under the underlying loan agreement; and sub-participation agreement has a corresponding mean- ing.
(2) 20 2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 4 r 23 21 22 (1) (2) (3) (4) 23 (1) Calculation of amount for market risk and operational risk How to calculate amount for market risk and operational risk A deposit taker must calculate its aggregate amount for market risk and operational risk by applying the book value for its total assets as at the date of calculation and its risk-weighted amount for credit risk, calculated in accordance with regulation 11, in the following formula: total assets + deposit taker’s risk-weighted amount for credit risk 2 × 0.175 Part 4 Restrictions on related party exposures Overview This regulation is intended only as a guide to the general scheme and effect of this Part.
The limit on related party exposures is a limit, expressed as a ratio, on the exposures that a deposit taker may have to related parties, relative to the deposit taker’s capital base.
The limit applies to all exposures to related parties, in aggre- gate (and is not a limit on exposures to individual related par- ties), and, if the deposit taker is part of a borrowing group,— applies to exposures to related parties of all members (a) of the borrowing group (by virtue of the definition of related party); and (b) is relative to the capital of that borrowing group.
This Part sets out what a trust deed must include about the maximum limit on related party exposures (see regulation 23) and how the maximum limit must be calculated.

Trust deed must include maximum limit on aggregate related party exposures of no more than 15% of capital Every deposit taker and trustee must ensure that the trust deed includes a maximum limit on aggregate exposures to related parties that the deposit taker must not exceed.
21 Part 4 r 24 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 (2) (3) The maximum limit must be fixed by agreement between the deposit taker and the trustee (but see section 157ZD of the Act for provisions that apply if there is no agreement).

The maximum limit must be expressed as a ratio that— (a) must be calculated in accordance with regulation 24; and (b) must not exceed 15%.
How to calculate maximum limit ratio 24 (1) A deposit taker must calculate the maximum limit (and meas- ure whether or not it is exceeding that maximum limit) by— determining the amount of the aggregate exposures as (a) follows: (i) identifying the exposures as set out in regulation 25; and (ii) measuring those exposures as set out in regula- tions 26 and 27; and (iii) adding together all of those exposures; and determining the amount of capital under regulation 10, using the book values most recently reported to the trustee; and applying those amounts in the following formula: (b) (c) aggregate exposures capital × 100 If the deposit taker is part of a borrowing group, both the ag- gregate exposures and the capital must be calculated on a con- solidated basis (see regulation 5).
If accounting standards require a securitisation special purpose vehicle to be consolidated for the purposes of group financial statements, the special purpose vehicle must be consolidated with the deposit taker or the borrowing group for the purposes of the calculations under this Part.
Identifying related party exposures The deposit taker must identify, for the purposes of regula- tion 24(1)(a)(i), all actual, potential, or contingent exposures to loss for the deposit taker (or a member of its borrowing (2) (3) 25 (1) 22 2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 4 r 27 (2) group) under a contract or arrangement if a related party fails to discharge its obligations (whether or not the related party is a counterparty to the contract or arrangement).
In identifying those exposures, the deposit taker must— (a) include those not recorded in the statement of finan- cial position (for example, commitments, contingen- cies, stand-by lines, letters of credit); and exclude those that are share capital or subordinated loans.
(b) 26 Measuring related party exposures (1) An exposure identified under regulation 25 (other than a mar- ket-related contract) must then be measured on the following basis: (a) if it is included in the statement of financial position, the exposure is the book value most recently reported to the trustee: if it is not included in the statement of financial position, the exposure is the maximum loss that the deposit taker (or member of the borrowing group) would incur, as at the date of calculation, as a result of the related party failing to discharge its obligations.
(b) (2) In each case, however, the exposure must be measured net of allowances for impairment loss and without taking into ac- count any credit risk mitigation arrangements.
27 Measuring related party exposures that are (1) (2) market-related contracts If an exposure identified under regulation 25 is a market-re- lated contract, the exposure must be measured as the notional principal amount of the contract, as at the date of calculation, multiplied by the credit conversion factor that applies under subclauses (2) and (3).
The credit conversion factor must be determined under the fol- lowing table according to the type of contract and its original maturity: 23 Part 4 r 27 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 Type of contract Interest rate contract Original maturity Credit conversion factor 0.5% less than 1 year 1 year or more Exchange rate contract less than 1 year 1 year or more Equity or commodity contract less than 1 year aggregate of 1% for each year (or part of a year) of maturity 2% aggregate of 2% for 1st year and 4% for each additional year (or part of year) of ma- turity 5% 1 year or more, but less than 2 years 2 years or more 7% 10% In this regulation and regulation 26,— (a) (b) a market-related contract means a contract that is set- tled on a future date and the value of which is deter- mined by reference to the price of an underlying equity or commodity, to an interest rate or exchange rate, to changes in any of those rates or prices, or to an index of any of them (the underlying market); and a market-related contract is— (i) an interest rate contract if the underlying mar- ket is an interest rate, changes in an interest rate, or an index of interest rates: an exchange rate contract if the underlying mar- ket is an exchange rate, changes in an exchange rate, or an index of exchange rates: an equity or commodity contract if the under- lying market is an equity or commodity, or changes in the prices of an equity or commodity, or an index of equity or
 commodity prices; but (ii) (iii) (c) if a market-related contract is more than 1 type of mar- ket-related contract under paragraph (b), it must be clas- sified as being the type of those market-related contracts that has the highest credit conversion factor under the table in subclause (2); and (3) 24 2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Schedule (d) original maturity means the maturity of the contract under its terms as at the date it takes effect (rather than the residual maturity at the time of the calculation).
Part 5 Revocation 28 Revocation The Deposit Takers (Credit Ratings) Regulations 2009 (SR 2009/420) are revoked.
Schedule Tables 1 to 3 Table 1 Risk-weighted exposures for on-balance sheet assets rr 12,13,15 Item Class Cash (notes, coin, and gold bullion held by deposit taker or bor- rowing group member (as applicable) on site) Claims on Crown and Reserve Bank Claims on public sec- tor entities Claims Zealand banks short-term Rated claims (see regulations 14 and 15) New registered on – with a rating grade of 1 – with a rating grade of 2 – with a rating grade of 3 – with a rating grade of 4 long-term Rated claims (see regulations 14 and 15) Risk weight 0% 0% 20% 20% 20% 50% 100% 150% 25 Schedule Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 Table 1—continued Item Class Risk weight – with a rating grade of 1 – with a rating grade of 2 – with a rating grade of 3 – with a rating grade of 4 – with a rating grade of 5 – with a rating grade of 6 Qualifying insured residential mortgage loans Residential mortgage loans (see regulation 16) – first ranking with a loan-to- valuation ratio not exceeding 70% – first ranking with a loan-to- valuation ratio exceeding 70% but not exceeding 80% – first ranking with a loan-to- valuation ratio exceeding 80% but not exceeding 90% – first ranking with a loan-to- valuation ratio exceeding 90% but not exceeding 100% – first ranking with a loan- to-valuation ratio exceeding 100% – second or subsequent ranking – first ranking security with a loan-to-valuation ratio not ex- ceeding 60% – first ranking
 security with a loan-to-valuation ratio exceed- ing 60% but not exceeding 100% Property develop- ment loans (see regu- lation 17) 26 20% 50% 100% 100% 150% 150% 20% 35% 50% 100% 125% 150% 150% 150% 200% 2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Schedule Table 1—continued – any other property develop- including those loans, ment with second or subsequent ranking security, no security, and first ranking security with a
 loan-to-valuation ratio ex- ceeding 100% Risk weight 300% Item Class 24 loans with Other security qualifying over and/or land buildings (see regula- tion 16) 25 26 27 28 29 Loans secured over qualifying moveable machinery) (see regu- lation 18) Personal loans – first mortgage over land and/or buildings with a loan-to-valu- ation ratio not exceeding 70%, excluding property develop- ment loans and residential mortgage loans – first mortgage over land and/or buildings with a loan-to-valu- ation ratio exceeding 70% but not exceeding 100%, ex- cluding property development loans and residential mortgage loans – first ranking in respect of which a financing statement has been registered and perfected under the Personal Property Secur- ities Act 1999 and when an identification number is used to describe the collateral with a loan-to-valuation ratio not ex- ceeding 70% – in respect of which a financing statement has been registered and perfected under the Per- sonal Property Securities Act 1999 – in respect of which a financing statement has not been regis- tered under the Personal Prop- erty Securities Act 1999 100% 150% 100% 100% 150% 27 Schedule Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 Table 1—continued Item Class Risk weight Other (not loans within classes 15 to 29, except in a case to which regulation 13(2) applies) 30 31 – where a financing statement has been registered and per- fected under the Personal
 Prop- erty Securities Act 1999 – where a financing statement has not been registered and perfected under the Personal Property Securities Act 1999 32 Assets in respect of which deposit taker or other borrowing group member applic- (as able) is lessor under an lease operating (excluding leases over assets that are land and buildings) Equity holdings (not deducted from capital) operating 33 34 Other assets Table 2 Rating grades for short-term credit assessments Rating grade Rating agency credit assessments
 150% 200% 175% 600% 350% Standard & Poor’s Ratings Services A-1 A-2 A-3 Other Moody’s Investors Service P-1 Fitch Ratings F1 P-2 P-3 Other F2 F3 Other 1 2 3 4 28 2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Schedule Table 3 Rating grades for long-term or issuer credit assessments Rating grade Rating agency credit assessments Standard & Poor’s Ratings Services AAA Moody’s Investors Service Aaa Fitch Ratings AAA AA+ AA AA− A+ A A− BBB+ BBB BBB− BB+ BB BB− B+ B B− CCC+ CCC CCC− CC C D Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C AA+ AA AA− A+ A A− BBB+ BBB BBB− BB+ BB BB− B+ B B− CCC+ CCC CCC− CC C D Michael Webster, for Clerk of the Executive Council.
29 Explanatory note Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 Explanatory note This note is not part of the regulations, but is intended to indicate their general effect.

These regulations, which come into force on 1 December 2010, pre- scribe various matters for the purposes of Part 5D of the Reserve Bank of New Zealand Act 1989 (the Act), which relates to the pru- dential regulation of deposit takers.
The regulations— • specify the type of credit rating that a deposit taker is required to have: require every deposit taker and trustee to ensure that the de- posit taker’s trust deed includes the minimum capital ratio that the deposit taker must maintain: specify that the minimum capital ratio that must be included in the trust deed is not less than 8% if the deposit taker has a credit rating under the Act and not less than 10% if it does not have such a credit rating: set out how the minimum capital ratio must be calculated: declare additional classes of persons to be related parties of deposit takers for the purposes of Part 5D: require every deposit taker and trustee to ensure that the de- posit taker’s trust deed includes a maximum limit on aggregate exposures to related parties relative to capital, fixed by agree- ment between the deposit taker and trustee: provide that the maximum limit on related party exposures included in the trust deed must not exceed 15%: set out how the maximum limit on related party exposures must be calculated.
• • • • • • • The regulations are organised into 5 parts as follows: Regulations 1 and 2 relate to the title and commencement of the regu- lations.

Part 1: preliminary provisions Regulation 3 defines terms used in the regulations.

The Act also defines a number of terms used in the regulations.
The effect of regulation 3(4) is that if a term is used in the regulations but is not defined and that term has a meaning according to generally 30 2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Explanatory note accepted accounting practice, then the term must be given the mean- ing according to generally accepted accounting practice.
Regulation 4 restates the statutory definition of related party and ex- tends that definition so that any related party of a member of the borrowing group is treated as also being a related party of the de- posit taker for the purposes of Part 5D.
The following classes are also added: • sister entities of the deposit taker or any member of the bor- rowing group: persons in which the deposit taker or any member of the bor- rowing group has a substantial interest (which, in essence, is 10% control over the entity or control or significant influence over 25% of the board composition): persons with which the deposit taker or a group member (or a person with a substantial interest in the deposit taker or group member) have interlocking boards (in essence, 40% common membership).
• • The extended definition of related party applies for the purposes of Part 5D of the Act.

The term is used in section 157L of the Act (which relates to governance requirements for deposit takers) and in sections 157V to 157Y of the Act and Part 4 of these regulations (which impose limits on aggregate related party exposures).
Regulation 5 provides that where a deposit taker is a member of a bor- rowing group, every calculation that the regulations require a deposit taker to make must be made on a consolidated basis for the deposit taker’s borrowing group.

Part 2: requirements relating to credit ratings Regulation 6 requires the rating of creditworthiness that a deposit taker must have from an approved rating agency under section 157I of the Act to be a local currency (New Zealand dollar), long-term, is- suer rating.
These are the same requirements as prescribed by the De- posit Takers (Credit Ratings) Regulations 2009 (which are revoked by these regulations).

A long-term issuer rating expresses an opinion about the overall capacity of a deposit taker to meet its financial obli- gations (in contrast to an issue rating, which relates only to a specific financial obligation).
31 Explanatory note Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 Part 3: requirements relating to maintenance of minimum capital ratio This Part sets out the regulations needed under sections 157S to 157U of the Act.

Regulation 8 requires every deposit taker and trustee to ensure that the deposit taker’s trust deed includes the minimum capital ratio that the deposit taker has to maintain.
This must be not less than 8% if the deposit taker has a credit rating under section 157I of the Act and not less than 10% if the deposit taker does not have such a credit rating.
Regulation 9 provides that the capital ratio must be calculated as the ratio (expressed as a percentage) of the deposit taker’s capital (cal- its culated as set out in regulation 10) to the sum of 2 amounts: risk-weighted amount for credit risk (calculated as set out in regu- lation 11) and its aggregate amount for market risk and operational risk (calculated as set out in regulation 21).

If the deposit taker has a borrowing group, the calculation must be done on a consolidated basis.
To calculate its risk-weighted amount for credit risk, the deposit taker must classify each of its on-balance sheet exposures into the first class that applies to the asset in table 1 of the Schedule (unless the asset is a loan secured over more than 1 form of security) and then mul- tiply the value of each asset by the risk-weight that applies to that class set out in the second column of the table.
The resulting total amount for risk-weighted on-balance sheet exposures must then be added to the deposit taker’s following off-balance sheet exposures: direct credit substitutes, asset sales with recourse, and forward asset purchases.

In the case of a loan secured over more than 1 form of security, instead of classifying that asset into the first class that ap- plies in table 1, it must be classified into the class that refers to one of those forms of security and that produces the highest risk weight.
Regulations 12 to 20 contain more detailed provisions about when certain assets must be included in the calculation of risk-weighted on-balance sheet exposures and requirements that must be satisfied before certain on-balance sheet assets are able to be classified into various of the classes listed in table 1.

Regulation 21 sets out a formula for calculation of the deposit taker’s aggregate amount of market risk and operational risk.
Two values need to be determined to apply the formula: the deposit taker’s total assets (taken from the book value) and the deposit taker’s 32 2010/167 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Explanatory note risk-weighted amount for credit risk (taken from the calculation made under regulation 11).

Part 4: restrictions on related party exposures This Part sets out the regulations needed to implement sections 157V to 157Y of the Act.
The combined effect of the Act and these regu- lations is to require deposit takers and trustees to include an agreed maximum limit on aggregate exposures to related parties in the trust deed of no more than 15% of capital (expressed as a ratio).

It is a limit on aggregate related party exposures, not a limit on exposures to individual related parties.
If the deposit taker is part of a borrow- ing group, the ratio must be calculated on a consolidated basis so that it captures exposures of every member of the borrowing group to a related party of any member of the borrowing group and applies rela- tive to the consolidated capital of the borrowing group.

Regulation 24 sets out the ratio calculation.


For the purposes of that calculation, the related party exposures must be identified in accord- ance with regulation 25 and measured in accordance with regulations 26 and 27.

Regulation 25 requires the inclusion of not just the stand- ard forms of lending, but all on- and off-balance sheet exposures.

Exposures of a capital nature are excluded because they are required to be deducted from capital.
Regulation 26 requires the full potential exposure to be measured.

However, market-related contracts must be measured under regulation 27 by applying a credit conversion factor that is intended to approximate their replacement cost over the life- time of the contract.

Part 5: revocation Regulation 28 revokes the Deposit Takers (Credit Ratings) Regula- tions 2009.
33 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 2010/167 Issued under the authority of the Acts and Regulations Publication Act 1989.

Date of notification in Gazette: 24 June 2010.

These regulations are administered by the Reserve Bank of New Zealand.

12 34 Wellington, New Zealand: Published under the authority of the New Zealand Government—2010