Alan Bollard: After the National Bank acquisition - living with big Australian
banks
An excerpt of an address by Dr Alan Bollard, Governor of the Reserve Bank of New Zealand, to the
Australasian Institute of Banking and Finance, Auckland, 6 November 2003.
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Having a banking industry consisting mainly of banks with Australian parentage has many advantages
for us. Despite our country's small size, our banking system benefits from the presence of strong,
innovative, internationally-connected players that are from a highly-respected country and understand
our preferred ways of banking. Of course, from time to time one hears complaints about "branch office"
treatment of New Zealand borrowers, but overall on a day-to-day basis banks' customers in New
Zealand do well out of the deal. Meantime, the Reserve Bank's main concern remains to regulate for
the promotion of a sound and efficient New Zealand financial system, regardless of the fact of its
Australian parentage.
The conditions we put on ANZ's acquisition of the National Bank do not signal any radical new
approach to banking regulation. However, they do represent ongoing enhancements that we are very
serious about and have been working on for some time. These are aimed at ensuring that local boards
have effective operational reach over core assets and people, and that lines of responsibility and
accountability are clear. We have been able to effect these conditions due to the new powers put in
place by the RBNZ Amendment Act in August, and they provide an indication of the direction of our
generic policy thinking on these matters.
The Reserve Bank's conditions associated with the acquisition were in four main areas. First, any
transfers or outsourcing of the National Bank's core banking functionality, including by way of an
operational merger, will require the Reserve Bank's further consent. Core functionality includes all
management, operational capacity and systems necessary to operate the bank on a standalone basis
in the event of failure of an outsourcing provider, including a parent bank. The intent of this
requirement is to ensure that any outsourcing does not undermine the legal authority and practical
ability of the directors or statutory manager of the National Bank to run the bank on a standalone basis
if the need should arise. This doesn't necessarily mean that the core functionality must be in New
Zealand - it means that legal and practical access to it in a crisis must be unimpeded.
The second area where we imposed conditions of consent strengthens the first. We require that the
National Bank chief executive's employment contract be between that person and the board of the
National Bank, and that any amendments to the National Bank's constitution have our consent. The
intent of these measures is to ensure that there is coherence in the National Bank's local
accountability arrangements and that the local board remains in a strong position to exercise
independent and meaningful governance of the management of the National Bank, in the best
interests of the National Bank, in good times and in bad. This requirement should be seen as a means
of reinforcing our emphasis on the role of directors in overseeing a bank's operations, and our ability to
manage a crisis involving the failure of any large bank in New Zealand.
Third, we require all prospective appointments of directors or senior executives to the ANZ or the
National Bank to be advised to us and the appointments made only if we have no objection. This
measure ensures that the appointment process is in line with our new obligation introduced by the
RBNZ Amendment Act to have regard to the suitability for their positions of directors and senior
managers of registered banks. Generally speaking we would be unlikely to object to an appointment
unless there were strong reasons to believe the individual would be unsuitable for a position of
responsibility over a registered bank.
Finally, we require that each registered bank in the ANZ Group maintain a level of capital in line with
our current policy on capital adequacy for consolidated banking groups. This tightens up the capital
adequacy rules a little in this case, to account for the fact that the ANZ Group now contains two
systemically important registered banks. We regard it as important that each of these banks maintain
adequate capital on a solo basis.
We took these steps in pursuit of our statutory obligations to promote the maintenance of a sound and
efficient financial system in New Zealand, and to avoid significant damage to the financial system that
could result from the failure of a registered bank. We don't think the conditions will make a great
difference to the current day-to-day running of the National Bank's operations under normal
circumstances. However, we do see them as important in bolstering our ability to deal with a crisis
situation involving the bank or the ANZ group. We sought to impose the conditions in a manner
consistent with our general approach to banking regulation, which is not to get into the business of
managing banks, but to put the onus for effective bank management on the shoulders of those
bestplaced to carry that task - the directors and senior executives of banks.
In giving consent, we recognised that, under certain circumstances, all our large banks being
Australian-owned could increase our system's exposure to stress emanating from the Australian
economy and financial system. We will be considering this further and have let it be known that we will
take further measures to manage this risk if necessary.
As noted before, the conditions imposed on the ANZ's acquisition are a specific application of our
current policy thinking around governance and crisis management, coloured by the additional
considerations introduced by the RBNZ Amendment Act. This thinking is still developing, and relevant
to all systemically important banks. Generic policies regarding these matters will be fleshed out as part
of our broader financial stability work programme, and we will be consulting with banks on those
generic policies in due course.