Groser Tim: Reserve Bank of New Zealand Amendment Bill (No 3) — Second Reading 
Groser Tim: Reserve Bank of New Zealand Amendment Bill (No 3) — Second Reading 
[Volume:649;Page:17967] 
TIM GROSER (National) 
: 
 National is supporting the Reserve Bank of New Zealand Amendment Bill (No 3). It is an overtly technical bill but I believe that that should not obscure the fact that it relates to something fundamentally important. 
I suspect that if we were to ask members across various different parties in the House what they thought were essential attributes for a stable society we would come up with a fairly common core of issues around the rule of law property rights democratic process freedom of press and so on and so forth. But actually the preservation of a sound financial system is absolutely central to any successful and stable society. One can see that most clearly in the absence of that condition. When I was living in Indonesia I saw many reasons why the Suharto regime might have eventually fallen but like everybody else no way did I predict that it would become a consequence of a fall in the Thai baht. So one can see the impact of financial contagion in any society that has weak financial institutions. I certainly recall when I first went to live in Jakarta it was pointed out to me that there were 250 banks with an average asset valuation of the size of a typical Westpac branch in New Zealand. So financial contagion can lead to dramatic political change and of course in some respects some very negative and oppressive regimes have been brokered in history through unsound financial systems. 
What we are debating here is very technical but fundamentally important to our own society in the long term. When we think about the two principal functions of the Reserve Bank of New Zealand—price stability as defined by Parliament and the preservation of a sound financial system—we find that this bill which is pushing out that second responsibility into the non-bank deposit taker sector makes a very serious and significant contribution to what is a very important part of any stable society. We are in a sense very fortunate in this country that we have a generally sound financial system but of course it is precisely in this sector that we have discovered recently—and in many tragic cases rather too late in terms of this legislation—what the implications are for New Zealanders who have not had that stability. 
It is worth reflecting on the fact that about 95 percent of the assets of the financial sector are in the traditional banking sector while about only 5 percent are in the finance company sector. People make a number of comments about Australian ownership of the banks but it is of little comfort to people if they lose money in a locally controlled bank. The Australian banking sector dominates the traditional banking sector but what we know is that those banks are amongst the soundest in the world out of the thousands of banks that exist. That is the bedrock point I think behind this legislation and what is quite clear is that we have gone from a situation historically in the 1960s and 1970s of excessive regulation of the banking sector through to an under-regulated non-bank deposit taking sector. I think there is some tendency sometimes in New Zealand society for us to move from one extreme to another and this is possibly another example of that. 
It is intriguing that this bill predates the meltdown in the finance sector and as other speakers have commented it is grossly unfortunate for those people who were caught up in the collapse of many of our finance companies that this is rather too late to assist them. I have always felt that the phrase “caveat emptor” in some cases although an essential principle that we have to respect is sometimes as cold as charity. Asking even reasonably economically literate New Zealanders to try to make an assessment about the financial prudence of companies in which they are investing their money is a bridge too far I think for many New Zealanders. So quite clearly we have been short of an adequate regulatory framework in the non-bank deposit taking sector and although it is a little unfortunate that we did not move more quickly in this respect at least we are now putting in place some additional and much-needed regulatory framework. 
I suppose that as we seek to introduce a sounder regulatory framework in this sector we inevitably create an incentive structure for some other sector then to emerge precisely to escape the new regulations. This is the process of financial disintermediation. I remember that when I was a young New Zealander—some rather long time ago—because of the excessive regulations around the banking sector in terms of mortgage finance people like me who were young New Zealanders at the time used to go into solicitors’ funds to try to get mortgage finance precisely because they had grown up as a source of mortgage finance because the banking sector was so heavily regulated. So it is a sort of cat and mouse game that the authorities play with the markets here. We are now moving—a little late probably—to put in a proper regulatory framework in this sector. By doing so we automatically create an incentive for some other growth in some non-regulated part of the sector and no doubt a future Parliament will have to come back to fix this up—that is the way it works. 
The essential characteristics of this bill have been pretty well described by other speakers. We know we have a regulatory framework that currently exists only for the first tier of the banking sector and we are now seeking to apply a similar regime to the second tier. Quite clearly this will include finance companies—the source of so much grief recently—but I see some very sensible changes have been introduced in the select committee process to stop the unintended capture of certain other institutions such as hire companies that accept deposits as part of their security process. I see that there is a sensible threshold limit of $10 million in assets below which this legislation will not apply and there are minimum prudential requirements around capital adequacy ratios and governance regimes and requirements that are being put into place. 
As other speakers have said although I think the whole concept of giving the non-bank deposit takers a credit rating is a sensible move forward it is very important that New Zealanders do not see this as a panacea and there have been several good examples given by previous speakers. 
The disclosure of key financial information is another important aspect of the bill and it will be pleasing to see that the Reserve Bank now has a statutory responsibility to report to the House regularly on its activities. 
All in all we support the bill. As I said it is unfortunate that it has come too late to help New Zealanders who have had savings destroyed in the meltdown of the finance companies but at least it will perhaps save some grief in the future.