Foss Craig: Reserve Bank of New Zealand Amendment Bill (No 3) — Second Reading In Committee Third Reading 
Text is incorporated into the Bound Volume 
Foss Craig: Reserve Bank of New Zealand Amendment Bill (No 3) — Second Reading In Committee Third Reading 
[Sitting date: 02 September 2008. Volume:649;Page:18212. Text is incorporated into the Bound Volume.] 
CRAIG FOSS (National—Tukituki) 
: 
 The National Party is voting for the Reserve Bank of New Zealand Amendment Bill (No 3). I acknowledge the previous speakers and I will just touch on a couple of points Dr Pita Sharples raised. 
Currently there are Acts and legislation to regulate banks. With reference to that word “bank” an institution cannot have the word “bank” in its name unless it is regulated by the Reserve Bank. That is why the other institutions are described as “non-bank” because a completely different tree of regulation is set up—there are trustees involved etc. So that is where “non-bank” comes from but I pick up the point that it is funny to be talking about what is not a bank rather than these financial institutions as we generally understand them.  
This bill is actually part of a suite of bills: there is the Financial Advisers Bill and the Financial Service Providers (Registration and Dispute Resolution) Bill which are on the Order Paper and before select committees at the moment. I make the point that many non-bank financial institutions have actually survived and their depositors’ moneys are quite safe. They obviously followed quite conservative strategies—perhaps there is a bit of luck involved. But unfortunately and very sadly some funds have been lost. We are very sympathetic to that but we also have to distinguish between organisations where illegal or misleading behaviour has been alleged—and I repeat the word “alleged”—and the Serious Fraud Office is currently investigating some of those larger institutions and institutions that have come to difficulty because of the credit crunch funding crises and the inability to raise further funds so they have had a market difficulty as opposed to alleged dodgy behaviour which the Serious Fraud Office is looking into at the moment both in New Zealand and in Australia I understand. I think everyone in this Parliament is very sympathetic and wishes all speed to the Serious Fraud Office and the appropriate agencies to find any dodgy behaviour and arrest and bring those involved to account. Many families and individuals are suffering immensely because of some very very dodgy behaviour.  
But there is another point that seems to be lost on many commentators. At the same time as these three bills are going through—the Reserve Bank one here and the other two I just spoke about—there is of course the monetary policy inquiry. It seems to have been missed by a lot of commentators that actually they are touching on many of the same issues. In this bill here we talk about capital adequacy prudential ratios—basically everything that the non-banks influence. They have a part to play of course in the financial system—as the monetary policy inquiry is looking at across the sector I guess at a much more macro level. As we go through the Committee stage I will be talking particularly about some of the technical pieces in there and I will seek advice on the technical stuff from Mr Doug Woolerton as we go through further.  
But there is a concern—it comes from here and I raised this concern at select committee—that there is a balance. It is a fine balance and I am constantly concerned about any politicisation or further influence of monetary policy via some of the methods and tools that are in this bill here and the confusion of prudential regulation with monetary policy. They are totally different. The moment there is greyness between those areas we are in trouble. If members think our interest rates in New Zealand are high now I tell them that any removal of that certainty—those Chinese walls—will actually add further to the New Zealand risk premium that we currently suffer under and which has actually got worse particularly over the last 9 years.  
It is all about risk. This legislation sets up a framework for non-bank financial institutions—let us just call them things that are not banks; it is a bit easier—that is about risk. It is about the risk of their funding stream and the Reserve Bank looking to see whether they are actually too exposed—whether they have lent for 10 years and are borrowing every 3 months. The Reserve Bank will look at that and say that if the tap gets turned off for 3 months the financial institution will be in deep trouble. That is actually the exact problem many institutions are facing right now. It is compounded by the credit crunch that started in the United States and arrived in New Zealand about the middle of last year. But it is accentuated here because our interest rates start so much higher and there already starts to be a risk premium in New Zealand. Sadly New Zealand is at the back of the queue when we are lining up whoever it is from New Zealand to try to find funding in times of crisis. This is the exact problem that many of those pretty sound institutions are having right now: they have lent for 10 years and borrowed for shorter terms. 
We can think way back to the PSIS problem—in the early 1970s I think it was—and to the problem JBL had way back then too. It is a common theme: when any of these institutions run into difficulty it is simply because their funding does not match their obligations on the other side; their liabilities are short term and their assets are long term. They have borrowed short and lent long and as interest rates go higher they have to pay more they have negative cash-flow or sometimes that cash flow is turned right off. That is the big problem many of those financial institutions are facing right now.  
Another point that I raised throughout the period when the Reserve Bank of New Zealand Amendment Bill (No 3) was before the Finance and Expenditure Committee was that this issue is about risk and there has been a merging of all things financial not only within New Zealand but also around the world. There has to be a level playing field because if a bank and a non-bank financial institution have the same funding profile and the same asset and risk profile the requirements upon them should be the same. Otherwise the Reserve Bank or—as a clause in this bill allows—even the Minister of Finance can start to skew or favour one particular type of organisation over the other and we do not want to go down that track.  
It is really a balance between our need and our want as parliamentarians to provide for the public good a framework to ensure that those who do not fully understand what they may be getting themselves into when they invest in something after seeing some flash advertising programme on TV with celebrity presenters etc. and without really understanding the risks of doing so—there is a tension between that and at the other end of the spectrum the principle of caveat emptor or let the buyer beware. I think we are all pretty much in the middle space there. There are many companies that have—deceptive is not quite the right word perhaps misleading is the correct word—implied guarantees of people’s funds as they were invested and in fact those guarantees turned out not to be there once the surface was scratched. This bill starts to address that and brings as it states in the introduction some accountability and transparency back into all things non-bank. I think it is a sign of the maturity of our financial sector that most organisations have come round and are now quite supportive of this bill. The current crisis and the issues people are having regarding non-bank financial institutions are making the bill more pertinent.  
We also need to note that there are about only 70 or 80 non-bank financial institutions in total—and that number is declining—and I think they manage about 10 or 15 percent of all funds under management in New Zealand. That is my point: yes there have been some terrible losses but our financial system is actually quite sound. Unfortunately in the case of many of these institutions the perception of the risk to investors was not understood was not particularly apparent or perhaps was somewhere down in the small print. That is not acceptable I do not think to anyone in this House or even to the common person out in the street.  
As we go through the other parts I will also speak about this thing called Basel II which defines how all these capital adequacy ratios are set etc. But it is fair to say that actually there are existing frameworks out there which banks have used for a long time. Banks also get into trouble and then they do come right but there comes a point when a bank gets so big that of course the regulator cannot afford to let that institution fail. We have seen that to a massive extent in the case of Northern Rock in the UK Fannie Mae and Freddie Mac in the United States and in fact in the case of some Australasian banks too unfortunately where some larger banks have absorbed some of the minor institutions into their own balance sheet. Although National is voting for the bill I say that we just have to be careful that an implied underwriting or guarantee by the Reserve Bank or the taxpayer of these non-bank financial institutions is not given. It is a very slippery slope that we go down once we get into that space. The tensions of the current financial crisis make that quite tempting and we just have to resist that. Thank you Mr Assistant Speaker. I look forward to speaking through the Committee stage.  
Bill read a second time.