Dalziel Lianne: Westpac New Zealand Bill — In Committee 
Dalziel Lianne: Westpac New Zealand Bill — In Committee 
[Volume:672;Page:18835] 
Hon LIANNE DALZIEL (Labour—Christchurch East) 
: 
 Thank you Mr Chairman for the opportunity to speak on clauses 1 and 2 of this very important bill the Westpac New Zealand Bill. 
I begin by traversing the policy that lies behind the legislation we have before us tonight. The first thing I will do is remind the Committee why the Reserve Bank came to the view that it was important to have local incorporation. I think the reason for that can be brought back to the provisions of the Reserve Bank of New Zealand Act. In Part 5 of the Act the Reserve Bank is given powers to register banks and perform prudential supervision. Section 68 of the Act states that those powers must be used for the purposes of: “(a) promoting the maintenance of a sound and efficient financial system; or (b) avoiding significant damage to the financial system that could result from the failure of a registered bank.” 
We have been very lucky in this country to be honest with the system we have in place. We have not had the failure of a registered bank in the way that occurred in other jurisdictions. Of course the behaviour that was identified in the global financial crisis as undermining the integrity of our global financial system stemmed from those people who did not appreciate the sense of confidence that people had in banks in general. People were really let down by the behaviour of individuals who were running those banks. Those individuals came up with amazing derivatives collateralised debt obligations and various other ways of chopping dicing and slicing the different levels of risk within products. Those products did not make much sense to anyone who knew anything about what those individuals were supposedly able to advise people on. 
The Reserve Bank’s supervisory regime though comprises three important pillars. The first is market discipline which involves creditors and financial markets monitoring banks. The second is self-discipline which involves banks and their decision makers responding to incentives to operate prudently and efficiently. The third is regulatory discipline which is where the Reserve Bank sets the prudential rules by which banks are required to operate. When the local incorporation policy was brought into being the Reserve Bank was responsible only for the prudential supervision of banks. It was subsequent to that with the Review of Financial Products and Providers which I was the lead Minister on at the time that a decision was made to extend the jurisdiction of the Reserve Bank to cover the non-bank deposit taking sector. 
If we carve out the non-bank deposit taking sector and its behaviour within New Zealand from what happened with the banking industry within New Zealand and Australia—and in that respect we were fortunate to be tied to Australia—then we can identify that we suffered our own mini-version of the global financial crisis which was located in the non-bank deposit taking sector. So our decision to regulate in that area was entirely appropriate. Everyone says that it should have been done sooner. I ask them how much sooner that could have been done than doing it as soon as the return on the discussion documents was made available. I do not know whether that could have been done any sooner than it was. 
But leaving that aside the point that is often overlooked is what happens when we have such a large exposure to foreign-owned banks. Australian-owned banks in New Zealand still account for and did at that time about 90 percent of assets held in our banking system. That is an enormous benefit but it is an enormous exposure as well. I think that was what drove the Reserve Bank to consider the whole issue of local incorporation. Its view at the time was that foreign ownership acted as a channel through which distress from abroad could spread to New Zealand. That was the risk the Reserve Bank was trying to address. That meant that although the banks looked like New Zealand banks in name—Australia and New Zealand Banking Group Westpac Banking Corporation New Zealand branch—they had the ability and the incentive to act in ways inconsistent with promoting a robust and efficient New Zealand financial system. This was the problem: potentially an Australian bank could behave in the interests of an Australian bank and not act through its New Zealand branch in the best interests of the New Zealand banking system. That is why the Reserve Bank felt that it was really important to undertake the review of its policy in the early 2000s. 
My colleague made the point that Westpac tried to find alternative ways to address the policy intent without meeting the regulatory obligations that were being worked through by the Reserve Bank. To be fair Westpac put up a proposition that the Reserve Bank of the day did consider. The Reserve Bank declined to accept that proposition at the end of 2004 and as a result we dealt with legislation in 2006 that brought into play the Westpac New Zealand Act 2006. 
The one question that I still have not quite had answered is this: the Westpac New Zealand Act was obviously designed with a view that the transfer that had occurred at that time would be the one and only transfer required. I am not sure whether it was deliberate or just an assumption that that would be the case. I wonder whether we are debating this legislation tonight because we did not have sufficient foresight to understand that the rules would again come into play. I think I should put that on the record. The reason why we are having this debate tonight is because of a condition that was reached with the Reserve Bank in terms of its local incorporation policy. That condition requires that systemically important banks be incorporated locally in order to provide a degree of assurance that the Reserve Bank will be able to manage a failure affecting the bank. 
One of the conditions requires that branches do not have New Zealand liabilities excluding those to related parties in excess of $15 billion. That is the cut-off point where banks suddenly become systemically important. So that means that the Westpac branch that remained at the time in 2006 did not reach that threshold of “systemically important” but now it does. That says something pretty amazing about the extent of business that Westpac has managed to generate in the institutional banking sector over that period of time. I have already confessed my conflict of interest because I of course bank with Westpac so I am saying positive things about them but not for that reason. It appears that Westpac has reached that threshold in that period of time. 
The question is: does that mean that if that happens again with what remains in the branch of Westpac Banking Corporation we will need more legislation to address it or will this bill be sufficient to enable a further Order in Council to be made to transfer assets and liabilities in order to keep the liabilities’ cap in future below the level where the Reserve Bank would require this process to be undertaken? That is really the only outstanding question I have in that regard. I take it that the member in charge of the bill Craig Foss is not going to stand and advise the Committee whether Westpac is in the qualifying financial entity area. Maybe that means that it is not as relevant as it would otherwise be. 
I want to know whether this legislation has life beyond 2011 or a limited life as did the 2006 Act and whether other banking institutions that may have dual registration will be affected. I think others have that dual registration. I think Rabobank is one of them. Will we end up having a multiplicity of legislative interventions as opposed to regulatory interventions by way of Order in Council? That would make a lot more sense to me.