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:18220. Text is incorporated into the Bound Volume.] 
CRAIG FOSS (National—Tukituki) 
: 
 I shall pick up from the earlier speaker Doug Woolerton who was starting to talk about scarcity of capital. That is a big problem. The word “capital” goes right through here—if one looks at the new section 157R about capital ratio requirement and even before that it talks about “capital” etc. As I said earlier it is a very very scarce commodity. When times are good there seems to be plenty of it but as we have recently found out all around the world particularly down here in New Zealand where we are at the end of the capital queue if you like it is particularly scarce. That is reflected in New Zealand in what we have to pay for our capital as well as the general state of our economy.  
But it is not just capital that the framework in this bill will start to address. It is the definition and the qualification of what a particular asset is. Then one has to apply so much capital to it. It works the other way actually. So if one has a house for example it is bricks and mortar and a certain amount of capital is required for that which is 4 percent. If one has a business with a house above it then all sorts of different ratios start to apply. Because capital is so scarce many institutions will go to all sorts of lengths to make sure or to try to make sure at least that the regulatory body such as the central bank or Reserve Bank in this instance agrees with them about the class of that asset—whatever it is—and therefore that is how much capital is required to be stashed away for it.  
If one takes the house example one could have a mortgage in Australian dollars—one could have borrowed Australian dollars to fund that house mortgage. So not only is there risk on that house of bricks and mortar and one’s income to be able to fund the mortgage—one’s income might be in Australian dollars so one has foreign exchange risk. Or one might have a house in New Zealand from which one is earning money in Australia for example so the bank is exposed not only to the bricks and mortar and one’s income to fund the mortgage but also to the exchange rate between Australia and New Zealand and also to the interest rates of New Zealand and Australia where someone could borrow there to fund oneself here. Take that to the huge extreme of course with Uridashi bonds with the good old Japanese housewife lending about $120 billion I think it is to New Zealand.  
This raises a very important point because we must always remember that New Zealand is a debtor nation and sadly that is one of the reasons we have to pay such high interest rates which have incidentally approximately doubled over the last 9 years. We have to address that and not just assume that we are a creditor nation. It makes one approach many things in another way when one confronts the fact that one owes an awful lot more than one owns or earns.  
I refer to parts of Part 1 including new section 157S “Deposit takers and trustees must ensure capital ratio included in trust deed” and new section 157T “Deposit taker must maintain capital ratio required to be included in trust deed”; that is all very good but it does require quite a bit of work for those various institutions. That is countered by the fact that at the Finance and Expenditure Committee we extended time for them to have all that in place to 18 months which is obviously 1½ financial years for most of them. The credit-rating agencies will start to look at their assets to find out how much capital they need and therefore tell them how much the ratios and what their exposures are in regard to their trustees and what their allocations are and the Reserve Bank reassures us that at the end of this quarter it will have at least a starting list of credit-rating agencies. Again Mr Chair I alert you to the questions I asked of the Minister in the chair before around those agencies and I would like him to consider answering those and I am sure those listening in would like him to at least consider some reply to them.  
In my second reading speech I talked about this thing called Basel II. Basel is a place in Switzerland that used to be the centre of the financial universe. Section 157V starts to talk about that as far as non-bank financial institutions are concerned. All banks reference Basel II—there was a I now there is a II and there is in fact even a further move from II—and its application to non-bank financial institutions is obviously the commonality between financial institutions and the finance sector.  
Interestingly Basel II has moved to a point where the Reserve Bank can now accept a bank’s own credit rating and measurement models. So as long as a “Foss Bank” if you like rocks along to the Reserve Bank and says: “Here’s my model for measuring my exposures; is this OK?” and the Reserve Banks says yes then that means I can have different capital ratios outside of Basel II. I would be interested if the Minister could answer whether they would be extending that same freedom—that throttling or flexibility—to non-bank financial institutions. I cannot recall the answer from select committee hearings and submissions so I would be interested in the Minister’s opinion on that.  
Touching on new section 157Y relating to liquidity requirements I note it states: “Regulations may impose requirement that liquidity requirements be included in trust deed” and members can also look at new section 157Z. I presume they are talking about debt ratios exposure the 60 percent 80 percent or 10 percent leverage—whatever it might be. But again when the legislation states: “Regulations may impose requirement” we need to know from the Minister in the chair that whatever is required of the institutions pari passu—meaning all things being equal—for the banking institutions the requirements will be the same and the cost of capital is not being increased to non-bank deposit-takers. That is my largest fear because many people rely on such institutions to fund themselves through this increasingly expensive cost of living and increased mortgage rates just to get by. I would be interested in the Minister’s comments around that.  
Finally as we wander through the legislation I will talk about confidentiality of information. Again the committee made good strides and I thank the officials for helping us with that because again in the early drafts it was open slather. Confidentiality outside of an institution and the regulatory body—the Reserve Bank in this instance—is absolutely paramount. Of course every other bank and institution wants to know the exposures of the competitors but that information is none of their business; they can fight that out amongst themselves in the market place. It is good that it is confidential and there are some quite good parameters around that and checks and balances to stop any dubious leaking of information outside what would be necessary in a prudential bill like this.  
I will also talk just a bit further to the offences and penalties. I would like the Minister in the chair to describe some of those in a bit more detail if he could. Earlier I asked about the process around policy advice from the Governor of the Reserve Bank or the Reserve Bank. What happens if one of those parties chooses not to follow that advice? I realise that this particular clause is about the institutions themselves but what if an institution that is heavily exposed and has a huge amount of deposits chooses not to follow what the Reserve Bank says because there is a moral hazard there? If a bank or an institution calls the Reserve Bank’s bluff what happens—if the bank or institution said: “We have done all we can we have funded all we can we just have to taihoa we have good assets here we just need to ride this storm out.”?  
The previous speaker talked about frozen assets. So I ask the Minister in the chair what would happen in that instance. If the Reserve Bank in that instance froze a large institution—$100 million in deposits or whatever it might be—we start to question that and there could be some systemic problems going down from that right throughout the financial system. The simple outcome of that is that interest rates will be higher in New Zealand for longer as they have been in truth with this Government here for the last 9 years.  
Incidentally if this bill had come in in 2000 or 1999 the underlying interest rate that these institutions would have had to deal with would have been 4.5 percent. That was the official cash rate when Dr Cullen became Prime Minister—at least Minister of Finance; I am getting a bit ahead of myself there—and we have recently seen 8.25 percent. Thank you Mr Chair. 
The question was put that the amendments set out on Supplementary Order Paper 225 in the name of the Hon Dr Michael Cullen to Part 1 be agreed to. 
Amendments agreed to. 
Part 1 as amended agreed to.