Groser Tim: Reserve Bank of New Zealand Amendment Bill (No 3) — Second Reading In Committee Third Reading 
Text is incorporated into the Bound Volume 
Groser Tim: Reserve Bank of New Zealand Amendment Bill (No 3) — Second Reading In Committee Third Reading 
[Sitting date: 02 September 2008. Volume:649;Page:18227. Text is incorporated into the Bound Volume.] 
TIM GROSER (National) 
: 
 In the course of the discussion around the Reserve Bank of New Zealand Amendment Bill (No 3) over the last few months one of New Zealand’s experts suggested to me that the position of the Reserve Bank is a little like that of a parking attendant who has a closed circuit television trained on a number of different levels in a parking building and whose responsibility it is to make sure that everything is tidy and safe. From time to time the regulator—in that case the parking attendant—will look through and see something slightly dodgy going on at one level of the parking building which justifies his or her zeroing in and trying to respond in a policy sense to it. Most of the time it is a sort of cat-and-mouse game. I think the cat wins most of the time but occasionally the mouse may win.  
That is an elaborate way of describing the process that goes on in any financial system. The Government of the day will regulate one part of the financial system thereby putting into place almost automatically an incentive on the part of other operators to try to lower their costs by getting around the regulatory frameworks that the Government has just created and creating a new niche in the market. So we have a situation here in which we have I think a very sound regulatory framework for the banking sector of New Zealand as defined very precisely in New Zealand law and any institution that wishes to carry the title “bank” in its name as my colleague Mr Foss pointed out during the various stages of this bill has a legislative requirement to conform to the very technical and demanding provisions relating to banks. But by definition we have created in the past an incentive structure for a non-bank deposit taker sector to emerge and it is now quite apparent that the light regulatory frameworks that have governed that sector are inadequate. The cat is catching up with the mice again.  
Unfortunately I am quite confident that a future Parliament at some stage will have to do exactly the same tidying-up effort as this one. As soon as one loophole is closed by definition that opens the opportunity to game the system and create the opportunity for new loopholes. However that is the nature of the process and in this bill Parliament is solidly behind the effort to try to improve the non-bank financial sector.  
The reasons for that I think have been well traversed. Amongst the many things that make up a sound society the rule of law property rights an independent press and a sound financial system are clearly of central importance to a well-functioning society. We have learnt of course about the importance of the financial system from Adam Smith onwards. He said that when two or three merchants gather together it is usually for the purpose of deceiving the public so the very founder of the whole free-market philosophy still accepted that a free market needed to have appropriate regulatory frameworks put around it. There is no more important sector than the bank and the non-bank financial sector in which to ensure that we do have an appropriate regulatory framework. Unfortunately I suspect that we will not ever overcome the old saying that a fool is very quickly parted from his or her money but we at least can minimise some of the risk around that through appropriate regulation.  
We have here in the bill I think a pretty sound framework. My understanding is that the Finance and Expenditure Committee—I was not part of its process—has had access to some excellent international-quality advice and I think that the end result will ensure that as we move now to regulate beyond the first tier of the financial sector the banking sector into the second tier we have a structure that will provide a robust framework looking forward. Obviously we are looking at only the major institutions here in the sector. There is a licensing threshold—from memory it is around $10 million—that an institution has to meet before this quite demanding framework comes into play. And then as we have discussed in the various stages of the bill there are minimum capital adequacy ratios and governance requirements that need to be met. Quite a lot of bespoke engineering has been going on in this bill—for example in respect of building societies. It is carefully defined in the bill that building societies are not themselves operator banks. There are quite specific governance structures that reflect the reality of a building society.  
We have had a very serious look at the two opposing sides of the argument in respect of credit ratings. On the one hand I think there has been widespread recognition amongst members that credit ratings are not a panacea. My colleague Chris Tremain pointed out that the most recently collapsed firm I think Hanover Finance was one of the non-bank deposit takers that had actually found it in its own interest to go out and get a credit rating. But that did not stop Hanover Finance falling over. I think members have been aware that in reality there is a bit of a moral hazard around that issue. The public may interpret it that if a company has an international credit rating under the provisions of this legislation that somehow takes risk out of the equation. Well the bill has done what it can—quite explicitly in fact in its principles—to make it clear that that is not the intent of the bill. The legislation probably will be misread at some future point but the House has done what it can to lay down the realities. At the end of the day we are into risk minimisation not risk elimination on this issue. So on balance although there was a strong argument against credit ratings the bill has come out in favour of them for the non-bank financial deposit taking sector.  
There is a whole series of provisions around financial disclosure including some provisions we have just debated in respect of the bank’s own legislative requirements and in respect of its supervisory role in terms of putting information before a narrow group a group of international and domestic experts who do need access to information of a highly technical nature in order to make an informed judgment about the soundness of the system. I am sure that the improved reporting procedure across various aspects of the bank’s responsibilities will further enhance the financial stability of this country.  
To sum up by referring to the bigger picture I think we all understand that although this bill is deeply technical the soundness of the financial system is of central importance to this country. We have taken a beating in the non-bank financial sector recently but the majority of New Zealanders have had the protection of a very sound system which is one of the world’s best systems. It has been put under pressure obviously as the effects of the subprime crisis have worked their way through the system. I think there are some improvements here. I am sure this is not the last word for the incentive reasons I have tried to explain. The process of financial disintermediation is an ongoing process and we will have to deal with it again. But I do think New Zealanders should be confident that we are going in the right direction.