Cullen Michael: Motions — Reserve Bank Funding Agreement—Ratification 
Cullen Michael: Motions — Reserve Bank Funding Agreement—Ratification 
[Volume:647;Page:16654] 
Hon Dr MICHAEL CULLEN (Minister of Finance) 
: 
 I move  
That pursuant to section 161(2) of the Reserve Bank of New Zealand Act 1989 this House ratify the funding agreement entered into by the Minister of Finance and the Governor of the Reserve Bank of New Zealand pursuant to section 159 of that Act on 28 April 2008 and presented to the House on 20 May 2008. 
 This is a relatively narrow motion and debate. It applies to a variation to the funding agreement to enable the Reserve Bank of New Zealand to exercise functions that it will acquire under legislation at present in front of the House that has very broad support within the House. 
The Reserve Bank’s operating expenditure is funded from gross income under terms established by the Reserve Bank of New Zealand Act 1989—the Act—and a 5-year funding agreement. The Act requires the Minister of Finance and the governor to enter into a funding agreement for successive periods of 5 years. The current funding agreement was signed in April 2005 and expires at the end of June 2010. However this agreement does not account for the bank’s new prudential responsibilities that it is going to acquire and I am therefore asking the House to ratify today a variation to that agreement to enable the Reserve Bank to have the necessary funding for that role. 
In December 2005 Cabinet agreed that the prudential regulation for the financial sector should be consolidated into a single regulator and agreed in principle that this regulator should be the Reserve Bank. Subsequently in June 2007 Cabinet agreed to changes to the institutional arrangements of the Reserve Bank and also that the costs of regulating non-bank deposit takers and the cost of regulating and supervising insurance companies should be met through a variation of the Reserve Bank’s funding agreement to be ratified by Parliament. The Reserve Bank of New Zealand Amendment Bill (No 3) which is currently before the Finance and Expenditure Committee gives the bank these new regulatory functions and powers. Additional funding is required by the bank in order to provide advice in respect of matters relating to the intended regulatory regime for non-bank deposit takers and insurers and to develop the operational capability to assume new statutory responsibilities. 
The key influences behind the revised variation in funding are as follows. In addition to licensing and undertaking prudential supervision of banks the new policy outputs that will be required of the Reserve Bank are firstly that the bank will license non-bank deposit takers and be responsible for various obligations upon non-bank deposit takers to be included in regulations. Front-line supervision of non-bank deposit takers tends to be undertaken by trustees. Secondly the bank will license and undertake prudential supervision of insurance companies. 
In this funding agreement nominal expenditure is set at $43.3 million in 2008-09 and $46.9 million in 2009-10. This is an increase of $2.3 million and $3.9 million respectively for each of these years above the funding levels specified for each of these years in the current funding agreement. The increase in costs arises from the staff required for increased policy advice responsibilities and for activities associated with greater oversight of the non-bank sector. The bank considers it will have the capacity to accommodate all the funding required for its expanding responsibilities under current funding levels for the year ending this month and as a result the agreement is not varied for the 2007-08 financial year. 
This funding agreement—the variation—contains no provision for the marginal costs of anti - money-laundering supervision by the bank. In the event that Cabinet agrees that the Reserve Bank is really the anti - money-laundering supervisor of the entities that it regulates then it is likely the bank will seek additional funding for this new responsibility at that time. 
I should perhaps add that the bank has significantly increased its prudential supervisory capacities over the last 2 or 3 years. I think it was well recognised under both the previous governor and the current governor that those capacities had been run down to a somewhat unsatisfactory low level. With the new legislation to come into force as I said those prudential supervisory capacities will need to be expanded because these new requirements and responsibilities would not be able to be met out of current resources. I think what we have seen in the New Zealand financial markets over the last 2 years emphasises the importance of improving the supervision of non-bank deposit takers. Tens and tens of thousands of New Zealanders have lost money over the last 2 years as a range of finance companies have gone under. Hopefully increased supervision will reduce the risk in the future of that happening.