alan bollard : supervising overseas - owned banks : new zealand ’ s experience address by dr alan bollard, governor of the reserve bank of new zealand, to the trans - tasman business circle, sydney, 11 august 2004. * * * in many respects the australian and new zealand economies are similar. with banking, however, there is a big difference - the new zealand banking system comprises banks owned overwhelmingly from abroad, whereas in australia the banks are mainly australian - owned. of course, the main overseas - owned banks in new zealand are australian - owned banks and, in this sense, it might be said that banking is another thing we have in common. but that would be to overlook that banking authorities in countries with predominantly overseas - owned banks face some additional, and different, issues from those in which the banks are mainly locally - owned. these differences include different roles in the supervision of banks, depending on whether one is the supervisor of the “ home ” country parent bank, or, as is predominantly the role of the rbnz, a “ host ” supervisor of overseas - owned banks. more broadly, and more importantly, for a country whose banking system comprises predominantly overseas - owned banks, there are different issues concerning the capacity of its banking system to weather a crisis. in this regard, overseas ownership can be both an undoubted strength, but also a potential risk. there are also issues concerning the depth and breadth of financial services that overseas - owned banks provide to the local economy. in new zealand we are a very welcoming host of overseasowned banks, but we also look for our “ guests ” to be good guests, and to make a positive contribution to the new zealand economy. a number of things have happened recently to raise interest in these issues. first, there has been the take - over by the anz of the national bank of new zealand, previously owned by the british bank, lloyds tsb. this means that about 85 per cent of new zealand ’ s banks, measured by total assets, are now australian - owned. australia and new zealand also now share the same “ big four ” banks. the anz owns the merged anz national in new zealand ; nab owns the bnz ; the commonwealth owns asb ; and westpac in new zealand trades as a branch operation. second, early this year the new zealand minister of finance and the australian treasurer put trans - tasman banking supervision on the initial agenda of issues for working towards a single

operator of the securities settlement system. the bank has a number of controls to minimise the likelihood and impact of operational risks, including a highly developed enterprise risk management framework, formal operational investment policies and limits, an active ( internal and external ) audit programme, and a proactive problem management ( incident reporting ) regime. portfolio management the bank manages its foreign reserves in two separate pools, an un - hedged pool ( exposed to changes in interest rates and fx rates ) and a hedged pool. the primary purpose for both pools of reserves is to maintain crisis intervention capability. the un - hedged pool of reserves serves a secondary purpose of allowing the bank to lean against ( on a modest scale ) extreme cyclical peaks and troughs in the exchange rate that are judged inconsistent with economic fundamentals. in contrast to most central banks, a large portion ( currently 75 percent ) of the bank ’ s foreign reserves is in the hedged pool ( 100 percent prior to 2007 ) which helps to keep the return on foreign reserves relatively stable across time. for foreign reserves to be effective in meeting their purpose they need to be allocated across a diversified set of instruments that will maintain deep liquidity in both normal times and times of crisis or stress. the allocation of hedged and un - hedged reserves is collectively described as the strategic asset allocation ( saa ) and is set by the bank ’ s assets and liabilities committee. the saa has a large influence on the bank ’ s financial risk profile, given foreign reserves comprise a large part of the bank ’ s balance sheet. i will now describe the characteristics of each pool of reserves in more detail and the saa as it applies to hedged and un - hedged reserves. the first pool of reserves, hedged reserves, is what distinguishes the bank ’ s approach to reserves management from most other central banks. the bank borrows foreign currency ( through long - dated cross currency basis swaps and also foreign currency loans from the new zealand treasury ) to fund investments primarily in us, european, and japanese sovereign debt markets. borrowing in foreign currency reduces currency risk, but it generates refinancing risk. the bank manages this refinancing risk by borrowing for long maturities ( up to 15 years ) and ensuring that maturities are staggered as much as possible. the duration of borrowing is matched to the duration of investments to reduce interest rate risk ( i. e. if borrowing is on a three - month floating basis, investments are matched to