Corporate

RBNZ wants more money to fight bank boards’ failures

The Reserve Bank is asking the Government for more money so it can increase the intensity of its scrutiny of banks and insurers, after it has become clear directors and senior executives had been performing their governance and assurance obligations poorly for years. Lynn Grieveson reports.

At the release of the RBNZ’s Financial Stability Report on Wednesday, governor Adrian Orr said the regulator would be making “a very clear business case” for more funding from the Government to further boost its “supervisory capability and intensity”.

It has already added extra staff to the supervisory team – which now numbers around 38 -  but deputy governor Geoff Bascand said it wanted to “substantially increase in the coming year and the following year”. Many will be based in Auckland, where many of the head offices of financial institutions are located.

"... we found that some banks didn’t know what they didn’t know"

The emphasis now will be on making bank directors ‘show their working’ when they give assurances that their bank is compliant with regulations around culture, conduct, capital requirements and liquidity.

“The self-discipline [the RBNZ wants to see] really is around ‘show us how you got the assurance’, and that is putting a lot more emphasis on the boards and senior managers to not just say things are fine – show how you got to that burden of proof,” Orr said.

“This comes from work Geoff [Bascand] and team did back in 2017 when we reviewed the attestation regime and we found that some banks didn’t know what they didn’t know”.

"Many of these have related to errors in the calculation of capital adequacy and liquidity ratios, and in some cases have gone undetected for a number of years."

'Nothing found, so nothing wrong'

Bank directors are required to “attest” that their bank is complying with regulations, but that 2017 review found that many were doing so on the basis of “negative assurance”. In other words, if they hadn’t explicitly uncovered evidence, that they weren’t compliant they would swear that they were.

Since the RBNZ started demanding that they “look harder, dig deeper”, the banks are finding problems they didn’t know existed. In Wednesday’s Financial Stability Report, the RBNZ said “a number of banks have disclosed breaches of their conditions of registration. Many of these have related to errors in the calculation of capital adequacy and liquidity ratios, and in some cases have gone undetected for a number of years.

“The prevalence and duration of calculation errors indicate weaknesses in the governance and control processes of the banks involved.

“This trend is also concerning from a systemic risk perspective. While minimum capital and liquidity requirements have not been breached, the pattern of failure to calculate regulatory requirements correctly points to inadequacies in banks’ broader risk management frameworks.”

Orr said it “really does put the acid on the banks to have to do it” when you demand proof of why they believe they are compliant with regulations.

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