The Reserve Bank has published the first consultation paper on the standards to be introduced under the Deposit Takers Act 2023 (DT Act). The consultation represents the next stage in a significant multi-year work programme by the Reserve Bank to implement the DT Act.
In this insight we summarise the Reserve Bank's policy proposals. The consultation closes on 26 July.
If you have any questions on the consultation or would like assistance in training your team on the upcoming changes to be introduced by the DT Act, please get in touch with one of our experts below.
Core standards
Under the DT Act, standards will replace the prudential requirements that are currently set out in:
- the Banking (Prudential Supervision) Act 1989 (BPS Act);
- banks' conditions of registration (CoR);
- the Banking Supervision Handbook (ie the BSs);
- the Banking Prudential Requirements (BPRs);
- the Orders in Council (OiCs);
- section 93 information requests; and
- the non-bank deposit taker (NBDT) regulations.
The standards are expected to commence from July 2028.
The first consultation paper covers the four core standards:
- capital (currently contained in the CoR and the BPRs);
- liquidity (currently contained in the CoR, BS13 and BS13A);
- Deposit Compensation Scheme (DCS) (a new standard); and
- disclosure (currently contained in the BPS Act and the OiCs).
The core standards are the standards that deposit takers will be assessed against when the Reserve Bank considers their application for a licence under the DT Act (although it is expected that there will be a simpler application process for deposit takers that are currently registered banks or licensed NBDTs).
The proposals in the consultation paper have been informed by the Proportionality Framework that the Reserve Bank published in March 2024, which requires the Reserve Bank to articulate how it will give effect to the proportionality principle when developing standards under the DT Act.
Capital standard
The Reserve Bank proposes to continue to implement its 2019 Capital Review decisions broadly unchanged for Group 1 deposit takers (those with assets greater than $100 billion, ie the domestic systemically important banks (D-SIBs)) and Group 2 deposit takers (those with assets less than $100 billion but more than $2 billion, ie the non D-SIBs, other than the two smallest registered banks).
The most significant change proposed is to require Group 3 deposit takers (those with assets less than $2 billion, which includes all NBDTs and the two smallest registered banks) to calculate their risk-weighted assets (RWAs) using the standardised approach (currently contained in BPRs 131 and 132). It is also proposed that Group 3 deposit takers will be subject to the same minimum capital requirements as Group 1 and 2 deposit takers but will be required to hold a smaller 4% prudential capital buffer to reflect their lesser systemic importance. The Reserve Bank expects that the increase in minimum capital requirements for Group 3 deposit takers will be offset by lower RWAs under the standardised approach and be capital neutral at a sector-level (although it expects that some Group 3 deposit takers will need to increase capital levels to comply with the new requirements).
The Reserve Bank is also consulting on some technical amendments to the capital rules, including:
- a new mechanism to allow sectoral capital requirements to be imposed;
- the creation of a specific risk weight for exposures to the New Zealand Superannuation Fund under the standardised approach; and
- changes to how the capital charges for operational and market risk are calculated (the operational risk changes were signalled during the 2019 Capital Review decisions).
Liquidity standard
The Reserve Bank has been undertaking a review of its liquidity policy since early 2022. Following the first two consultation papers, which focused on the quantitative requirements of the policy, the main decisions already made by the Reserve Bank include to:
- retain and modify its existing quantitative liquidity metrics (ie the one-week and one-month mismatch ratios (MMR) and core funding ratio (CFR)), rather than adopt the Basel metrics (ie the liquidity coverage ratio and net stable funding ratio); and
- tighten the eligibility criteria for primary and secondary liquid assets in the MMR so that only assets that are both high quality and liquid in private markets (ie not just considered to be liquid because of the Reserve Bank's repo facilities) are eligible.
This consultation paper constitutes the third consultation paper of the review. Many of the proposals in the consultation have been informed by the findings from the Reserve Bank's liquidity thematic review published in September 2021 and the liquidity stress tests published in February 2022.
The liquidity standard will apply to all deposit takers, but on a proportionate basis. Group 3 deposit takers will only be subject to some of the qualitative liquidity requirements that are proposed to apply to Group 1 and Group 2 deposit takers and will also be subject to less complex quantitative liquidity requirements (the cash-flow coverage ratio).
Qualitative liquidity requirements
The Reserve Bank is proposing some changes to the qualitative liquidity requirements that are currently set out in the CoR and BS13. The changes are intended to streamline and further clarify the requirements. Most of the qualitative liquidity requirements will be included in the new liquidity standard, with the rest set out in guidance.
Modifications to the calculation of the MMR and the CFR
In the consultation paper, the Reserve Bank proposes a mix of minor and more significant changes to the calculation of the MMR and the CFR, including:
- Renaming the one-week mismatch ratio the "7-day mismatch ratio" and the one-month mismatch ratio the "30-day mismatch ratio".
- Restructuring the MMR and the CFR so that they both have a natural minimum of 100%.
- Removing the ability of banks to use reasonable simplifying assumptions when calculating quantitative liquidity metrics.
- Including insurance companies and superannuation funds in the definition of market funding.
- Including a new category of non-market funding called "insured deposits" with a lower run-off rate for the MMR and higher factor for the CFR, to reflect that protected deposits will likely be a more stable source of funding during a period of liquidity stress once the DCS has commenced.
- Including a new size band category of non-market funding for deposits greater than $100m with a higher run-off rate for the MMR and lower factor for the CFR, to reflect the lessons from the collapse of Silicon Valley Bank in early 2023 where withdrawals from large depositors contributed to the bank's failure (see our previous insight here).
- Integrating the way deposits are grouped into size band categories of non-market funding with the Single Depositor View approach (the grouping of deposits into the correct size bands was identified as an area of non-compliance during the liquidity thematic review). Single Depositor View is discussed in more detail below in respect of the DCS standard.
- Removing the ability to include undrawn committed credit lines granted to the deposit taker as a cash inflow from the calculation of the MMR.
The Reserve Bank will complete a quantitative impact statement to assess the appropriate calibration of the MMR and the CFR (ie run-off rates for the MMR and scalar factors for the CFR) to reflect factors like technological change allowing for the quicker spread of information and withdrawal of deposits.
Potential features and components of the committed liquidity facility
In the second consultation paper, the Reserve Bank consulted on the types of assets that should qualify as primary and secondary liquid assets under the MMR, particularly given the limited supply of high-quality liquid assets in New Zealand.
As set out above, the Reserve Bank's decisions included to tighten the eligibility criteria for primary and secondary liquid assets in the MMR. Related to this, the Reserve Bank also decided to establish a Committed Liquidity Facility (CLF) under which the Reserve Bank would enter into bilateral agreements with deposit takers to provide them with liquidity via a repo facility, with high-quality assets that are illiquid in private markets (ie the assets that will no longer satisfy the eligibility criteria for the MMR) eligible as collateral under the CLF.
The consultation paper sets out at a high-level the likely features of the CLF, which will be consulted on in more detail in the future. The Reserve Bank expects the CLF to contribute up to 40-50% of a depositor taker's assets contributing to the MMR.
Qualitative liquidity requirements for branches of overseas banks in New Zealand
During the Reserve Bank's consultation on the branch policy review the Reserve Bank raised the possibility of imposing quasi-liquidity requirements on branches of overseas banks operating in New Zealand, such as ring-fencing assets in New Zealand (see our previous insight here).
In the consultation paper the Reserve Bank is not proposing to introduce quantitative liquidity requirements for branches, but remains concerned that branches might not hold sufficient NZD-denominated funding to meet their obligations.
Instead, the Reserve Bank is proposing to require branches to have a New Zealand CEO-approved liquidity risk management framework to manage liquidity risk that the deposit taker considers is adequate to manage material sources of potential liquidity stress.
DCS standard
Together with the DCS regulations (see our previous insight here), the DCS standard will operationalise the DCS, which is expected to commence mid-2025. The standard will cover two aspects of the DCS scheme: disclosure and Single Depositor View. The DCS standard will not commence until July 2028.
Disclosure
The disclosure aspect is intended to assist depositors to understand whether their deposits are protected deposits and the eligibility requirements for coverage under the DCS.
In addition to the requirement for a deposit taker to publish a list of protected deposits on its website (see section 193 of the DT Act), the consultation paper proposes the use of an identifying trademark in all advertising, communications and product disclosure statements related to protected deposits. The paper proposes that the trademark would be linked to information about the DCS hosted and maintained by the Reserve Bank.
The disclosure requirements seek to build public awareness of the DCS without overemphasising the protection it provides. As the DCS will commence in mid-2025 before the DCS standard (July 2028), the Reserve Bank proposes that the use of DCS branding during the interim period will be governed by trademarks and terms of use agreements.
Single Depositor View
Single Depositor View (SDV) (formerly Single Customer View) refers to the data needed by the Reserve Bank to determine an eligible depositor's entitlement to compensation and to pay the compensation.
Under the DCS, eligible depositors will be entitled to compensation for their protected deposits of up to $100,000 per deposit taker. The SDV data will also be used to set levies payable by deposit takers (prior to the standard coming into force in July 2028, the Reserve Bank will use a proxy for protected deposits based on internal reporting to the Reserve Bank).
The Reserve Bank proposes to collect SDV files from deposit takers containing 56 variables (which includes a mix of mandatory and non-mandatory variables). The information proposed to be collected is necessary for the identification of eligible depositors and protected deposits, calculation of entitlement to compensation, and accounting for legal obligations (such as tax). The information will also facilitate the payment of compensation – the information will be shared with an alternative deposit taker to support the payout process (payment via one or more other deposit takers is the Reserve Bank's preferred payout mechanism).
The standard will also require documented internal control processes and procedures for the production and testing of SDV files.
Disclosure standard
The disclosure standard will replace the disclosure requirements which are currently imposed by the BPS Act and the OiCs.
For Group 1 and Group 2 deposit takers and branches of overseas banks, the Reserve Bank proposes to carry over the current disclosure regime, with some minor modifications (eg a new requirement to disclose CEO and executive management remuneration). The disclosure standard will also likely incorporate other changes that arise following the consultation on the core and non-core standards this year.
Two more significant changes proposed are to:
- remove the need for directors and New Zealand CEOs of branches to attest to the accuracy of public disclosure and compliance with prudential requirements (instead, the Reserve Bank will rely on the new duty for directors and New Zealand CEOs of branches under sections 93 and 94 of the DT Act); and
- require each deposit taker to produce a board-approved disclosure policy about internal control and procedures.
For Group 3 deposit takers, the Reserve Bank is consulting on two possible options:
- a Dashboard-only approach; or
- a full-year disclosure statement only ('Bank-lite') approach.
The consultation paper focuses only on public disclosure. The Reserve Bank will consult on the appropriate legal mechanism for private reporting by deposit takers to the Reserve Bank when it consults on the exposure draft of the disclosure standard. Private reporting is currently done by way of section 93 information requests.
Next steps
In July 2024, the Reserve Bank expects to publish a second consultation paper on the non-core standards which is expected to cover the following standards:
- outsourcing (currently contained in BS11);
- lending (currently contained in BS19 and BS20);
- related-party exposures (currently contained in BS8);
- governance (currently contained in BS14);
- risk management (new standard);
- operational risk (new standard);
- branches (currently contained in BS1); and
- Open Bank Resolution (currently contained in BS17).
Following this consultation, the key milestones to implement the DT Act include:
- Q3/Q4 2024: Consultation on the non-core standards and publication of the DCS regulations.
- Mid-2025: Commencement of the DCS.
- 2025/2026: Consultation on exposure drafts of the core and non-core standards.
- 2025/2027: Issuance of the core and non-core standards and commencement of the licensing process.
- July 2028: Full commencement of the DT Act.
- Mid-2045: The Depositor Compensation Fund is expected to reach target fund size of 0.8% of protected deposits (approximately $1 billion based on current estimates of protected deposits).