They also said the mere possibility of this level of regulation is already causing difficulties; making it harder to raise capital to grow and provide financial services to more New Zealanders.
The Bill modernises the Reserve Bank’s framework for regulation and supervision of the deposit-taking sector and introduces an insurance scheme for depositors.
The insurance scheme will be funded by levies collected from deposit takers to be used to compensate depositors in the event of their deposit-taker collapsing. Compensation will be capped at $100,000 per depositor, per institution. Secondary legislation will be needed to get the insurance scheme up and running by late 2024.
The Bill also includes modernising the licensing process, enabling a range of prudential standards to be applied to particular deposit takers or classes of deposit takers and expanding the Reserve Bank’s supervisory and enforcement tools.
The committee has recommended a number of changes be made by the Government to the Bill, which brings banks and non-bank deposit-takers (NBDTs) under a single regulatory regime.
A number of the changes are in response to concerns 13 NBDTs raised in a submission in November around the regime being too heavy-handed.
The committee says these concerns are in part a result of the approach taken to the design of the bill.
As originally introduced, the Bill would grant the Reserve Bank a significant degree of flexibility in how it discharges its prudential regulatory function, guided primarily by the objective of ensuring the financial system is stable.
“We appreciate the Reserve Bank needs flexibility to determine how best to achieve the overall objectives set for it, not least so that the prudential regulation regime continues to be fit for purpose in the face of future developments that cannot necessarily be foreseen now,” the committee says.
“Nonetheless, we consider improvements can be made to the Bill that would balance the need for flexibility with our desire to maintain diversity.
“Our intention is that diversity in the deposit-taking sector, and the resulting accessibility and financial inclusion outcomes, should not be unduly compromised by the focus on financial stability or the legislative framework Parliament puts in place for prudential regulation.”
Proportionality
The committee says the overall risk to financial stability associated with smaller deposit takers is generally lower than the risks posed by large registered banks.
The requirements that may be needed to ensure that banks are operating prudently may be excessive for achieving the goal of ensuring that smaller entities are too. Prudential regulation is not a one-size-fits-all game, the committee says.
“We agree that an insufficiently nuanced approach to the regulatory standards could impose unnecessary compliance costs on deposit takers, and potentially reduce diversity and competition in the sector.”
The NBDTs told the committee the Bill should be an opportunity to encourage the independent New Zealand-owned banking sector and reduce the country’s existing dependence on offshore banks and improve competition, innovation, financial system diversity and financial inclusion in the banking sector.
“The regulatory burden has not corresponded with any benefits to being prudentially regulated compared to the benefits given to the banks. This makes growing or starting a small, retail deposit-taking business an unattractive proposition and this Bill should reverse that, not make it worse,” the NBDTs say.
The committee suggested the law require the creation of a “proportionality framework” that factors in the size, nature and relative risk to financial stability of different kinds of deposit-takers.
Diversity
The deposit-taking sector is dominated by four Australian-owned banks that make up 85% of the sector (by assets).
Non-bank deposit takers–such as credit unions, building societies, and finance companies—comprise a small part of the sector in New Zealand, at slightly more than $3 billion out of $650 billion in assets.
However, says the committee, these smaller deposit takers play an important role in providing access to financial services for New Zealanders who may struggle to access finance from the big banks.
“We heard from some submitters that the bigger banks tend not to be as accommodating as the non-bank deposit taking sector of less common or less conventional arrangements in how people live their lives.
“Diversity in the deposit-taking sector is therefore crucial to maintaining the level of financial inclusion New Zealand has.
“Non-bank deposit takers also benefit the banking sector by providing competition to the sector, and they can also be a source of innovation in the provision of financial products and services,” the committee says.
Other suggestions from the committee include clauses added to the Bill to emphasise the need for regulation to support New Zealanders having “reasonable access to financial products and services”.
Who pays?
Who pays what in levies is still to be determined.
Banks want to pay less because they are already more regulated and claim to be safer, while NBDTs say it would be unfair for them to be burdened with higher levies as it would make them uncompetitive. They also say if one of them failed it would be less of an overload on the financial system than if a bank fell over.
Before its second reading in Parliament the Government will consider the committee’s recommendations on the Deposit Takers Bill.
The Government wants the Bill to become law before the election.
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