Bills Digest no. 41 2006–07
Financial Sector Legislation Amendment (Trans-Tasman
Banking Supervision) Bill 2006
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Contact Officer & Copyright Details
Financial Sector Legislation
Amendment (Trans-Tasman Banking Supervision) Bill
Commencement: on Royal Assent
To facilitate trans-Tasman
cooperation in the prudential regulation of financial
Early in 2004 a working party of Australian and New Zealand
officials began discussions to look at options for integrating the
banking and finance regulatory regimes in both countries. The New
Zealand Government published a Report entitled Review of the
regulation and performance of New Zealand s major
financial institutions (the Review) in early
2005.(1) The main recommendation of that Review was that
the New Zealand Treasurer discuss with the Australian Treasurer,
Peter Costello, the benefits of enhanced co-ordination and
cooperation in the regulation of financial institutions. Subsequent
negotiations between the Australian Treasurer and New Zealand
Treasurer have led to this Bill. They have also led to changes
being proposed to relevant legislation in New Zealand.
The issue of trans-Tasman financial supervision has received
little attention in Australia. However, the issue is quite
important in New Zealand. In announcing the Bill, the press release
by the Parliamentary Secretary, Chris Pearce, refers to the high
level of commercial integration between the Australian and New
Zealand banking markets.(2) The press release goes on to
suggest key benefits in moving towards seamless regulation of banks
on both sides of the Tasman, including minimising compliance costs
and promoting efficiency. In fact the integration comes about
because of the domination of the Australian banks and insurance
companies on both sides of the Tasman.
The Australian big four banks (ANZ, Commonwealth, National
Australia and Westpac) control 89 per cent of the assets of the New
Zealand banking system.(3) By contrast, an inspection of
APRA s statistics reveals no Australian presence of any
identifiable New Zealand bank.(4) At 89 per cent of the
New Zealand banking system, the big four Australian banks control
more of the New Zealand market than the Australian market where
they account for around two thirds of the Australian banking
industry (as measured by share of assets). There would be some New
Zealand held equity in the Australian banks, but apart from that
the dominance of the trans-Tasman financial system is almost
completely one way. Hence regulation of the New Zealand banking
system in practice means little more than regulating the
subsidiaries and branches of the big four Australian banks.
Foreign ownership remains an issue in New Zealand. While the
above discussion suggests the New Zealand banking industry is 89
per cent owned by the Australian big four, the Review reports that
New Zealand banking is 98 per cent foreign owned.(5)
Therefore, if a bank is not owned by Australian interests it is
probably owned by other foreign interests. Prior
to deregulation of the New Zealand banking industry, foreign
ownership was lower at 60 per cent.
The Review also discusses the impact on New Zealand of
decision-making dominated in Australia as well as the disappearance
of head office and back office functions from New Zealand. The
Review expressed concern about the outsourcing of banking functions
to Australia. It found that the New Zealand banking system is
potentially subject to risks emanating from technological failure
in Australian activities. On the positive side, outsourcing may
result in efficiency gains and so benefit banks themselves as well
as bank customers.
The Review also considered non-bank financial institutions such
as insurance and managed investment funds. Essentially the same
reasoning applies in the case of non-bank financial institutions.
The non-bank sectors are not as important in New Zealand as they
are in Australia in terms of their significance in the financial
system as a whole. The non-bank sector is 26 per cent of the New
Zealand financial system compared with 51 per cent in Australia.
Moreover, the Review notes that while insurance companies
are also a concern, the risk of an insurance failure causing harm
to the rest of the economy is less likely in New Zealand than for a
bank. (6) For these reasons banks have been the main
focus of attention.
In principle there should be some savings for APRA through a
more cooperative arrangement with the Reserve Bank of New Zealand
(RBNZ). Yet no savings are identified because APRA is self-funding,
relying on the levies that it imposes on the institutions it
regulates. It sets the levies to recover its costs, so, to that
extent there would be no impact on the budget bottom-line as a
result of any efficiencies. There would, however, be an impact on
total budget revenue and total expenses and those could have been
The present Bill tries to progress a seamless trans-Tasman
regulatory scheme by amending the relevant Australian legislation.
The Bill does not create a co-operative arrangement as such but
implements the agreement by inserting the appropriate concerns into
the Australian legislation. It should be pointed out that the Bill
applies to all institutions, banks, building societies, super
funds, insurance companies, and all other institutions now subject
to the Australian Prudential Regulation Authority Act
Schedule 1 of the Bill makes various changes to
the Australian Prudential Regulation Authority Act 1998,
the Banking Act 1959 and the Financial Sector
(Transfers of Business) Act 1999.
The Bill inserts a new Section 8A Trans-Tasman
cooperation into the Australian Prudential Regulation Authority
Act 1998. This section requires the Australian Prudential
Regulation Authority (APRA) to support and consult with the New
Zealand authorities in carrying out their duties and avoid actions
that might have a detrimental effect on the New Zealand financial
system stability (item 8A).
In order to harmonise the Australian and New Zealand
arrangements the Bill makes it clear that one of APRA s objectives
is to promote financial system stability in Australia . Many of the
changes in the Bill involve adding words that specifically mention
financial system stability . For example, Financial system
stability is explicitly inserted into Section 8 of the
Australian Prudential Regulation Authority Act 1998 that
sets out APRA s purpose (item 5).
Outsourcing was a big issue for New Zealand. Australian banks
have the potential to undertake a lot of the back-room operations
for New Zealand companies in Australia. That creates a potential
risk to the stability of the New Zealand financial system in the
event of some failure in the Australian operations. The Bill
addresses those concerns by specifically mentioning actions that
prevent or interfere with outsourcing arrangements as an action
that is likely to have a detrimental effect on financial system
stability in New Zealand and therefore a factor that APRA needs to
take into account when making regulatory decisions (item
The main impact of this Bill is to reduce the duplication in
Australia/New Zealand financial regulation and to harmonise the
regulation in each country.
The Bill makes financial system stability one of the APRA
objectives. However, the Reserve Bank of Australia (RBA) has always
had that role. The RBA notes that:
Financial system stability is the absence of
financial crises, such as distress in financial institutions or
disturbances in financial markets, that are sufficiently severe to
threaten the health of the economy. The Reserve Bank has a clear
mandate to contribute to the maintenance of financial stability
because financial crises are costly.(7)
The new legislation will provide for the two Australian
regulatory bodies, the RBA and APRA, to have financial system
stability as one of their objectives. The second reading speech
claims that the changes will assist in the implementation of
reciprocal legislative amendments in New Zealand legislation. It is
not clear what that would mean in practice. For example, does this
mean that APRA s general responsibilities have been expanded?
In New Zealand the functions of the RBNZ are similar to
functions that were held by the RBA before APRA was hived off as a
separate body. The RBNZ is responsible for banking supervision as
the RBA was before the power was given to APRA. The RBNZ is also
responsible for financial system stability precisely because its
charter includes functions that in Australia remain with the RBA.
In Australia the split of functions between the RBA and APRA has
meant that APRA is concerned with the soundness of individual
companies it regulates, but once the soundness of an entity
threatens financial system stability then responsibility passes to
the RBA. The RBA can issue liquidity and that is the ultimate
weapon to confront any financial instability. Ultimate authority on
these issues has to reside with the RBA and some arrangement would
have to be made between the two if these new arrangements proposed
in the Bill are to work effectively. If it is the status quo then
the insertion of the objective financial system stability into APRA
s legislation is redundant. However, if APRA is to have a real role
then understandings about the respective roles need to be worked
out with the RBA.
There is always a danger that the regulators fail to respond to
a crisis because the lines of demarcation are not clear. If they
are both responsible for financial system stability then there will
need to be further thought as to how they might cooperate and share
- Joint Report by New Zealand Treasury, Reserve Banks of New
Zealand and the Ministry of Economic Development, January 2005.
available at: http://www.treasury.govt.nz/mfireview/rrpnzmfi-report.pdf.
- Hon Chris Pearce, MP, Parliamentary Secretary to the Treasurer,
Better co-operation in banking supervision with New Zealand ,
Press Release No 034, 14 September 2006 at:
- Figure calculated from Reserve Bank of New Zealand statistics
obtained from its web site on 10 October 2006 at: http://www.rbnz.govt.nz/statistics/banksys/g1/data.html.
- Statistics for individual banks operating in Australia can be
obtained from APRA s site at: http://www.apra.gov.au/Statistics/Monthly-Banking-Statistics.cfm.
- ibid., p. 7.
- ibid., p. 9.
- RBA, About Financial System Stability at:
accessed 5 October 2006.
26 October 2006
Bills Digest Service
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