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New Zealand

6. Financial Sector

Capital Markets and Portfolio Investment

New Zealand policies generally facilitate the free flow of financial resources to support the flow of resources in the product and factor markets.  Credit is generally allocated on market terms, and foreigners are able to obtain credit on the local market. The private sector has access to a limited variety of credit instruments.  New Zealand has a strong infrastructure of statutory law, policy, contracts, codes of conduct, corporate governance, and dispute resolution that support financial activity. The banking system, mostly dominated by foreign banks, is rapidly moving New Zealand into a “cashless” society.

New Zealand adheres to International Monetary Fund (IMF) Article VIII and does not place restrictions on payments and transfers for international transactions.

New Zealand has a range of other financial institutions, including a securities exchange, investment firms and trusts, insurance firms and other non-bank lenders.  Non-bank finance institutions experienced difficulties during the global financial crisis (GFC) due to risky lending practices, and the government of New Zealand subsequently introduced legal changes to bring them into the regulatory framework.  This included the introduction of the Non-bank Deposit Takers Act 2013 and associated regulations which impose requirements on exposure limits, minimum capital ratios, and governance. It requires non-bank institutions be licensed and have suitable directors and senior officers.  It also provides the RBNZ with powers to detect and intervene if a non-bank institution becomes distressed or fails.

The GFC also prompted New Zealand to introduce broad-based financial market law reform which included the establishment of the Financial Markets Authority (FMA) in 2014.  The Financial Markets Conduct Act (FMC) 2013 provided a new licensing regime to bring New Zealand financial market regulations in line with international standards. It expanded the role of the FMA as the primary regulator of fair dealing conduct in financial markets, provided enforcement for parts of the Financial Advisers Act 2008, and made the FMA one of the three supervisors for AML/CFT, alongside the RBNZ and the Department of Internal Affairs.  The FMA supervises approximately 800 reporting entities.

Legal, regulatory, and accounting systems are transparent.  Financial accounting standards are issued by the New Zealand Accounting Standards Board (NZASB), which is a committee of the External Reporting Board established under the Crown Entities Act 2004.  The NZASB has the delegated authority to develop, adopt and issue accounting standards for general purpose financial reporting in New Zealand. The NZASB’s accounting standards are based largely on international accounting standards, and generally accepted accounting principles.

Smaller companies (except issuers of securities and overseas companies) that meet proscribed criteria face less stringent reporting requirements.  Entities listed on the stock exchange are required to produce annual financial reports for shareholders. Stocks in a number of New Zealand listed firms are also traded in Australia and in the United States.  Small, publicly held companies not listed on the NZX may include in their constitution measures to restrict hostile takeovers by outside interests, domestic, or foreign. However, NZX rules generally prohibit such measures by its listed companies.

In 2017 the market capitalization of listed domestic companies in New Zealand was 46 percent of GDP, at USD 95 billion.  The small size of the market reflects in part the risk averse nature of New Zealand investors, preferring residential property and bank term deposits over equities or credit instruments for investment.  New Zealand’s stock of investment in residential property has exceeded NZD 1 trillion (USD 680 billion) since in 2016. Between December 2015 and December 2018, the value of residential property increased 28 percent to NZD 1.12 trillion (USD 762 billion).

Money and Banking System

The Reserve Bank (RBNZ) regulates banks in New Zealand in accordance with the Reserve Bank of New Zealand Act 1989.  The RBNZ is statutorily independent and is responsible for conducting monetary policy and maintaining a sound and efficient financial system.  The New Zealand banking system consists of 26 registered banks, and more than 90 percent of their combined assets are owned by foreign banks, mostly Australian.  There is no requirement in New Zealand for financial institutions to be registered to provide banking services, but an institution must be registered to call itself a bank.

In November 2017 the government announced it would undertake the first ever review of the RBNZ Act.  In December 2018 the government passed an amendment to the Act to broaden the legislated objective of monetary policy beyond price stability, to include supporting maximum sustainable employment.  It also requires that monetary policy be decided by a consensus of a Monetary Policy Committee, which must also publish records of its meetings. While policy decisions at the RBNZ have been made by the Governing Committee for several years before the amendment, the Act had laid individual accountability with the Governor, who could be removed from office for inadequate performance according to the goals set through the Policy Targets Agreement.

Applicants for bank registration must meet qualitative and quantitative criteria set out in the RBNZ Act.  Applicants who are incorporated overseas are required to have the approval of their home supervisor to conduct banking business in New Zealand, and the applicant must meet the ongoing prudential requirements imposed on it by the overseas supervisor.  Accordingly, the conditions of registration that apply to branch banks mainly focus on compliance with the overseas supervisor’s regulatory requirements.

The RBNZ introduced a Dual Registration Policy for Small Foreign Banks in December 2016.  Foreign-owned banks are permitted to apply for dual registration – operating both a branch and a locally incorporated subsidiary in New Zealand – provided both entities comply with relevant prudential requirements.  Locally incorporated subsidiaries are separate legal entities from the parent bank. They are required, among other things, to maintain minimum capital requirements in New Zealand and have their own board of directors, including independent directors.  In contrast, bank branches are essentially an extension of the parent bank with the ability to leverage the global bank balance sheet for larger lending transactions. Capital and governance requirements for branch banks are established by the home regulatory authority.  There are no local capital or governance requirements for registered bank branches in New Zealand.

New Zealand has no permanent deposit insurance scheme and the RBNZ has no requirement to guarantee the viability of a registered bank.  The RBNZ operates the Open Bank Resolution (OBR) which allows a distressed bank to be kept open for business, while placing the cost of a bank failure primarily on the bank’s shareholders and creditors, rather than on taxpayers.  While the scheme has been generally successful, in 2010 the government paid out NZD 1.6 billion (USD 1.1 billion) to cover investor losses when New Zealand’s largest locally owned finance company at the time, went into receivership.  There have since been bailouts of several insurance companies and other smaller finance companies.

New Zealand’s banking system relies on offshore wholesale funding markets as a result of low levels of domestic savings.  Banks are able to raise funds in international markets relatively easily at reasonable cost, but are vulnerable to global market volatility, geopolitics, and domestic economic conditions.  Domestically, banks face exposure due to the concentration of New Zealand exports in a small number of commodity-based sectors which can be subject to considerable price volatility. Residential mortgage and agricultural lending exposures have also presented risk.

The four largest banks (ASB, ANZ, BNZ and Westpac) control 88 percent of the retail and commercial banking market measured in terms of total banking assets.  With the addition of Kiwibank, that rises to 91 percent. Kiwibank launched in 2002 and is majority owned by NZ Post (53 percent), with the NZ Superannuation Fund (25 percent), and the Accident Compensation Corporation (22 percent).

The RBNZ report the total assets of registered banks to be about NZD 556 billion (USD 378 billion) as of March 2019.  They estimate the amount of non-performing loans to be about NZD 3.7 billion (USD 2.5 billion) for December 2018. Approximately 0.7 percent of bank loans are non-performing.

The four banks have capital generally above the regulatory requirements.  The initial findings from a RBNZ review of bank capital requirements released in March 2017 found New Zealand banks to be “in the pack” in terms of capital ratios relative to international peers.  There have since been subsequently four rounds of consultations revisiting capital requirements after the Australian Financial System Inquiry made recommendations that were subsequently accepted by the Australian Prudential Regulation Authority to improve the resilience of the Australian banks.  While this contributes to the ultimate soundness of the New Zealand subsidiaries, it does not directly strengthen their balance sheets.

In February 2019 the RBNZ proposed to almost double capital requirements for the four big banks.  The RBNZ proposed to require banks’ Tier 1 capital to be comprised solely of equity and to increase from the current minimum of 8.5 percent of total capital to 16 percent over five years.  It also wants Tier 1 capital to be pure equity, rather than hybrid-type securities that usually behave as debt but which can be converted into equity if required, and which are about a fifth of the cost of pure equity.  Since the GFC, the minimum tier 1 capital has already been raised from 4 percent of risk-weighted assets to 8.5 percent. 

All New Zealand’s banks have more tier 1 capital than the current minimum with the RBNZ estimating it averages about 12 percent.  The RBNZ expect with better capitalized banks, will improve the strength of the banking system and make bank failures less frequent.  The RBNZ admit higher capital requirements could make it more expensive for New Zealanders to borrow. A higher capital ratio could impact the RBNZ monetary policy rate and the New Zealand currency.

The RBNZ acknowledge the proposals take New Zealand to the higher end of international norms, but cite Basel Committee estimates that will put New Zealand in the third quartile.  The RBNZ has estimated the extra capital the big four Australian-owned banks will need to raise to meet its current proposals would be about NZD 20 billion (USD 13.6 billion).

Rating agency risk assessments of the large New Zealand banks is heavily influenced by expectations of support from the Australian parent banks.  While the implicit support of the parent banks is valuable, it can also present risk if they are placed on negative outlook. Ratings agency Standard & Poor’s (S&P) have said the current RBNZ proposals could place a burden on the Australian parents of New Zealand’s four major banks because the potential implications are material and complex due to cross-border regulatory issues.  Banks would also need to replace capital if they implement the additional proposal to exclude quasi-equity instruments, usually fixed interest securities that can be converted to equity if a bank gets into difficulties, from qualifying as tier 1 capital. S&P are skeptical that additional capital requirements would improve the banks’ credit ratings because they equalize their ratings on the New Zealand banks with the credit profiles of their respective parent groups, and the parent banks are highly likely to provide timely financial support for the New Zealand major banks, if needed.  Further the proposals are unlikely to affect the parent bank ratings but they will likely need to strengthen their consolidated group capital to meet RBNZ requirements. If ratings agencies do not raise their assessment, then the improved “safety” of New Zealand banks are unlikely to get access to cheaper credit as suggested.

Similarly, Fitch Ratings called the proposals radical and highly conservative relative to international peers.  But were in favor of banks’ increasing their resilience to potential threats to the stability of the financial system.

While the Zealand banking system has one of the lowest ratios of non-performing loans to gross lending in the OECD, macro prudential measures introduced in October 2013 have introduced loan-to-value ratio restrictions, defined as those with loans greater than 80 percent of value.  In the intervening years these tools have been tweaked by the RBNZ to reduce banks’ risk exposure during an escalation of house prices and debt, and several banks announced they would at least temporarily cease lending to foreigners for residential property purchases.

The penetration of New Zealand’s major banks has improved since the introduction of the voluntary superannuation scheme, KiwiSaver in 2007.  The increase in their market share is also a result of the appointment of three additional banks as default KiwiSaver providers in 2014. In 2018 there were over 2.8 million KiwiSaver members, and the amount invested in KiwiSaver schemes is estimated to be NZD 50 billion (USD 34 billion).

There are some restrictions on opening a bank account in New Zealand that include providing proof of income and needing to be a permanent New Zealand resident of 18 years old or above.  Access to money in the account will not be granted until the individual presents one form of photo ID and a proof of address in-person at a branch of the bank in New Zealand. Some banks will require a copy of the applicant’s visa.  If the applicant does not apply for an IRD number, the tax rate on income earned will default to the highest rate of 33 percent. New Zealand banks typically have a dedicated branch for migrants and businesses to set up banking arrangements.

Foreign Exchange and Remittances

Foreign Exchange

New Zealand has revoked all foreign exchange controls.  Accordingly, there are no such restrictions – beyond those that seek to prevent money laundering and financing of terrorism – on the transfer of capital, profits, dividends, royalties or interest into or from New Zealand.  Full remittance of profits and capital is permitted through normal banking channels and there is no difficulty in obtaining foreign exchange. However, withholding taxes can apply to certain payments out of New Zealand including dividends, interest, and royalties, and may apply to capital gains for non-residents and on the payment of profits to certain non-resident contractors.

New Zealand operates a free-floating currency.  As a small nation that relies heavily on trade and global financial and geopolitical conditions, the New Zealand currency experiences more fluctuation when compared with other developed high-income countries.

Remittance Policies

The Pacific Islands are the main destination of New Zealand remittances from residents and from temporary workers participating in the Recognized Seasonal Employer (RSE) scheme.  The RSE allows the horticulture and viticulture industries to recruit workers from nine Pacific Island nations for seasonal work when there are not enough New Zealand workers. The cap for workers has gradually increased over time from 5,000 when the RSE was established in 2007, to 12,850 in November 2018.  Other people who use remittance services include recently resettled refugees, and other migrant workers particularly in the hospitality and construction sectors. 

The tightening of anti-money laundering and combatting terrorism financing laws has made access to cross-border financial services difficult for some Pacific island countries.  Banks, non-bank institutions, and people in occupations that typically handle large amounts of cash, are required to collect additional information about their customers and report any suspicious transactions to the New Zealand Police.  From 2018 the law has been extended to lawyers, conveyancers, accountants, and bookkeepers, and from January 2019 it has been extended to realtors.

Financial institutions have had to comply with the AML/CFT Act since 2013 (Phase 1 sectors remitters, trust and company service providers, casinos, payment providers, lenders and other financial institutions).  If a bank is unable to comply with the Act in its dealings with a customer, it must not do business with that person. This would include not processing certain transactions, withdrawing the banking products and services it offers, and choosing not to have that person as a customer.  Since then New Zealand banks have been reducing their exposure to risks and charging higher fees for remittance services, which in some instances has led to the forced closing of accounts held by money transfer operators (MTOs). 

The New Zealand government is working with banks to improve the bankability of small MTOs, and to develop low cost products for seasonal migrant workers in the RSE.  New Zealand is also using its membership in global fora to encourage a coordinated approach to addressing high remittance costs, and is working with Pacific Island governments to find ways to lower costs in the receiving country, such as the adoption and use of an electronic payments systems infrastructure.

The New Zealand Treasury released a report in March 2017 to explore feasible policy options to address the issues in the New Zealand remittance market that would maintain access and reduce costs of remitting money from New Zealand to the Pacific.

In 2017, the Tongan Development Bank in partnership with the World Bank Group launched a remittance facility, the ‘Ave Pa’anga Pau voucher, for use between New Zealand and Tonga:  http://www.avepaanga.co.nz/. The voucher is purchased online in New Zealand and redeemed or remitted to a bank account in Tonga. The Tonga Development Bank receives the funds only via electronic payments in New Zealand before disbursing them in Tonga using the liquidity obtained by importers.

In 2018 the New Zealand and Australian governments hosted a series of roundtable meetings in Auckland, Sydney, and Tonga, with the Asian Development Bank and the International Monetary Fund that included officials from banks, MTOs, and regulators from Australia, New Zealand, and the Pacific, senior officials from international financial institutions, and training providers to discuss the issue and identify practical solutions to address the costs and risks of transferring remittances to Pacific countries and difficulties in undertaking cross-border transactions.

Sovereign Wealth Funds

The New Zealand Superannuation Fund was established in September 2003 under the New Zealand Superannuation and Retirement Income Act 2001.  The fund was designed to partially provide for the future cost of New Zealand Superannuation, which is a universal benefit paid by the New Zealand government to eligible residents over the age of 65 years irrespective or income or asset levels.

The Act also created the Guardians of New Zealand Superannuation, a Crown entity charged with managing and administering the fund.  It operates by investing initial government contributions (and the associated returns) in New Zealand and internationally, in order to grow the size of the fund over the long term.  Between 2003 and 2009, the government contributed NZD 14.9 billion (USD 10.1 billion) to the fund, after which it temporarily halted contributions during the GFC. In December 2017 the newly elected government resumed contributions, with the Fund receiving an estimated NZD 500 million (USD 340 million) payment in the year to June 2018.  Planned contributions will be NZD 1 billion (USD 680 million) in the year to June 2019, NZD 1.5 billion (USD 1 billion) to June 2020, and NZD 2.2 billion (USD 1.5 billion) to June 2021. 

The guardians have a stated commitment to responsible investment, including environmental, social and governance factors, which is closely aligned to the United Nations Principles for Responsible Investment.  It is a member of the International Forum of Sovereign Wealth Funds, and is signed up to the Santiago Principles.

In February 2019, the fund was valued at NZD 41.2 billion (USD 28 billion) of which 45.8 percent was in North America, 19.3 percent in Europe, 13.9 percent in New Zealand, 10.2 percent in Asia excluding Japan, 6.1 percent in Japan, and 2.7 percent in Australia.

Following an announcement in October 2016 the NZSF significantly reduced its exposure to both fossil fuel reserves and carbon emissions, divesting assets of value USD 690 million from 297 companies by August 2017.  The NZSF claims its global passive equity portfolio – about 40 per cent of the total fund – is “low-carbon.” However remaining investments include at least 29 airlines and over 300 companies within the oil and gas sector and the metals and mining sector.

In April 2019, the fund divested NZD 19 million (USD 13 million) from seven companies (including four U.S. companies), involved in the manufacture of civilian automatic and semi-automatic firearms, magazines or parts prohibited under recently enacted New Zealand law.  For several years the fund has explicitly excluded companies that are directly involved in the manufacture of cluster munitions, the manufacture or testing of nuclear explosive devices, the manufacture of anti-personnel mines, the manufacture of tobacco, recreational cannabis, and the processing of whale meat.  In 2013 the fund divested a group of five U.S. companies due to their involvement with nuclear weapons.

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