New Zealand will allow advanced approaches
WELLINGTON - New Zealand regulators bowed perhaps to the inevitable as Global Risk Regulator went to press and said they would allow advanced approaches to credit and operational risk measurement in the implementation of Basel II in New Zealand.
The Reserve Bank of New Zealand said the use of the internal ratings-based (IRB) approaches to credit risk and the advanced measurement approaches for operational risk will be available only to banks that meet certain criteria.
New Zealand's initial preference was for banks to apply the simpler, standardised approaches to measuring credit risk. But large Australian banks, regulated by the Australian Prudential Regulation Authority (Apra), own 85% of the New Zealand banking system. Apra wants large Australian banks to adopt the more sophisticated IRB approaches, which would have left the banks' New Zealand subsidiaries out on a limb.
"The majority of banks in New Zealand are owned by banks in other countries. In particular, the four largest banks in New Zealand - Westpac, ANZ National Bank, BNZ and ASB - are all owned by banks based in Australia and supervised by Apra," Reserve Bank deputy governor Adrian Orr noted.
"We are working closely with Apra throughout the Basel II process," he added.
Apra has decided on a single end-2007 start-date for implementing Basel II in Australia compared with the staggered end-2006 and end-2007 start dates suggested by the Basel Committee, the architect of Basel II.
"This initiative is an important example of the Reserve Bank's enhanced home-host regulatory relationship with Apra, necessitating co-operation, co-ordination and mutual recognition of regulatory effort," Orr said.
In a letter to bank chief executive officers Orr said the terms of engagement between Apra and the Reserve Bank are high-level principles for the cross border implementation of Basel II in New Zealand and Australia.
"Our work with Apra on Basel II will be a major initiative in developing the Reserve Bank's enhanced home-host relationship with the Australian authorities. Basel II will also provide an important example of the opportunities for closer co-ordination and harmonisation of supervisory arrangements for trans-Tasman banks,"
Under Basel II, the Reserve Bank will remain responsible for setting capital adequacy requirements for all banks incorporated in New Zealand. The Reserve Bank will seek to implement Basel II in a way that promotes the basic principles of New Zealand's capital adequacy regime. These are that the level and quality of capital that banks must hold for times of stress should be conservative; that the capital adequacy rules for all banks should be simple; and that bank directors and senior management should face appropriate incentives to manage risks effectively.
