Tougher rules for non-bank sector

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Non bank deposit takers such as finance companies are facing a much tougher regulatory regime than previously expected.

Thursday, May 14th 2009, 7:27AM

The Reserve Bank, which takes over prudential responsibility for the sector, has outlined some of its plans in the Financial Stability Report released yesterday.

It says the new regime won't be "a quick fix for the current challenges facing the non-bank deposit taking sector. Rather the regulations aim to raise standards across the industry and improve the future resilience of the sector."

The bank is setting rules around related party transactions and minimum capital ratio requirements.

It says the rules for related party exposure will be similar to the regime for registered banks, but has been simplified and calibrated to the non-bank sector.

It is proposed that a limit on aggregate credit exposures of the deposit taker or the borrowing group to all related parties must be specified in the trust deed and fixed by agreement between the deposit taker and the trustee, provided it does not exceed a maximum limit of 15 percent of tier one capital.

The bank expects to have these regulations in place around the middle of the year.

Non-bank deposit takers will be required to have a minimum capital ratio of 8% if they hold a credit rating and 10% if they do not.

The higher ratio requirement is intended to compensate for the lesser degree of security applied to unrated firms.

The bank has previously announced that firms will need a credit rating from one of the big three international agencies (Standard and Poors', Moodys or Fitch). However it has raised the threshold and said firms with liabilities of less than $20 million will be exempt from this requirement.

It says around 15 non-bank institutions with assets of more than $100 million have yet to obtain a credit rating.

Failure to hold a rating when they become mandatory on March 1, next year will be a breach of the law.

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