Reserve Bank considers liquidity controls for non-bank deposit takers

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The Reserve Bank is considering introducing new liquidity controls for non-bank deposit takers as part of the new prudential regime which comes into effect next month which require firms have risk management plans.

Tuesday, February 2nd 2010, 9:47PM

by Paul McBeth

The sector’s new regulator has called for submissions on whether NBDTs should face similar liquidity requirements as banks and to what extent, with the intention to provide policy recommendations to Cabinet in the second quarter this year.

Under the new prudential regime, all non-bank deposit takers not given an exclusion by the central bank, will need a credit rating from Standard & Poor’s, Fitch Ratings or Moody’s Investor Services.

The paper puts forward a series of options to regulate liquidity risk which includes “the potential introduction of new quantitative and qualitative requirements,” after central bank Governor Alan Bollard last week said the capital ratio requirements for banks will probably mean he will not have to hike interest rates by as much with banks forced to source more cash from retail deposits and longer-dated wholesale funds.

The bank’s early view on the issue is that borrowers should also face any liquidity requirements to prevent any arbitrage, while its analysis of prescribing exact requirements show the larger NBDTs will “easily exceed the ratio requirements calibrated for locally incorporated banks” given their reliance on securing retail funds.

“While there are arguments in favour of imposing additional liquidity requirements on NBDTs, the main issue we face in relation to prescribing quantitative liquidity requirements for NBDTs is the diversity in liquidity needs in the sector,” the paper’s authors said.

“It is not clear to us that specifying a single set of precise requirements across the sector is a sensible approach.”

The discussion paper does say prescribing a measurement framework under which companies and trustees can determine their own requirements would offer some risk management as well as address “some of the exit challenges from the DGS (deposit guarantee scheme).”

The Reserve Bank has identified three options in the paper:

• Effectively maintaining the status quo,
• Prescribing a measurement framework for trustees and firms to determine their own quantitative requirements, or
• Prescribing precise requirements.

Paul is a staff writer for Good Returns based in Wellington.

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