Of the 15 foreign-owned banks in New Zealand, 12 conduct at least some business here through a branch of an overseas bank (an NZ Branch), including seven that are ‘dual-registered’ to operate as both an NZ Branch and a New Zealand subsidiary.
The conditions applying to them vary considerably, depending on the Reserve Bank’s assessment of the NZ Branch (and its home jurisdiction) at the time it was registered.
The Reserve Bank has determined to simplify its approach by:
- Restricting all NZ Branches to business with ‘wholesale investors’ under relevant Financial Markets Conduct Act (FMCA) requirements. This restriction won’t just apply to deposit taking, they will not be permitted to provide any services to retail customers in New Zealand, even services that many non-banks provide on a retail basis;
- Setting the maximum NZ Branch size at $15bn total assets (rather than $15bn liabilities, as now);
- Further limiting NZ Branches of dual-registered banks to customers with turnover or net assets of $50m or above. The Reserve Bank may also impose further restrictions to ensure the NZ Branch and subsidiary are sufficiently separate.
The Reserve Bank will conduct a later round of consultations on how or whether the Depositor Compensation Scheme (DCS) should apply to NZ Branches. It seems open to removing them from the DCS (probably a practical outcome given that the compliance costs would outweigh any benefits) but time is running out against the DCS commencement date (most recently indicated to be mid-2025).
New approach to prudential regulation
The outcomes of the Branch Review take a newly restrictive approach, indicative of wider changes to the Reserve Bank’s role under the Reserve Bank of New Zealand Act 2021 and the Deposit Takers Act 2023 (DTA).
In addition to its longstanding focus on the stability of the financial system as a whole, the Reserve Bank is now tasked under its Financial Policy Remit with ensuring a low incidence of regulated entity failure and will soon also have a purpose to promote the safety and soundness of all entities under the DTA.
These purposes may not always sit comfortably with other traditional roles, such as encouraging competition and market support.
Other recent Reserve Bank initiatives (including the Liquidity Policy Review) also indicate a more conservative stance, elements of which include:
- a more active supervisory role
- prioritising the elimination of risk where that is within the Reserve Bank’s purview, and
- eliminating factors that may be outside the Reserve Bank’s control.
Restricting NZ Branches from taking retail deposits links directly into the introduction of the DCS and is a clear factor when considering financial stability in New Zealand. But the Reserve Bank’s reasoning for extending the prohibition to all retail services draws a longer bow.
- In its summary of submissions the RBNZ stated that “the broader restriction of all retail business is justified under the assessment principles of the Branch Review, as it would further mitigate risks to financial stability, in terms of the confidence of retail customers in our banking system.”
There is little mention, however, of the benefit retail customers might obtain from the products NZ Branches could offer or whether they're likely to be provided elsewhere. Neither does the RBNZ elaborate on why an NZ Branch providing non-deposit services to retail customers is thought to create significant financial stability risk (or, to put it another way, why it is considered riskier for an NZ Branch to provide such services than an FMA-regulated derivatives issuer or a wholesale-funded lending institution).
- The higher $50m restriction applied to dual-registered NZ Branches reflects a concern that “off-shoring” may otherwise occur where the resources of an NZ Branch are withdrawn by the parent and allocated elsewhere. However, the larger economies of scale and capital available to an NZ Branch may allow it to continue to offer products that may not be profitable or even practical for a subsidiary. The policy is effectively encouraging the withdrawal of such services immediately.
The differing treatments between sole and dual-registered Branches also sit uncomfortably with the stated intention of levelling the playing field.
Banks and banking groups in New Zealand run a variety of different operating models, so each NZ Branch will be affected differently by these changes. What we can say is that:
- We expect NZ Branches will be evaluating which services will continue to make economic sense when saddled with the additional cost and lost economies of scale/global resource access arising from use of a subsidiary;
- NZ Branch services often fill niches in the market (either a global service that is not otherwise available in New Zealand or tailoring to a specific customer base). We expect that startups, fintechs and other unregulated (or less regulated) entities may eye up some of the opportunities created by the new constraints on NZ Branches but, where they are unable to provide the service efficiently, the gaps will remain unfilled. The review Regulatory Impact Statement acknowledges this, saying: “There may be a small negative effect on inclusion if branches that currently provide services to some under-represented groups withdraw from the market”;
- An influx of new participants will benefit from the implementation of open banking around the same time. Technology, for example, could allow a non-bank to ‘front’ the deposit taking aspects of a regulated narrow deposit taker, while providing FX and other services through a separate non-bank entity. It is not difficult to imagine a scenario similar to Apple fronting deposits for Goldman Sachs;
- Whether the Reserve Bank then seeks to regulate these new players is a question for the future – but tightened spending under the National-Led Government means this is unlikely to be a government priority. Nor is it likely to be far up the RBNZ’s ‘to do’ list.
- The pathway for potential new bank entrants has narrowed even further, straining the ability of the Reserve Bank to encourage competition.
- More broadly, we expect to see the Reserve Bank’s more conservative, active approach to reappear across other policy decisions.
Ultimately this is a new barrier for New Zealand’s banking sector, but it may be an opportunity for new players and competition to make headway.