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Need for effective local supervision of banks

Need for effective local supervision of banks

The Reserve Bank is emphasising the continuing need for countries with predominantly foreign-owned banks to have the capacity to maintain the stability of their financial systems and to respond to a banking crisis.

Speaking at a US Federal Reserve conference in Chicago on bank insolvency, Reserve Bank Governor Alan Bollard outlined the particular challenges increasingly facing countries with banking systems dominated by foreign banks. He also discussed the ways foreign and domestic regulatory authorities can better cooperate and coordinate their actions, including in the case of Australia and New Zealand.

Dr Bollard said that responding to a banking crisis was "a challenge for any supervisor, but it is all the more complicated when it is a foreign-owned bank that gets into difficulty, given different jurisdictions, potentially different statutory objectives between home and host (supervisory) authorities, and a greater degree of jurisdictional separation between taxpayers and depositors than is the case with domestically-owned banks.

"In the absence of any fair and formalised, operationally and legally robust, trans-national regulatory framework, the financial stability buck stops at national laws and the supervisor's and central bank's duties under those laws. The financial stability stakes are too high to pass on such a responsibility lightly. In banking, while the home and host authorities have some complementary interests, they also have areas of potentially diverging and conflicting interests, as well as jurisdictional limits.

"The Reserve Bank of New Zealand ... believe(s) that it is essential to maintain the frameworks needed to fulfil (its) responsibilities. This includes a clear legal and practical basis to supervise the financial system and the capacity to respond to a financial crisis effectively on a stand-alone basis if necessary. Equally, we must have a clear legal basis for providing liquidity support when required.

"But, we also recognise the benefits of mutual recognition and harmonisation of regulatory policies where sensible, and the benefits of cooperation and coordination between the home and host supervisory authorities. The efficiency and effectiveness of our banking supervision will be greater, and the crisis management options wider, the closer the home and host authorities are."

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