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New legislation provides basis for confidence

Date 3 October 2008
Time 1.00pm

New legislation provides a strong basis for confidence

The passing of the Reserve Bank Amendment Bill (No 3), making the Reserve Bank the regulator of deposit takers, provides a strong basis for confidence in the non-bank deposit-taking sector, Reserve Bank Governor, Alan Bollard, said today.

Speaking to an Auckland business audience, Dr Bollard said there has been over the last year or so a 'slow-burn' contagion of finance company failures.

"A number of factors have contributed to the casualties," he said. "There has been a downturn in the property development sector. Investors have been exposed to significant risks in exchange for a relatively small margin over bank deposit rates. People have shifted their money from finance companies to institutions with a lower degree of risk, notably the banks. And then there has been the international credit crisis."

Dr Bollard said that the failures have also highlighted fragile business structure, poor risk management, and inadequate governance. The passing of the Reserve Bank Amendment Act, making the Reserve Bank the regulator of non-bank deposit takers, will help to address these issues in the future.

"The major players in the financial systems are, of course, the commercial banks, and despite the crisis on Wall Street, they have continued to operate strongly in New Zealand. These institutions are well capitalised businesses and give no current reason for concern," commented Dr Bollard.

Under the new legislation trustees will continue to be front-line supervisors of deposit takers. The Reserve Bank's role will be to require information from trustees of deposit takers, to develop and enforce minimum prudential and governance requirements, and to administer credit rating requirements.

Credit ratings from reputable rating agencies will play an important role. Credit ratings will assist depositors to compare the level of risk they are taking with the return they are getting when they invest in a deposit taker.


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