Financial Integrity System Assessment

International Monetary Fund’s 2016 Financial Sector Assessment Program (FSAP) review of New Zealand

In 2016, the International Monetary Fund (IMF) conducted a Financial Sector Assessment Program (FSAP) of New Zealand’s financial system. While the FSAP assessment is centred on different things from Transparency International New Zealand’s Financial Integrity System Assessment (FISA), the FSAP assessment provides an important context for the evidence that will be collected for the FISA.

The FSAP team was led by the IMF’s Alejandro López Mejía. It was comprised of several other IMF employees, external experts and inputs from the IMF Legal Department.

Included in the review were

  • The Reserve Bank of New Zealand (RBNZ)
  • The Financial Markets Authority (FMA)
  • The Ministry of Business, Innovation, and Employment (MBIE)
  • The Ministry of Justice
  • The New Zealand Treasury (the Treasury)
  • The Department of Internal Affairs (DIA)
  • various market participants.

The IMF mission also met with

  • The Australian Treasury
  • The Reserve Bank of Australia (RBA)
  • The Australian Prudential Regulation Authority (APRA)
  • The Australian Securities and Investments Commission (ASIC)
  • and market participants in Australia.

An important attribute of the FSAP is that it provides an opportunity for New Zealand’s financial system to be benchmarked against international principles.

It’s these principles that provide context for the FISA, to be carried out for the first time this year and only in New Zealand.

FSAPs assess the stability of the financial system as a whole. They are intended to help countries identify key sources of systemic risk in the financial sector and implement policies to enhance its resilience to shocks and contagion. Certain categories of risk-affecting financial institutions such as operational or legal risk and/or risk related to bribery, corruption and fraud, are not covered in the FSAPs system-wide stability analysis.

In contrast, TINZ’s FISA will centre on the assessment of how the financial system addresses the prevention of bribery, corruption and fraud based on evidence about the attributes of financial system integrity that contribute to its resilience. It is this resilience that will enable the financial system to rebuff financial flows associated with corrupt behaviour and money laundering internationally.

The previous IMF FSAP published in 2004 found that the New Zealand financial system had a well-capitalized banking system, which counterbalanced some concerns on the lack of active supervision, high dependence on wholesale funding, and low savings.

As part of its 2016 review, the IMF team examined the implementation of the 2004 FSAP’s key recommendations. Only one of the 2004 recommendations were “Fully Implemented”.

“Fit-and-proper criteria should continue to apply in a comprehensive manner. The RBNZ could offer independent bank directors the possibility of discussing areas of concerns without absolving directors of their statutory responsibilities.”

It took from 2004 until 2010 for the RBNZ to introduce new corporate government requirements which came into effect in 2012.

The changes were broadly designed to strengthen the independence of locally incorporated foreign-owned banks (vis-à-vis their parents). Post GFC, the RBNZ has also significantly increased its engagement with independent directors.”

Turning to the IMF’s 2016 review:

Imbalances in the housing market, banks’ concentrated exposures to the dairy sector, and their high reliance on wholesale offshore funding are the key macro financial vulnerabilities in New Zealand. The banking sector has significant exposures to real estate and agriculture, is relatively dependent on foreign funding and is dominated by four Australian subsidiaries. A sharp decline in the real estate market, a reversal of the recent recovery in dairy prices, deterioration in global economic conditions, and a tightening in financial markets would adversely impact the system. The key risks faced by the insurance sector relate to New Zealand’s vulnerability to natural catastrophes”. (IMF FSSA, published 10 April 2017, page 6)

  • Despite these vulnerabilities, the banking system is resilient to severe shocks.
  • Strengthening for macroprudential framework is important.
  • The approach of the RBNZ to supervision should be strengthened by increasing the weight of regulatory discipline in its three-pillar framework.
  • Increasing supervisory resources for all financial sectors is key.
  • The proposed reforms to the regulatory and oversight framework for Financial Market Infrastructures (FMIs) will get New Zealand broadly on par with international standards.
  • The reform of securities market regulations significantly improved the framework, but further enhancements are required.
  • The crisis resolution framework needs to be enhanced further.
  • The home-host relationships between Australia and New Zealand are well above international practice, but stronger collaboration would enhance synergies.

While there has been progress on a framework for assessing systemic importance, and discussions on coordinated responses, the authorities involved have national mandates and accountabilities, which may constrain their ability to agree in advance on measures to deal with a potential crisis whose precise details are unknown”. (IMF FSSA, page 37)

This framework also has the potential for collaboration on strengthening ways for New Zealand and Australia financial sector organisations to work together to repel financial flows stemming from international crime, money laundering and/or corruption.

Actions

Recent Activity

Protect our whistleblowers
Transparency International New Zealand (TINZ) is calls for better whistleblower protection. 8 Aug, 2017

Auditor General resignation requires transparency
Transparency International New Zealand (TINZ) calls on Parliament to release the report by Sir Maarten Wevers that lead to the resignation of Auditor-General Martin Matthews. 5 Aug, 2017

TINZ applauds decline in foreign trusts
Government implementation of tougher disclosure requirements for foreign trusts have led to around 75% discontinuing or exiting New Zealand. 9 Jul, 2017

Public Sector Integrity Media Release
State Services Commission took a very positive step in addressing a key recommendation of TINZ's Integrity Plus 2013 New Zealand National Integrity System Assessment by advertising a role for Deputy Commissioner, Integrity, Ethics and Standards. 11 May, 2017

Corruption Perceptions Index 2016 TINZ media release
Transparency International 25 Jan, 2017