The Reserve Bank of New Zealand (RBNZ) (Māori: Te Pūtea Matua) is the central bank of New Zealand. It was established in 1934[2] and is currently constituted under the Reserve Bank of New Zealand Act 2021.[3] The governor of the Reserve Bank, currently Adrian Orr, is responsible for New Zealand's currency and operating monetary policy.
History
the Dominion Farmers Building was the 1st headquarters of the Reserve Bank of New Zealand
The Reserve Bank of New Zealand was established from 1 August 1934 by the Reserve Bank of New Zealand Act 1933.[2] The Reserve Bank first issued banknotes in 1934, see New Zealand pound.
The Banking (Prudential Supervision) Act 1989,[4] which came into effect in February 1990, resulted in the Reserve Bank becoming independent of government control in RBNZ's role of managing monetory policy by introducing an inflation targeting mandate. New Zealand was the first country in the world to try this regime, which was later adopted in other countries.[5]
The Reserve Bank of New Zealand Amendment Act 2008[6]
included amendments to the BPSA 1989,[4] including the introduction of capital requirements for deposit takers.
The Non-Bank Deposit Takers Act 2013[7]
gave RBNZ the role of prudential regulator and licensing authority for non-bank deposit takers.
The bank's primary functions and responsibilities have been modified several times over its history. In 2018, the Labour-led coalition government passed the Reserve Bank of New Zealand (Monetary Policy) Amendment Act 2018,[8] which created the bank's monetary policy committee and codified "maximum sustainable employment" as an objective of monetary policy alongside price stability.[9]
In 2021, the Government passed the Reserve Bank of New Zealand Act 2021,[10] which created a new statutory governance board that was appointed by the Governor-General of New Zealand at the advice of the Government and Reserve Bank Governor.[11] The RBNZA 2021 also designated the New Zealand Treasury as the bank's external monitor, mandated that the bank publish annual performance expectations and financial risk management statements, and establish a new Foreign Reserves Coordination Framework.[12]
2021 also saw the Financial Market Infrastructures Act 2021[13] enacted, creating a regulatory regime for financial market infrastructures.
In December 2023, the National-led coalition government passed the Reserve Bank of New Zealand (Economic Objective) Amendment Act 2023[14] which eliminated maximum sustainable employment as an objective of the Bank and returned the Bank to its primary focus of managing price stability.[15][16]
Museum
RBNZ headquarters in Wellington
The Reserve Bank Museum, based at the bank's headquarters in Wellington Central, has been open to the public since 2006.[17][18]
Ownership
The Reserve Bank has been wholly owned by the New Zealand Government since 1936. The Reserve Bank is established by the Reserve Bank of New Zealand Act 2021[3] and has statutory independence. The Reserve Bank is accountable to Parliament and provides an annual dividend to the Government.[19][3]
Monetary policy
The Reserve Bank's primary function, as defined by the RBNZ Act 2021 is to provide "stability in the general level of prices" and "maximum sustainable employment".[20]
The Reserve Bank is responsible for independent management of monetary policy to maintain price stability. The degree of price stability is determined through a Policy Target Agreement with the Minister of Finance.[21] Policy Target Agreements are public documents and hence a government cannot secretly change the targets to gain a short term surge in economic growth.
The mechanism of this is the official cash rate which affects short-term interest rates. The bank will provide cash overnight at 0.50% above the cash rate to banks against good security with no limit. Furthermore, the bank will accept deposits from financial institutions with interest usually at the official cash rate.
Banks that offer loans at interest higher than the official cash rate will be undercut by banks that offer cheaper loans, and banks that loan out lower than the official cash rate will make less compared to other banks which can simply deposit their money in the Reserve Bank with a higher rate of return. The Reserve Bank borrows and offers loans with no limit on volumes in order to ensure that the interest rate in the market remains at the official cash rate level.
Through controlling this, the Reserve Bank can then influence short term demand in the New Zealand Economy and use this to control prices.
Adjustments to the official cash rate are made eight times a year. It can make unscheduled adjustments but does not usually do so.[citation needed]
Fractional-reserve banking
Like all modern monetary systems, the monetary system in New Zealand is based on fiat and fractional-reserve banking. In a fractional-reserve banking system, the largest portion of money created is not created by the Reserve Bank itself. Private sector commercial banks create 80% or more.
Issuing of currency
The bank by virtue of the Reserve Bank Act has the sole right of issuing New Zealand legal tender notes and coins. The Reserve Bank controls the issuing of currency to banks and also replaces used and damaged money from circulation. In March 2005, the bank decided to remove the 5 cent coin from circulation (the following year), as well as reducing the size of 10, 20 and 50 cent coins.[22]
The Reserve Bank accepts all New Zealand currency for payment at face value. This applies to all demonetised or withdrawn currency, however such currency need not be accepted by money changers as it is no longer legal tender. All decimal notes are legal tender except $1 and $2 notes as these have been withdrawn.
Damaged notes are still worth something so long as they are recognisable. The Reserve Bank website notes that as a rule of thumb if there is more than half a bank note they will pay its full value. To receive payment people have to turn in the note to either the Reserve Bank in Wellington or any bank.
New Zealand Banknotes
are signed by the RBNZ Governor and before 1984, they were signed by the RBNZ Chief Cashier.
[23]
Central Bank Digital Currency
The RBNZ has been evaluating the pros and cons of issuing a central bank digital currency since 2018.
In April 2024, the RBNZ held a public consultation on the move toward a digital dollar. This digital currency would coexist with physical cash while offering privacy, security, and trust for users.[24][25]
Collectors coins
The Reserve Bank from time to time produces limited runs of legal tender coins for collectors and have a New Zealand theme and design. These coins generally do not circulate, but are legal tender. The coins are sold for the Reserve Bank via New Zealand Post's business unit.[26]
Prudential regulation
The Reserve Bank is responsible for the Prudential regulation of the New Zealand banking system to ensure that the system remains healthy, however it does not guarantee that a bank will not fail, or face problems.
As of April 2023[update] there are 27 registered banks.[27][28][29]
New Zealand-incorporated registered banks are required to maintain a minimum level of capital relative to their risk-weighted assets, measured by their Capital adequacy ratio. This helps ensure that banks have enough money to cover any losses they might incur.[30]
policy mandating the minimum amount that a commercial bank must hold in liquid assets. The liquidity policy of New Zealand's locally incorporated registered banks is primarily governed by two banking prudential requirements documents: 'Liquidity policy' (BS13) and 'Liquidity policy annex – liquid assets' (BS13A). These documents are part of the banks' conditions of registration. Additionally, reporting requirements are imposed under section 93 of the Banking (Prudential Supervision) Act 1989.[31]
Disclosure, BS7
All registered banks operating in New Zealand must issue a quarterly disclosure statement, which the Reserve Bank scrutinise. The purpose of these disclosure statements is to assist depositors to make sound decision and encourage banks to maintain sound banking practices
The disclosure comprises:
A key information summary that provides a brief overview of the bank's financial condition
General disclosure statement to provide comprehensive information on the bank
Supplemental disclosure statement
Credit Ratings
Under section 80 of the BPSA 1989, the RBNZ requires that all registered banks must have a valid credit rating for their long-term, senior, unsecured obligations in New Zealand dollars. These ratings, provided by independent agencies, assess a bank's financial stability and likelihood of repaying its debts. The RBNZ maintains a register of these ratings for each registered bank, which are also disclosed in the banks' semi-annual statements.
Outsourcing, BS11
The RBNZ outsourcing policy, Banking Standard 11, applies to large New Zealand-incorporated registered banks.
Outsourcing occurs when a bank uses another party to perform business functions that would traditionally have been undertaken by the bank itself. Common examples include IT processing, accounting, and call centers.
The outsourcing policy aims to ensure that large banks have the legal and practical ability to control and execute outsourced functions. It ensures that outsourcing arrangements do not compromise a bank's ability to be effectively administered under statutory management and operate for the purposes of continuing to provide and circulate liquidity to the financial system and the wider economy.
The bank must be able to facilitate basic banking services by any new owner of all or part of the bank. They must also address the impact of service or function provider failures on the bank's ability to carry on its business.
Large banks must achieve specific outcomes, including:
Meeting daily clearing, settlement, and other time-critical obligations.
Monitoring and managing financial positions (credit, liquidity, and market risk).
Providing basic banking services to existing customers, including liquidity and account activity reporting.[32]
Connected Exposures, BS8
NZ registered banks are required to report their large exposures to RBNZ. This includes not only the large exposures but also the 20 largest exposures, even if they do not meet the large exposure threshold.
Connected exposures occur when multiple counterparties are linked through control relationships or economic interdependence. For example, if one company controls another, or if the financial health of one entity directly affects another, they are considered connected.
The Basel Committee on Banking Supervision (BCBS) has set guidelines to limit large exposures. A large exposure is defined as any exposure that is 10% or more of a bank’s Tier 1 capital. For global systemically important banks (G-SIBs), the limit is stricter, capping exposures to other G-SIBs at 15% of Tier 1 capital.
These regulations aim to prevent banks from incurring significant losses due to the default of a single counterparty or a group of connected counterparties. This helps in maintaining the stability of the financial system by reducing the risk of cascading failures.[33][34]
Open Bank Resolution, BS17
'Open Bank Resolution (OBR)' is a tool for dealing with a bank failure. OBR allows authorities to reopen a failed bank the next day under statutory control. It seeks to prevent abrupt disruptions to the bank's essential functions. while a long-term solution to the bank's failure is found, customers can promptly access their accounts to make and receive payments.
OBR places the cost of a bank failure on the bank's shareholders and creditors, rather than taxpayers. Shareholders lose their investment first, followed by creditors if necessary.
Creditor claims may be frozen to absorb losses, and they may suffer financial loss if the bank is unable to satisfy its obligations.
In the absence of OBR, the only ways to deal with a bank failure are liquidation, government bailout, or acquisition by a competitor.
OBR covers banks with local incorporation that have more than $1 billion in retail deposits. The OBR programme is voluntary for other registered banks to participate in.[35]
Macroprudential regulation
The goal of Macroprudential regulation is to reduce the likelihood of a financial crisis by limiting excessive lending during upturns and making banks and households more resilient during downturns. It focuses on risks to the financial system as a whole.
A Memorandum of Understanding between the Minister of Finance and the RBNZ Governor defines macroprudential policy and has guidelines for how we use the policy.[36]
Trans-Tasman Council on Banking Supervision
The RBNZ is a member of the council, which promotes the coordination and harmonisation of trans-Tasman bank regulation, where appropriate. Its mandate also covers potential issues relating to financial stability, efficiency, and integration throughout the wider financial sector.
The Reserve Bank largely follows the 2010 Basel III standards in implementing its bank capital requirements.[37]
Deposit Takers Act
In June 2023 the Deposit Takers Act replaced the RBNZ Act 1989[4] and the NBDTA 2013[7] as the foundational law regulating Deposit Takers (New Zealand banks, building societies and credit unions).
It creates a single regulatory regime for all deposit takers and a deposit insurance scheme.[38][39]
Insurance industry supervision
Under section 12 of the Insurance (Prudential Supervision) Act 2010,[40] the RBNZ is charged with the prudential supervision of the New Zealand insurance industry. This includes the licensing of persons to carry on insurance business in New Zealand.
Regulation of non-bank deposit takers (NBDTs)
Under Part 5D of the RBNZ Act 1989,[4] the RBNZ was charged with the enforcement of the credit rating and prudential requirements applying to non-bank deposit takers (NBDTs) in New Zealand. These functions were introduced by the enactment of the Reserve Bank of New Zealand Amendment Act 2008.
Under the NBDT 2013[7] the RBNZ acts as the prudential regulator and licensing authority for NBDTs.[41]
Governors
Portrait of Leslie Lefeaux (1886-1962) - the 1st Governor of the Reserve Bank of New Zealand
The Governor is accountable for the Bank’s performance in maintaining price stability, promoting a sound and efficient financial system, and meeting the currency needs of the public but retains statutory independence as to how these key outcomes are achieved.[42]
The following have served as governors of the Reserve Bank:
The Arms of the Reserve Bank of New Zealand was granted on 1 June 1965[44][45]
Crest
A wreath of the colours Out of a Mural Crown Sable charged with three Bezants a demi Griffin Or holding between the paws a Portcullis Sable
Escutcheon
Gules two Keys in saltire wards downwards and outward, Argent in chief a representation of the Head of King Tāwhiao couped proper and in base an ancient Ship sail furled pennon and flags flying oars in action and in fess a Bull's Head couped and a Fleece Or
Supporters
On either side a Lion Sable each gorged with a collar of Bezants pendant therefrom a Key wards downwards and inwards Or
Motto
Securitas et Vigilantia (Latin: security and vigilance)
^Bollard, Alan; Gaitanos, Sarah (2010). Crisis: one central bank governor and the global financial collapse. Auckland: Auckland University Press. ISBN9781869404697. OCLC641984225.
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