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1Reserve Bank of New Zealand: Statement of Intent
Reserve Bank of New Zealand Statement of Intent For the period 1 July 2013 to 30 June 2016
Contents
What we do 2SOIGovernanceOrganisational Structure
Strategic direction 4Vision and valuesGoal, Outcomes, Functions, Success measures
Environmental setting and strategic priorities 8Reserve Bank strategic priorities for 2013–16 9
Functions – Initiatives Monetary policy formulation 12 Financial market operations 14 Macro-financialstability 16 Prudential supervision 18 Settlement services 20 Currency operations 21
Operations–EnablingtheBank 23
Financial management 25
ISSN 1175-6786Copyright © Reserve Bank of New Zealand 2013
2 Reserve Bank of New Zealand: Statement of Intent
What we doTheReserveBankofNewZealandisthenation’scentralbank.ACrownagency,theBankexercises
powersacrossthefinancialsectorthatarederivedfromseveralpiecesoflegislation:
• TheReserveBankofNewZealandAct1989
• TheInsurance(PrudentialSupervision)Act2010
• TheAnti-MoneyLaunderingandCounteringFinancingofTerrorismAct2009
• TheBillsofExchangeAct1908andChequesAct1960.
TheseActscanbeviewedelectronicallyon theNewZealandLegislationwebsite.Regulationsmade
undertheseActscanbeviewedonthesamesite.
SOIUndersection162AoftheReserveBankofNewZealandAct1989(theAct),theReserveBankmust
provide to the Minister a Statement of Intent(SOI)forthatfinancialyearandatleastthenexttwofinancial
years.ThisSOIcoversthethreeyearsoftheFundingAgreement2013-14–2015-16.
The SOItraversesthreeyearsandissetinthecontextoftheBank’slonger-termplanningandfunding.
The Bank is funded through a five-year funding agreement between the Governor and the Minister of
Finance,whichisratifiedbyParliament.ThefundingagreementspecifieshowmuchoftheBank’sincome
canberetainedbytheBanktomeetitsoperatingcosts.
Governance TheReserveBankActprovidesconsiderableday-to-dayoperationalautonomytotheBank,animportant
role for theMinisterofFinance insomekeydecisions,andarobustaccountabilitystructure inwhichthe
Bank’sBoard, theMinister,andParliament(viatheFinanceandExpenditureCommittee)allhaveformal
roles.Transparencyisanimportantfeatureoftheoverallframework.ForadescriptionofhowtheBank’s
performance is monitored, see the Bank’s Statement of Intent 2012-2015,pages33-35.
The MinisterTheMinisterofFinancehasresponsibilityfor:agreeingwiththeGovernoronthemonetarypolicytarget;
agreeingonchangestothescopeofthesupervisoryregime;approvalofanydecisiontoplaceafailingbank
intostatutorymanagementortogivedirectionstoaregisteredbank;andapprovalofOrders-in-Councilin
relationtobank,non-bankdeposittakerandinsuranceregulation.TheMinistercanalsodirecttheBankto
interveneintheforeignexchangemarketortoimpose,foralimitedperiod,analternativemonetarypolicy
target.Inthesecases,transparentproceduresaresetoutintheAct.
Board of DirectorsThe Reserve Bank has a Board of Directors whose primary function is to review the performance of the
GovernorandtheBank.TheBoardholdsregularmeetingsatwhichitreceivesextensivebriefingsonthe
Bank’sactivities,decisionsandpolicies.Atthesemeetings,theBoardalsoprovidesadvicetotheGovernor
onarangeofBankfunctions.
3Reserve Bank of New Zealand: Statement of Intent
TheBoard,throughitsAuditCommittee,reviewstheBank’sfinancialstatementsandinternalandexternal
auditactivity.Eachyear,theBoardwritesanassessmentoftheBank’sandtheGovernor’sperformance,
whichisprovidedasadvicetotheMinisterofFinanceandmadepubliclaterintheBank’sAnnual Report.
Whenrequired,theBoardmakesrecommendationstotheMinisterontheappointmentorreappointment
of theGovernor.TheMinistercanonlyappointaGovernor recommendedby theBoard.TheBoardcan
recommend to the Minister that the Governor be dismissed if the Board believes that the Governor’s
performanceorconducthasbeeninadequateorinappropriateinanyoneofvariousrespects.TheBoard
appointstheDeputyGovernorontheGovernor’srecommendation.
TheBoardtypicallymeetsninetimesayear,withprovisionforadditionalmeetings.Fourofthemeetings
take place outsideWellington.At the time ofwriting, theBoard has seven non-executive directors.The
currentBoardmembersareDrArthurGrimes (Chair);MsSueSheldonCNZM (DeputyChair);MrKeith
Taylor(ChairoftheBoard’sAuditCommittee);DrRodCarr;DrChrisEichbaum;ProfessorNeilQuigley;Ms
KerrinVautierCMG;andMrGraemeWheeler(Governor).Boardmembersareappointedforfive-yearterms
andareeligibleforreappointment.Twovacancieswillrequirefillingin2013,followingthedecisionsbyDr
Grimestostepdownafterservingjustover11years,andDrEichbaumnottoseekanotherterm.
Organisational structure
Graeme WheelerGovernor
Geoff Bascand Deputy Governor
& Head of Operations
John McDermottAssistant Governor
& Head of Economics
Grant SpencerDeputy Governor & Head
of Financial Stability
Bernard HodgettsHead of
MacroFinancial Stability
Steve GordonHead of Risk
Assessment & Assurance
Toby FiennesHead of
Prudential Supervision
Mark PerryHead of Financial Markets
Mike WolyncewiczChief Financial Officer
Brian HayrHead of Currency,
Property and Security
Mike HannahHead of Communications
Board Secretary
Lindsay JenkinHead of Human Resources
Tanya HarrisChief Information Officer
4 Reserve Bank of New Zealand: Statement of Intent
Strategic directionVision and Values
The Reserve Bank’s vision is to promote a sound and dynamicmonetary and financial system. It
endeavourstoachievethisvisionbybeingahighperformingsmallcentralbank,withvaluesof:
Integrity–Beingprofessionalandexercisingsoundjudgement
Innovation–Activelyimprovingwhatwedo
Inclusion–WorkingtogetherforamoreeffectiveBank.
The Bank seeks to achieve its vision by developing and implementing highly effective and efficient
monetary,regulatory,andfinancialpoliciesthatarewellsuitedfortheNewZealandeconomyandfinancial
system.TheBankendeavourstoensurethatitsobjectivesandprioritiesaresoundandwellcommunicated
andunderstood,itsbusinessoperationsarewellmanaged,anditinvestswiselyintherecruitment,training,
developmentandretentionofitsstaff.Italsoinvestsheavilyinreviewingandtestingitspolicyframeworks
andpolicysettingsinlightofdomesticandinternationalexperience,andwillensurethatitsindependenceis
balancedbyappropriatepublicdisclosureandaccountability.
OutcomesTheBankcontributestotheGovernment’sgoalofimproving New Zealand’s economic performanceby
targetingthreeoutcomes.ThesearedesignedtofosterconfidenceandstabilityinNewZealand’sfinancial
systemby:
• Maintainingstabilityinthegenerallevelofprices
• Maintainingasoundandefficientfinancialsystem
• Providinglegaltendertomeetthecurrencyneedsofthepublic.
Toachievetheseoutcomes,theBankperformsfunctionscovering:
• Monetarypolicyformulation
• Financialmarketoperations
• Macro-financialstability
• Prudentialsupervision
• Settlementservices
• Currencyoperations.
These functions, the linksbetween them through theoutcomes targeted,and themeasuresused to
evaluateperformance,areshowninthefollowingtables.
5Reserve Bank of New Zealand: Statement of Intent
The
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6 Reserve Bank of New Zealand: Statement of Intent
Goal, Organisational outcomes, Functions, Functional outcomes, Success measures
IMPR
OVE
D E
CO
NO
MIC
PER
FOR
MA
NC
E
PRIC
E ST
AB
ILIT
Y M
AIN
TAIN
ED
FUNCTION FUNCTIONAL OUTCOMES SUCCESS MEASURES
Monetary
Policy Formulation
• Stability in the general level of prices
Monetary Policy Formulation • Reserve Bank forecasts of annual CPI inflation should be comfortably within the target range in the
second half of the forecast horizon, and near the 2 percent target midpoint. • Measures of underlying inflation should generally remain within the target range. • Unnecessary instability in output, interest rates and the exchange rate should be avoided. • Monetary Policy Statements are informative and accurately assess the Bank’s performance in meeting
the objectives of the Policy Targets Agreement.
Financial Markets
• Adequate banking system liquidity
• Short-term interest rates consistent with monetary policy • Confidence in the efficient functioning of New Zealand financial markets • Foreign reserves available for efficient foreign exchange intervention and crisis
management.
Financial Markets • Short-term wholesale interest rates are maintained at levels close to the OCR. • No evidence of payment disruptions due to a shortage of settlement cash in the system, e.g., persistent
accessing of the Overnight Reverse Repo Facility. • Over the medium term, domestic market operations generate a positive return. • Foreign reserves are maintained at target levels, with liquidity and credit standards met throughout. • The Foreign Reserves Management portfolio yields a net return on assets that meets or exceeds the
benchmark portfolio. • The foreign exchange open position is managed such that:
a. the bulk of active foreign exchange purchases (sales) are undertaken around peaks (troughs) in the exchange rate cycle; and
b. the net return on the non-core open foreign exchange position is positive over the cycle.
SOU
ND
AN
D E
FFIC
IEN
T FI
NA
NC
IAL
SYST
EM
MA
INTA
INED
Macro-Financial Stability
Macro-Financial Stability • Financial stability, promoted by:
- increased resilience of the financial system during periods of extreme credit growth and rising leverage or abundant liquidity; and
- dampening of excessive growth in credit and asset prices.
• A sound and efficient financial system that supports the functioning of the economy.
• International and local confidence in
New Zealand’s financial system.
Settlement Services • An efficient, reliable and secure payments
system that supports the smooth functioning of the economy
• The Bank maintains, publishes and monitors a comprehensive set of indicators to assess vulnerability and stress in the financial system.
• Any measures taken to reduce financial system risks, including the use of macro-prudential instruments, are explained in the FSR, and their net benefits for financial system stability are assessed.
• All statistics are published in accordance with the dates published six months in advance on the RBNZ website.
• Statistics are relevant and meet international standards.
Prudential Supervision
• The bank, non-bank deposit taker and insurance regulatory regimes, and in particular the regulatory changes implemented during the year, promote the soundness and efficiency of the financial system in a cost-effective manner, as demonstrated by sound regulatory impact analysis.
• The prudential oversight function for banks, non-bank deposit takers, insurance companies and payment systems shows: vigilance in its monitoring activities; it is capable of identifying emerging financial stresses in a timely manner; and it is prepared, where necessary, to effectively resolve institutional failures in conjunction with government.
• The Bank demonstrates a consultative and transparent approach to its policy development, supported by robust analysis that is understood by regulated institutions and stakeholders.
• In its decisions on whether to grant licences to new applicants, the Bank takes a consistent approach within the legislative framework, without successful challenges.
• The Bank’s AML/CFT supervisory activities demonstrate an appropriate risk-based approach to supervision of reporting entities within the Bank’s sector.
• The FSRs provide a comprehensive assessment of the health of the New Zealand financial system.
Settlement Services
• Availability of ESAS/NZClear during core hours is at least 99.95 percent, as measured over a year. • Customer satisfaction with operations and with system development is demonstrated through an annual
customer survey in which an approval level of 90 percent or more is achieved. • All risks are well managed, as demonstrated by external audits for ESAS and NZClear. • International standards for payment and settlement systems (CPSS and IOSCO) are complied with,
subject to variations for local New Zealand conditions.
CU
RR
ENC
Y N
EED
S O
F TH
E PU
BLI
C A
RE
MET
Currency Operations
• Legal tender that meets the currency needs of the public
• All orders for notes and coins from banks that meet the Reserve Bank’s guidelines are supplied within agreed times.
• Notes and coins in general circulation are of a good quality as indicated by surveys of the condition of currency in circulation.
• The number of counterfeit notes in circulation should be fewer than 10 per million notes in circulation. • The business continuity exercise planned by the Senior Management Group for 2013 will incorporate
currency distribution from contingency reserves.
7Reserve Bank of New Zealand: Statement of Intent
Goal, Organisational outcomes, Functions, Functional outcomes, Success measures
IMPR
OVE
D E
CO
NO
MIC
PER
FOR
MA
NC
E
PRIC
E ST
AB
ILIT
Y M
AIN
TAIN
ED
FUNCTION FUNCTIONAL OUTCOMES SUCCESS MEASURES
Monetary
Policy Formulation
• Stability in the general level of prices
Monetary Policy Formulation • Reserve Bank forecasts of annual CPI inflation should be comfortably within the target range in the
second half of the forecast horizon, and near the 2 percent target midpoint. • Measures of underlying inflation should generally remain within the target range. • Unnecessary instability in output, interest rates and the exchange rate should be avoided. • Monetary Policy Statements are informative and accurately assess the Bank’s performance in meeting
the objectives of the Policy Targets Agreement.
Financial Markets
• Adequate banking system liquidity
• Short-term interest rates consistent with monetary policy • Confidence in the efficient functioning of New Zealand financial markets • Foreign reserves available for efficient foreign exchange intervention and crisis
management.
Financial Markets • Short-term wholesale interest rates are maintained at levels close to the OCR. • No evidence of payment disruptions due to a shortage of settlement cash in the system, e.g., persistent
accessing of the Overnight Reverse Repo Facility. • Over the medium term, domestic market operations generate a positive return. • Foreign reserves are maintained at target levels, with liquidity and credit standards met throughout. • The Foreign Reserves Management portfolio yields a net return on assets that meets or exceeds the
benchmark portfolio. • The foreign exchange open position is managed such that:
a. the bulk of active foreign exchange purchases (sales) are undertaken around peaks (troughs) in the exchange rate cycle; and
b. the net return on the non-core open foreign exchange position is positive over the cycle.
SOU
ND
AN
D E
FFIC
IEN
T FI
NA
NC
IAL
SYST
EM
MA
INTA
INED
Macro-Financial Stability
Macro-Financial Stability • Financial stability, promoted by:
- increased resilience of the financial system during periods of extreme credit growth and rising leverage or abundant liquidity; and
- dampening of excessive growth in credit and asset prices.
• A sound and efficient financial system that supports the functioning of the economy.
• International and local confidence in
New Zealand’s financial system.
Settlement Services • An efficient, reliable and secure payments
system that supports the smooth functioning of the economy
• The Bank maintains, publishes and monitors a comprehensive set of indicators to assess vulnerability and stress in the financial system.
• Any measures taken to reduce financial system risks, including the use of macro-prudential instruments, are explained in the FSR, and their net benefits for financial system stability are assessed.
• All statistics are published in accordance with the dates published six months in advance on the RBNZ website.
• Statistics are relevant and meet international standards.
Prudential Supervision
• The bank, non-bank deposit taker and insurance regulatory regimes, and in particular the regulatory changes implemented during the year, promote the soundness and efficiency of the financial system in a cost-effective manner, as demonstrated by sound regulatory impact analysis.
• The prudential oversight function for banks, non-bank deposit takers, insurance companies and payment systems shows: vigilance in its monitoring activities; it is capable of identifying emerging financial stresses in a timely manner; and it is prepared, where necessary, to effectively resolve institutional failures in conjunction with government.
• The Bank demonstrates a consultative and transparent approach to its policy development, supported by robust analysis that is understood by regulated institutions and stakeholders.
• In its decisions on whether to grant licences to new applicants, the Bank takes a consistent approach within the legislative framework, without successful challenges.
• The Bank’s AML/CFT supervisory activities demonstrate an appropriate risk-based approach to supervision of reporting entities within the Bank’s sector.
• The FSRs provide a comprehensive assessment of the health of the New Zealand financial system.
Settlement Services
• Availability of ESAS/NZClear during core hours is at least 99.95 percent, as measured over a year. • Customer satisfaction with operations and with system development is demonstrated through an annual
customer survey in which an approval level of 90 percent or more is achieved. • All risks are well managed, as demonstrated by external audits for ESAS and NZClear. • International standards for payment and settlement systems (CPSS and IOSCO) are complied with,
subject to variations for local New Zealand conditions.
CU
RR
ENC
Y N
EED
S O
F TH
E PU
BLI
C A
RE
MET
Currency Operations
• Legal tender that meets the currency needs of the public
• All orders for notes and coins from banks that meet the Reserve Bank’s guidelines are supplied within agreed times.
• Notes and coins in general circulation are of a good quality as indicated by surveys of the condition of currency in circulation.
• The number of counterfeit notes in circulation should be fewer than 10 per million notes in circulation. • The business continuity exercise planned by the Senior Management Group for 2013 will incorporate
currency distribution from contingency reserves.
8 Reserve Bank of New Zealand: Statement of Intent
Environmental setting and strategic prioritiesDespite continued strains in Europe and disappointing growth in many of the advanced economies,
globalfinancialmarketsentimenthasimproved.Themedium-termoutlookforNewZealand’stradingpartner
GDPgrowthremainsfirm.RecentIMFforecastssuggestthatgrowthintheglobaleconomywillaccelerate
in2014.
TheNewZealandeconomyhasbeengrowingmorerapidlythanmanyotheradvancedeconomies,but
alsofacesseveralchallenges.TheelevatedNewZealanddollarisdampeningcompetitivenessintheexport
and import-competing sectors, and farming has been adversely affected by drought. Government fiscal
consolidationcanbeexpectedtoaffectdemand.
TheChristchurchrebuildwillhavepronouncedeffectsontheNewZealandeconomyforseveralyears,
andthescaleandpaceofreconstructionandtheconsequencesforgrowthandinflationwillrequirecareful
monitoring.
Atthesametime,householdsandpartsofthefarmingsectorremainhighlyleveraged,privatesector
creditgrowthhasbeguntoincrease,andhousepricesarerisingstronglyinAucklandandCanterbury.
Theseconditionshaveheightenedriskstothebalancesheetsofhouseholds,banks,non-bankdeposit
takers,andinsurers,andpointtoincreasingriskstofinancialstabilityinNewZealand.
Overall,however,thebankingsystemiswellcapitalised.GiventheAustraliandominanceofownership
ofNewZealandbanks,andtheirimportance,albeitalesserone,inownershipoftheinsuranceindustry,the
ReserveBankmaintainsacloserelationshipwithAPRA,theAustralianPrudentialRegulatoryAuthority.In
addition,regulardiscussionstakeplaceintheTrans-TasmanBankingCouncil.
Strategic prioritiesThe Bank has adopted 10 strategic priorities for 2013-16 to enhance its capacity to respond to this
challengingenvironment.Manyofthesestrategicprioritiesrunacrossseveralfunctionsanddepartments.
Describedinmoredetailonpages8-10,theyhavethreekeyobjectives:
• ContinuingtostrengthentheBank’sperformance
• DevelopingamoreintegratedBankapproachtotheBank’spolicy
• Improvinginfrastructureandreducingenterpriserisk.
Informing GovernmentThe Bank keeps the Minister of Finance regularly informed about its thinking on significant policy
developments, especially where Cabinet decisions and legislationmay be required. This includes early
notificationoftheBank’sthinkingonregulatoryandrelatedpolicydevelopmentsandanycaseswherethe
Ministermayneed toexercisehispowers.TheBankalsoadviseson the regulatory impactofproposed
policydevelopments.
In terms of the 2013-16 SOI,thiswouldincludeinformationon:
• NewZealand’skeyeconomicissues,especiallythedriversandimpactsofthepersistentlyhighexchange
rate,andimprovingtheBank’smeasurementandunderstandingofNewZealand’ssavingbehaviour;
• measurestomitigatecontingentgovernmentliabilities,suchascouldarisefromthebankingsector;
• ongoingmacro-prudentialarrangements,especiallyastheymightaffectthehousingsector;and
• insurance sector supervision and the wider prudential regime, including the review of prudential
supervisionregimefornon-bankdeposittakers.
9Reserve Bank of New Zealand: Statement of Intent
Reserve Bank strategic priorities for 2013-16I. Continuing to strengthen the RBNZ’s performance
Priority Explanation 1. Strengthening the
support for decision making in the Bank
2. Continuing to improve performance culture
3. Communicating on abroaderfront
AcommitteecomprisingthefourGovernorsoftheRBNZunderthechairmanshipoftheGovernorhasbeenestablished.Thecommittee will assist the Governor in all major monetary, regulatoryandfinancialpolicydecisionsthatfallundertheRBNZresponsibilities.TherationaleforthecommitteeliesinthebroadrangeofresponsibilitiesoftheBank,theextensiveworkprogrammeunderwayonfinancialstability,thebenefitsofdecisionmakingthrough a committee structure, and the use of similar decision-makingbodiesinseveralcentralbanks.TheGovernorisresponsibleandaccountableforalldecisionsmadebythecommittee.
The Senior Management Group will continue to make all important managementdecisions.ThreenewmemberswilljointheOfficialCashRateAdvisoryGroup,whichwillberenamedtheMonetaryPolicyCommittee.
ThequalityoftheBank’smanagementisacriticalfactorincontinuingtostrengthentheBank’sperformance.Well-definedcorecompetencieswillbeestablishedforeachmanagerialcategoryandgreateremphasiswillbeplacedupondevelopingleadershipandmanagerialskills,andrewardingstrongmanagerialperformance.Similarly,therewillbegreaterdifferentiationincompensationforperformanceinthetechnicalstreams.Thetermsofreferenceandperformanceofcommitteeswillbereviewedtoimprovetheeffectiveness of the committees, and an annual review of staff developmentplansandworkforceplanswillbeintroducedtodeterminetheirconsistencywiththeBank’sstrategy.
To enhance understanding of the Bank’s policy choices in a challengingeconomicenvironment,theBankwillbeaproactivecommunicator,explainingitsroles,andwhatitcanandcannotbeexpectedtodo,inmonetarypolicy,prudentialsupervision,macro-prudentialpolicyandotherfunctions.Itwillinformpublicunderstanding through a focused programme, using a wider range ofmediatokeyaudiences.TheBankwillusemorespeakersanddeliver more on-the-record speeches, while off-the-record speeches willbefewer,butmoretargeted.
10 Reserve Bank of New Zealand: Statement of Intent
II. Developing a more integrated approach to the Bank’s policy
Priority Explanation 4. Establishinganew
Macro-Financial Department
5. Developing the Macro-Prudential Policy framework
6. Understanding the monetary policy / macro-prudential interface
7. Implementing a sound and comprehensive prudential regulatory regime
Consistentwiththegrowingemphasisonmacro-financialstability,theBankrecentlysignedaMemorandumofAgreementonMacro-PrudentialPolicywiththeMinisterofFinance.TheMOUprovidesgovernance arrangements for the use of macro-prudential tools thataredesignedtopromotegreaterfinancialsystemstability.TheBankhasestablishedanewMacro-FinancialDepartment,basedonthemacro-financialanalysissection,currentlywithintheFinancial Markets Department, and drawing in the Statistics Unit fromtheEconomicsDepartment.ThenewdepartmentwillplayanimportantroleinoverseeingthestabilityofNewZealand’smacro-financialsystem,andwilldesignandimplementmacro-prudentialinstruments.Itwillcollectanddisseminatefinancialstatistics,andundertake analysis and research in support of the Bank’s macro-prudentialpolicyfunction.ThedepartmentwillberesponsibleforcoordinatingtheproductionoftheBank’ssix-monthlyFinancialStabilityReport.ItwillhavecloselinkstotheBank’sotherpolicydepartmentsandwillreporttotheHeadofFinancialStability.
The Bank’s initial framework for the implementation of macro-prudentialpolicywasreleasedforpublicconsultationinMarch2013.Furtherworkwillbeneededtooperationalisethisframeworkinthelightofon-goinganalysisandexperienceinmacro-prudentialimplementation.ThisworkwillbeledbytheMacro-FinancialCommittee and the new Macro-Financial Department, with contributionsfromEconomics,FinancialMarketsDepartmentandPrudentialSupervisionDepartment.
TheBankwillexpanditsresearchaimedatbetterunderstandingthelinksbetweenmonetaryandfinancialstabilitypolicies,andthe implications for decision making across these two main policy functions.ThiswillbeajointinitiativeledbytheEconomicsDepartment,withcontributionsfromtheMacro-FinancialDepartment, Financial Markets Department and Prudential SupervisionDepartment.
The Bank is progressing towards its goal of delivering a modern, efficientandcomprehensiveprudentialregulatoryregimeacrossallthesectorsforwhichitisresponsible.Thefollowinginitiativesover2013-16willmovetheBanksignificantlytowardsthatend-point:Open Bank Resolution, licensing of insurance companies, and thelicensingandreviewofnon-bankdeposittakers.Inaddition,the Bank will complete a fundamental review of the legislative framework for the payments and settlement system regulation, undertakeanti-moneylaunderingon-sitevisitstoanumberofentities,includingthoseidentifiedaspotentially“high-risk”,andimplement a supervisory monitoring framework for the insurance sectorpost-licensing.
11Reserve Bank of New Zealand: Statement of Intent
III. Improving infrastructure and reducing enterprise risk
Priority Explanation 8. Further developing
operational systems
9. Strengtheningbusinesscontinuity
10. Re-examiningCurrency,Property and Security
The Bank will continue its investment in systems architecture andcontractstoensureamorerobustoperatingenvironment,reduce potential reputational risk, and develop new products and instruments.Prioritiesontheportfoliosidewillincludeimplementingtwo-way collateral for swaps, improving end-of-day processes andprioritisedbusinessimprovementproposals.Inaddition,enhancementswillbeundertakenontheFINDURtreasurysystem,financialmanagementsystems,andthepaymentssystems.
TheBankwillcontinuetestingandenhancingitsbusinesscontinuityresilience.Towardstheendof2013,theSeniorManagementGroupexpectstoundertakeacomprehensivebusinesscontinuityexerciserelatingtoasignificantregionalevent.Theexercisescenariowillplacestressonthepaymentssystem,financialmarketsandstaff.ItisintendedthattheexercisewillactivatetheAucklandofficeasheadoffice,andinvolvetheBank’sBoard,theTreasury,theMinisterofFinance’sofficeandotherkeystakeholders.
The Bank will take a fresh look at all aspects of the operations of the Currency,PropertyandSecurityDepartment.ThiswillincludetheBank’s procedures and controls around its currency management, and the management of its property assets, and the security arrangements.TheBanknoteupgraderemainsanimportantpriority.
12 Reserve Bank of New Zealand: Statement of Intent
Price stability
Refer to Strategic Priorities:
I. ContinuingtostrengthentheRBNZ’sperformance
1. StrengtheningthesupportfordecisionmakingintheBank
3. Communicatingonabroaderfront
II. DevelopingamoreintegratedapproachtotheBank’spolicy
5. DevelopingtheMacro-PrudentialPolicyframework
6. Understandingthemonetarypolicy/macro-prudentialinterface
Monetary policy formulation
Objective
Toachieveandmaintainstabilityinthegenerallevelofprices.
APolicyTargetsAgreement(PTA)specifiesthemonetarypolicytargetagreedbytheGovernorandthe
MinisterofFinance.ThecurrentPTArequiresthattheBank“keepfutureCPIinflationoutcomesbetween1
and3percentonaverageoverthemediumterm,withafocusonkeepingfutureaverageinflationnearthe2
percenttargetmidpoint”.Italsorequiresthat:“Inpursuingitspricestabilityobjective,theBankshall...seek
toavoidunnecessaryinstabilityinoutput,interestratesandtheexchangerate.”
Scope of operations
Tomeet thisobjective, theBankundertakes researchandanalysisofmacro-economicconditions to
enableitto:
• SetanOfficialCashRate(OCR)eighttimesayear,orasrequired,withtheaimofkeepinginflationwithin
thetargetband.
• PublishthequarterlyMonetary Policy Statements (MPSs)atthesametimeasfouroftheOCRdecisions.
The MPSssetouttheBank’sviewsontheeconomyandinflationarypressures,andthebasisforthe
OCRdecision.
• AnnouncetheotherfourOCRdecisionsaboutsixweeksaftereachMPS.
• Whereappropriateandfeasible,interveneintheforeignexchangemarkettoinfluencethelevelofthe
exchangerate,consistentwiththeobjectivesofthePTA.
13Reserve Bank of New Zealand: Statement of Intent
Environment and policy issues
Whileeconomicgrowthhasstrengthenedrecently,underpinnedbyconstructionandhouseholdsector
activity, the economy continues to face some near-term headwinds, including the high New Zealand dollar,
thedrought,andongoingfiscalconsolidation.AnnualCPI inflation iscurrently low, reflectingsoft trading
partnerinflation,thehighNewZealanddollarandsomemoderationininflationinthenon-tradablesector.
Despitetheheadwinds,economicgrowthandinflationareprojectedtoriseoverthenextfewyears.Post-
earthquakereconstructionandrepairsareboostinginvestment,andconsumptionandresidentialinvestment
areincreasing,inpartduetotheaccommodatingmonetarypolicy.Growthintheinternationaleconomyis
expectedtoincreaseoverthenexttwoyears.
Withinthisenvironment,keyissuesformonetarypolicyare:
• ThescaleandpaceofreconstructioninCanterbury,andtheconsequencesforinflationandgrowth.
• The factorsbehind thecontinuedstrengthof theNewZealanddollarand the impactof thecurrency
appreciationonthetradablessector.
• TheimplicationsformonetarypolicyofasignificantconsolidationintheGovernment’sfiscalposition.
• The effect of a resurgence in credit growth and strong asset price increases on existing economic
imbalances.
Theglobalfinancialcrisishaschallengedmonetarypolicyframeworks,includingpolicyobjectivesand
thechoiceofpolicyinstruments.TheBankwillcontinuetoreviewinternationalexperience,andensurethat
monetaryandmacro-prudentialframeworksareframedappropriately.
Initiatives and strategies
Toaddresstheseissues,theBankwill:
• Undertake research to increase understanding of future economic and financial cycles and develop
bettertoolsandanalyticalframeworkstoimprovefuturemonetaryandmacroprudentialpolicies.
• Developanddisseminatehighqualityanalysisofmonetarypolicyissuesandincorporatethisanalysis
intoawiderexternalengagementandcommunicationsstrategy.
• ImplementandembedtheneweconomicmodelintotheBank’sforecastingframework.
• Investigatepotentialstructuralchangesintheeconomyfollowingtheglobalfinancialcrisis.
Success measures
Seepage5.
14 Reserve Bank of New Zealand: Statement of Intent
Price stability
Refer to Strategic Priorities:
I. ContinuingtostrengthentheRBNZ’sperformance
1. StrengtheningthesupportfordecisionmakingintheBank
3. Communicatingonabroaderfront
II. DevelopingamoreintegratedapproachtotheBank’spolicy
5. DevelopingtheMacro-PrudentialPolicyframework
6. Understandingthemonetarypolicy/macro-prudentialinterface
III. Improvinginfrastructureandreducingenterpriserisk
8. Furtherdevelopingoperationalsystems
9. Strengtheningbusinesscontinuity
Financial market operations• Domestic markets• Foreign reserves management
Sound and efficient financial system
Financial markets
Objectives
Tosupporttheimplementationofmonetarypolicy;toassistintheefficientfunctioningofNewZealand’s
financial system; tomanage official foreign reserves; to implement theBank’s foreign exchangemarket
interventionpolicy;tomanagetheCrown’sfinancialliquidity;andtomaintaincrisisinterventioncapability.
Scope of operations
TheBank:
• Providesadviceonfinancialmarketissuesanddevelopmentsfortheformulationofmonetarypolicy.
• Manages official foreign reserves for use in times of financial distress or when foreign exchange
interventionisneededformonetarypolicypurposes.
• Implementsmonetarypolicythroughmarketoperationsthatensuremarketinterestratesareconsistent
withtheOCR.
• Managesliquidityinthebankingsystem.
• ProvidesandmanagestheCrownSettlementAccount.
• Actsaslenderoflastresorttothefinancialsystemifnecessary,aswellasassistingintheresolutionof
anyfinancialmarketorbankingcrisis.
15Reserve Bank of New Zealand: Statement of Intent
Environment and policy issues
GlobalfinancialmarketshavebecomelessturbulentaspoliciesinEuropetoaddressfinancialimbalances
areactedon.ThishasmadeiteasierforNewZealandbankstoaccessfunding,comparedwiththe2008-12
period,andtheReserveBank’sdomesticmarketsfunctionisreturningtoamorenormalenvironment.
TheprevailinglowinternationalinterestratesresultinlowreturnsontheForeignReservesportfolio.The
domesticandforeignreservesoperationsarebeingimplementedinanenvironmentwherecentralbanks
andotherfinancialregulatorsareadoptingtheG20FinancialStabilityBoard’snewregulatoryframework.
ThekeypolicyissuesfacingtheBank’sFinancialMarketsfunctionarethat:
• Significantrisksremaininkeyeconomies,andinternationalmarketuncertaintyandvolatilityarelikely
to persist. TheBank is, however, well placed to provide liquidity facilities for NewZealand banks if
conditionsdeteriorateseverely.
• ReturnsontheBank’sforeignreservesarelikelytoremainlowandvolatile inanenvironmentof low
globalinterestratesandwherethevalueoftheNewZealanddollarisinfluencedbyboutsofinternational
riskseekingandriskaversion.
• FurtherdeteriorationsincreditratingswouldmeantheBankwouldhavefewercounterpartieswithwhom
totransact.
Initiatives and strategies
Toaddresstheseissues,theBankwill:
• Modifyitsagreementswithcounterpartiestofacilitatetransactionsasnewregulationscomeintoforcein
manyofthejurisdictionsinwhichtheReserveBankinvests.
• Investigatewhethertomakeuseofcentralcounterpartiesforclearingtransactionsand,ifappropriate,
appointoneormoreagentstofacilitatecentralcounterpartyclearing.
• DevelopfurthertoolstomonitorandinformBankmanagementaboutthefinancialrisksthattheBankis
exposedto.
Success measures
Seepage5.
16 Reserve Bank of New Zealand: Statement of Intent
Sound and efficient financial system
Refer to Strategic Priorities:
I. ContinuingtostrengthentheRBNZ’sperformance
1. StrengtheningthesupportfordecisionmakingintheBank
3. Communicatingonabroaderfront
II. DevelopingamoreintegratedapproachtotheBank’spolicy
5. DevelopingtheMacro-PrudentialPolicyframework
6. Understandingthemonetarypolicy/macro-prudentialinterface
Macro-financialstability
Objectives
To promote financial stability by increasing the resilience of the financial system during periods of
extreme credit growth and rising leverage or abundant liquidity; and by dampening excessive growth in
creditandassetprices.
Toanalyseandreportonthesoundnessandefficiencyofthefinancialsystem,andtoproduceaccurate
andtimelydataandstatisticsthataretrustedandusedtoinformdecisionmaking.
Scope of operations
TheBank:
• Monitorsandreportsontherisksfacingthefinancialsystem,includingthosearisingfromthecreditcycle,
highindebtednessorexternalsectorimbalances.
• PublishesregularFinancial Stability Reports (FSRs)assessingthesoundnessandefficiencyoftheNew
Zealandfinancialsystem.
• Advises on the deployment or adjustment of macro-prudential instruments and the macro-financial
implicationsofotherReserveBankpolicies.
• Producesandpublishesaccurateandtimelystatistics,fromRBNZstatisticalsurveysandexternaldata
tosupporttheBank’spolicyfunctions.
Environment and policy issues
Thebenefitsofmacro-prudentialpolicyinstrumentscomefromreducingtheriskstothefinancialsystem
thatcanarisefromunsustainablecreditandassetpricegrowth,andrisinghouseholdorbusinesssector
leverage.Asmanycountrieshaveexperiencedinrecentyears,boom-bustcyclesincreditandassetprices
canbeextremelydestabilising forbankingsystemsandcancreate largeeconomiccosts.Theycanalso
poseasignificantfiscalburdenforthegovernment.
WhileNewZealandwasfortunatenottohaveexperiencedthemajorupheavalinitsfinancialsystem
seen in some countries, macro-prudential policy represents an important step in reducing the financial
17Reserve Bank of New Zealand: Statement of Intent
system’svulnerabilitytoanysuchinstabilityinthefuture.NewZealand’snetfinancialliabilitiesremainhigh
byinternationalstandards,reflectingasustainedperiodofcurrentaccountdeficits,financedbyborrowing
primarilythroughthebankingsystem.
These developments result in more demands for accurate and timely statistical data that meet
internationalstandards,whilebeingsensitivetothereportingburdenonbusiness.
Thekeypolicyissuesformacro-financialstabilityare:
• Highleverageinthehouseholdsectorandpartsofthefarmingsector.
• Increasingriskstofinancialstabilityarisingfromdevelopmentsinprivatesectorcreditandthehousing
market.
• Assessingwhenbesttooperationalisemacro-prudentialpoliciesandthecostsandbenefitsofdoingso.
• Re-examiningmacroeconomicstabilisationpolicyandhowprudentialpolicymightsupportandinteract
withmonetarypolicy.
• Determininghowbest tomeetagrowingdemand for timelyandaccuratedata to informmicro-and
macro-prudentialpolicies.
Initiatives and strategies
Toaddresstheseissues,theBankwill:
• Continuetodeveloptheimplementationframeworkformacro-prudentialpolicy.
• Expanditsreportingandanalysisofcreditmarketimbalances,andthecostsandbenefitsthatarisefrom
theuseofmacro-prudentialinstruments,andreflectthisanalysisinregularFinancial Stability Reports.
• Assess the implicationsofchanges inhouseholdandbusinesssectorbehaviourandfinancialsector
operating conditions forNewZealand’s savingsand investment imbalance, and for the conduct and
interactionofmonetaryandfinancialstabilitypolicies.
• Progressworkondevelopingflowoffundsandfinancialaccountstoproduceafullsuiteofasystemof
national accounts statistics for New Zealand, and work with Statistics NZ to improve data collection in the
financialsector.
Success measures
Seepage5.
18 Reserve Bank of New Zealand: Statement of Intent
Sound and efficient financial system
Refer to Strategic Priorities:
I. ContinuingtostrengthentheRBNZ’sperformance
1. StrengtheningthesupportfordecisionmakingintheBank
3. Communicatingonabroaderfront
II. DevelopingamoreintegratedapproachtotheBank’spolicy
5. DevelopingtheMacro-PrudentialPolicyframework
6. Understandingthemonetarypolicy/macro-prudentialinterface
7. Implementingasoundandcomprehensiveprudentialregulatoryregime
Prudential supervision
Objectives
Toprovideprudentialsupervisionsoastopromoteasoundandefficientfinancialsystem;tolimitdamage
tothesystemthatcouldarisefrominstitutionalfailureorotherfinancialsystemdistress;andtocontributeto
publicconfidenceinthefinancialsystem.
ActionswillberelevanttoNewZealand,withacost-effectivebalancebetweenregulatoryrequirements
andself-andmarket-discipline.
Scope of operations
TheBank:
• Registersandsupervisesbanks,settingandapplyingappropriateprudentialcriteria.
• Setsandoverseescriteriafordesignationofpaymentandsettlementsystems.
• Implementstheprudentialregulatoryframeworkfornon-bankdeposittakersandinsurers.
• WillsupervisereportingentitieswithintheBank’ssectorforAnti-MoneyLaunderingandCounteringthe
FinancingofTerrorism(AML/CFT).
• Appliesaframeworkforundertakingenforcementactionintheeventofidentifiednon-compliance.
Environment and policy issues
NewZealand’sfinancialsystem isheavily relianton the fourmajorAustralianbankinggroups,anda
close relationship ismaintainedwith theAustralian parent banks and theAustralian financial regulatory
authorities.
The global economy and Canterbury earthquakes have heightened risks to the balance sheets
of banks, non-bank deposit takers, and insurers.Governments and international regulators are seeking
promptresolutionframeworksthatpreventfailingfinancial institutionsandfinancialmarket infrastructures
fromdestabilisingthefinancialsystemandexposingthetaxpayertoriskof loss.Inaddition, international
regulatorsarestrengtheningfinancialmarketinfrastructurethroughrevisedstandards.
19Reserve Bank of New Zealand: Statement of Intent
HousingpricesarerisingrapidlyinAucklandandChristchurch,andhousingloanswithahighloan-to-
valueratiohavebeenincreasingasashareoftotalnewlendingforsomebanks.
TheNon-bankDepositTakersBill isexpectedtobepassedin2013,introducinglicensingandfurther
prudentialrequirements.AllinsurersarenowrequiredtobelicensedandaresubjecttotheBank’sregulatory
and supervisory regime.Reporting entitieswithin the sector supervised by theBankmust now formally
complywithAML/CFTstatutoryobligations.
ThekeypolicyissuesfacingPrudentialSupervisionare:
• TheadjustmentrequiredbytheBankandsupervisedinstitutionstomeetenhancedprudentialpolicies
andstandards.
• StrengtheningtheBank’scapacitytorespondtofinancialcrises,includingwiththeimplementationofthe
OpenBankResolution(OBR)policy.
• Reviewinghowprudentialpolicymaysupportandinteractwithmonetarypolicy.
• Reviewingtheexistingpaymentoversightpowersandhowtheycouldbestrengthened.
• CoordinatingwithotherAML/CFTsupervisorstoensureconsistencyinapproachandguidance.
Initiatives and strategies
Toaddresstheseissues,theBankwill:
• Enhanceitsmonitoringofriskstobankbalancesheetsandprofitability.
• InitiateamendmentstothestatutorymanagementpowersintheReserveBankofNewZealandAct1989
toclarifyaspectsofthelegislativeframeworkforOBR.
• Startthelicensingprocessfornon-bankdeposittakers(assumingenactmentoftheNon-BankDeposit
TakersBillin2013).
• Completethereviewofbankcapitaladequacyrequirementsforresidentialmortgageloans.
• Progressthenewlegislativeframeworkfortheformaloversightofpaymentandsettlementsystemsof
systemicimportance.
• FurtherrefinetheBank’scrisispreparedness,focusingoncoordinationwithotherfinancialregulators,
particularlytrans-Tasman.
• Monitor the financial soundness of all insurers as they move from provisional to full licensing by
September2013,andasCanterburyearthquakeclaimsdevelopandaresettled.
• DevelopandimplementtheAML/CFTsupervisoryregime.
• Completetherequiredreviewoftheprudentialregimefornon-bankdeposittakersbySeptember2013.
Success measures
Seepage5.
20 Reserve Bank of New Zealand: Statement of Intent
Sound and efficient financial system
Refer to Strategic Priorities:
III. Improvinginfrastructureandreducingenterpriserisk
8. Furtherdevelopingoperationalsystems
9. Strengtheningbusinesscontinuity
Settlement services
Objective
To ensure that payments system infrastructure services support the smooth functioning of the economy,
areprovidedefficientlyandreliably,andmeetinternationalstandards.
Scope of operations
TheBank:
• Operates theExchangeSettlementAccountSystem (ESAS)and theNewZealandcentral securities
depositorysystem(NZClear).
• Operates the infrastructure required for settlement of interbank payments (Settlement Before
Interchange),andthatrequiredforforeignexchangetransactionsthroughContinuousLinkedSettlement
Bank.
Environment and issues
International standards for system performance and resilience of systemically important payment
systemshavebeenlifted.
ThekeypolicyissuesfacingSettlementServicesaretheneedto:
• Improvebusinesscontinuityplanninganddisasterrecoverycapabilities.
• Respondtohigherinternationaloperatingstandards.
Initiatives and strategies
Toaddresstheseissues,theBankwill:
• ContinuetoenhanceandupgradeNZClearandESAS,asagreedwithindustry.
• Developaback-upsystemforESASprovidingadditionalcontingencycapability.
• Continuouslyimproveresilience,includingintegrationofday-to-dayAucklandoperationswithWellington,
andtheabilityofAucklandoperationstostandalone.
• Workwithindustrytoimprovetheoperationoftheclearingandsettlementinfrastructure.
Success measures
Seepage5.
21Reserve Bank of New Zealand: Statement of Intent
Legal tender meets currency needs of the public
Refer to Strategic Priorities:
III. Improvinginfrastructureandreducingenterpriserisk
10.Re-examiningCurrency,PropertyandSecurity
Currency operations
Objective
Tomeetthecurrencyneedsofthepublicbyensuring,asthesole issuerofcurrency,thesupplyand
integrityofbanknotesandcoins.
Scope of operations
TheBank:
• Procures,stores,processesandissuesbanknotesandcoinstothebankingsystem.
• Maintainsthequality,andverifiestheauthenticity,ofcurrencyincirculation.
• Issueslegaltendercollectors’currencythroughanoutsourcingarrangement.
Environment and issues
Demandfornotesandcoinscontinuestogroweachyear.Cashremainsanimportantmeansofmaking
payments in New Zealand. Given the heavy use of cash as amedium of exchange, the issues facing
CurrencyOperationsaretheneedto:
• EnsuretheefficiencyandsecurityoftheBank’scashoperations.
• Maintainthequalityofheavilyusedbanknotes.
• Avert counterfeiting risks, given the current polymer banknote series is 13 years old and the rapid
innovationincopyingandprinting.
• Reviewthelevelsandlocationsofcontingencyreserves,andtheappropriatenessofbusinesscontinuity
plans, in lightofnaturaldisasters in recent years,and theplanneddevelopmentofanewbanknote
series.
• Improvebanknoteprocessingworkflow,processandmanagementinformationtooptimiseoperational
efficiencyandcontrols,beforethenewbanknotesarereceived.
• Improvecurrencyinventorymanagementandforecastingofthecashcycle.
22 Reserve Bank of New Zealand: Statement of Intent
Initiatives and strategies
Toaddresstheseissues,theBankwill:
• Continueplanningforthereleaseanddistributionofanewbanknoteseries.
• Continuetoaddressqualityissuesrelatingto$5notesincirculation.
• Reviewbanknoteprocessingworkflow,process,andmanagementinformationrequirements.
• Evaluate new currency forecasting tools, methodologies, and industry benchmarks to identify best
practice.
• Further develop and fully utilise the Currency Management System for the efficient and secure
managementofcurrencyoperations.
• Reviewandimplementanychangestothelevelsandlocationofcontingencycurrencyreserves.
Success measures
Seepage5.
23Reserve Bank of New Zealand: Statement of Intent
Operations–enablingtheBank
Refer to Strategic Priorities:
I. ContinuingtostrengthentheRBNZ’sperformance
1. StrengtheningthesupportfordecisionmakingintheBank
3. Communicatingonabroaderfront
III. Improvinginfrastructureandreducingenterpriserisk
8. Furtherdevelopingoperationalsystems
9. Strengtheningbusinesscontinuity
10.Re-examiningCurrency,PropertyandSecurity
People and cultureThe Bank’s vision of being a high performing small central bank requires excellence in its people,
processesandresources.TheBankiscommittedtocontinuingtoimproveitsperformanceculture.
The quality of the Bank’smanagement is a critical factor in strengthening the Bank’s performance.
TheBankwillcontinuebuildingleadershipandmanagementcompetenciesthroughspecificdevelopment
programmes;andstaffwillhavebank-widetraininganddevelopmentopportunities.Akeyinitiativein2013
willbetoprovideamentoringprogrammeforearly-careerstaff.
Anannualreviewofthealignmentanddeliveryofstaffobjectivesanddevelopmentplansprovidesan
opportunitytoevaluatetheeffectivenessofperformancemanagement.Thelinkbetweenperformanceand
rewardwillbestrengthenedtoencourageappropriatecompetenciesandbehaviours,andadditionalfocus
willbeplacedonmanagingkey-personrisk.
CommunicationsThechallengingeconomicenvironmenthasheightenedpublicawarenessoftheBank’spolicyrolesand
operations,underliningtheneedtoenhanceunderstandingoftheBank’spolicychoices.
TheBankwillbeaproactivecommunicator,explainingitsroles,andwhatitcanandcannotbeexpected
todo,inmonetarypolicy,prudentialsupervision,macro-prudentialpolicy,andotherfunctions.Itwillinform
publicunderstandingthroughafocusedprogramme,usingawiderrangeofmediatokeyaudiences.The
Bank will use more speakers and deliver more on-the-record speeches, while off-the-record speeches will
befewer,butmoretargeted.
Knowledge servicesThe Bank requires technology that provides a high level of uninterrupted service, functionality and
security,aswellaseasyaccesstoabroadrangeofrelevantinformationsources.
Animportantinitiativewillbetoimplementacommonplatformtosupportsupervisoryfunctionsacross
theinsurance,non-bankdeposittakerandbankingsectors,andtheBank’sroleinanti-moneylaundering
andcounteringthefinancingofterrorism.
Asecondpriorityistofurtherdevelopandupgradekeyoperationalsystemsinfinancialmanagement,
treasury,currencyandthepaymentsarea.
24 Reserve Bank of New Zealand: Statement of Intent
AthirdpriorityistoenhanceandtesttheBank’sbusinesscontinuityinfrastructureforcriticalfunctions,
and further develop the capacity and functionality in theBank’sAuckland office.TheBank’s IT security
systemswillbemaintainedatindustrybestpracticeandwillbereadytorespondtoanincreasingthreatfrom
externalsources.
The Bank will continue to improve its electronic delivery of information, and support critical statistical
needs through the implementation of the Financial Sector Information System project, which integrates the
Bank’sstatisticaldata.
Internal financial servicesHighqualityfinancialsystemsandprocessesareneededtomanagetheBank’scomplexbalancesheet.
Thesesystemssupportworkflows,andreportsandprocessesforfinancialoperations,currencyoperations
andsecuritiestransactions.
The Bank is upgrading its treasury system, and also changing systems and processes for settlement
and reportingof financial instruments, to complywith international initiatives (suchas theuseof central
counterpartiesforsettlementofderivativetransactions).
From1July2014,theBankwillberequiredtoadoptanewfinancialreportingregime.AsaPublicBenefit
Entity,theBankwillberequiredtoapplyNewZealandEquivalentstoInternationalPublicSectorAccounting
Standards(NZ-IPSAS)ratherthanInternationalFinancialReportingStandards(IFRS).
Risk assessment and assuranceTheBankfacesawiderangeofrisks,somegeneralandothersuniquetocentralbanks.Theidentification,
management,andmonitoringoftheserisksiskeytomaintainingasoundanddynamicmonetaryfinancial
system.Inaddition,therecontinuetobesignificantchangesintheglobalenvironmentandwithintheBank
intermsofprojectsunderwayandrecentlyacquiredfunctions.Theseintroducenewrisksthatneedtobe
effectivelymanaged.
TheBank’sapproachtoaddressingenterpriserisksistoensuretheyarebeingidentifiedandmanaged
in a proactive, coordinated, prioritised and cost-effective manner. Risk assurance operations will focus
particularlyonfurtherdevelopingoperationalsystems,strengtheningbusinesscontinuityplanning,andthe
operationsoftheCurrency,PropertyandSecuritydepartment.
Increased automation and supporting software across the audit and risk management functions will help
tomaximiseoveralleffectiveness.TheBankwillalsoseektoidentifyandmanagetheincreasedexposureto
legalrisksfromtheexpandedprudentialregulatoryregimes.
Property, securityBankmanagementisreviewingtheoperationalcontrolsaroundpropertymanagementandsecurity.The
Bankrequirestheinfrastructureofthepropertiestobemaintainedatalevelthatpromotesefficiencyanda
safeandsecureenvironmentforallstaff,tenantsandvisitors.
Forsecurity reasons, theBankoperatesandmaintainsmodern, reliablesecurityaccessandcontrol
systems.Forefficiencyandenvironmentalreasons,theBankwillcontinuetoseektomaintainandextend
energy-savingandrecyclingprogrammes.
25Reserve Bank of New Zealand: Statement of Intent
Financial managementFinancial structureBalance sheet overview and funding of the Bank’s operations
The Reserve Bank receives no direct funding through the central government budgetary process.
Instead,theBank’smainsourceofincomeisthereturnonthesubstantialinvestmentstheBankholds,which
arefundedbytheissueofcurrencyandbytheBank’sequity.Currencyincirculationisaliabilityonwhich
nointerestexpenseisincurred.Thefundsreceivedwhencurrencyisissuedareinvestedandearninterest
income,whichisknownasseigniorage.
Thenatureandextentof theBank’sprincipalactivities thataffect itsbalancesheetaredescribed in
the Annual Report 2011–2012 (pages64–65).Foreignreservesmanagement,NewZealanddollarliquidity
management,andcurrencyoperationsmateriallyaffectthesizeandstructureoftheBank’sbalancesheet.
UndertheReserveBankAct,theMinisterandtheGovernorarerequiredtoenterintoafive-yearfunding
agreement tospecify theamountof theBank’s incomethatmaybeusedtomeetoperatingexpenses in
eachfinancialyear.TheBankreportsitsexpenditureagainsttheFundingAgreementinitsAnnual Report.
ThecurrentFundingAgreementcoversthefive-yearperiodending30June2015.Itprovidesfundingof
$47.8millioninthefirstyear(2010–11)increasingto$56.4millioninyearfive(2014–15).
Annual distributions paid by the BankUndertheReserveBankAct,theBank’sannualdividendisdeterminedusingthefollowingprinciples:
Statement of dividend principlesThe Bank shouldmaintain sufficient equity for the financial risks associated with
performing its functions.Equity inexcessof that required to cover those riskswill be
distributedtotheCrown.
Ingeneral,unrealisedgainsshouldberetainedbytheBankuntiltheyarerealisedin
NewZealanddollars.However,theBankmayrecommendthedistributionofunrealised
gainswheretheBankbelievesthattheprobabilityofthegainbeingrealisedishigh.
TheamountofthedividendtobepaidtotheGovernmentisdeterminedbytheMinisterofFinanceeach
AugustontherecommendationoftheBank,havingregardtotheviewsoftheBoardofDirectorsandany
otherrelevantmatters.
Drivers of the Bank’s financial performance and financial positionThe Bank prepares its financial statements by applying International Financial Reporting Standards
(IFRS).From1July2014,theBankwillberequiredtoapplyNewZealandEquivalentstoInternationalPublic
SectorAccountingStandards(NZ-IPSAS).Atthistime,thechangeinfinancialreportingframeworkisnot
expectedtohaveasignificantimpactontheBank’sfinancialreporting,althoughNZ-IPSASandIFRScould
divergeovertime.
TheprincipaldriversoftheBank’sfinancialperformanceandfinancialpositionare:
• Thevalueofcurrencyincirculation.
Currencyincirculationisanon-interest-bearingliability.Tradingbanksarechargedforcurrencyissued
26 Reserve Bank of New Zealand: Statement of Intent
tothemandtheBankearnsinterest,knownasseigniorage,oninvestmentoftheseamountspaidbytrading
banks.At30April2013,currencyincirculationwas$4.6billion.
ThesizeoftheBank’sopenforeignexchangepositionandrelatedchangesinforeignexchangerates.
TheBankhasapolicyofholdingsomeof its foreigncurrency reservesonanunhedgedbasis.This
allowsittomoreeffectivelyrespondtoaforeignexchangecrisis,andtosmoothmoreextremeexchangerate
movements.TheBankhasabenchmarkholdingofSDR1.0billionunhedgedforeigncurrencyreserves,with
theabilitytoholdmoreorlessthanthebenchmarkovertheexchangeratecycle.
HoldingunhedgedforeignreservesmeansthattheBank’snetequitywillfluctuatewithchangesinthe
exchangerate:foreignexchangeslossesmaybeincurredwhentheNewZealanddollarisstrong,andgains
mayberecordedwhentheNewZealanddollarisweak.Theunhedgedpositionincreasesvolatilityinthe
Bank’sfinancialperformanceandfinancialposition.
At30April2013,theBankheldanopenforeignexchangepositionofSDR1.5billion(NZD2.6billion),
upfromSDR1.1billion(NZD2.2billion)at30June2012.
• InterestratesearnedontheBank’sinvestmentingovernmentsecuritiesandother
securities.
UndertheNewZealandEquivalentstoInternationalFinancialReportingStandards(NZIFRS),theBank’s
holdings of New Zealand government securities are valued at market value, with unrealised gains and losses
onthoseholdingsbookedtoequity.InterestincomeisrecognisedintheBank’sIncomeStatement.
• ThesizeandperformanceoftheBank’sforeignreservemanagementandmarket
operationsfunctions.
TheBankholdsforeignreservesthatcanbeliquidatedatshortnoticetosupportitsfunctions,including
monetary policy objectives and the maintenance of orderly markets. At 30 April 2013, the Bank had
foreignreserveassetsequivalentinvaluetoNZD8.5billion,whichprovidetheBankwithforeigncurrency
interventioncapacity.
• NewZealandgovernmentdepositsheldattheBank.
TheBank provides a settlement account facility to theNewZealandGovernment.The size ofNew
Zealandgovernmentdepositsheld in theCrownSettlementAccount (CSA) isabigdriverof theBank’s
balancesheet.LargerCSAdepositsareswappedintoforeigncurrencyandinvestedbytheBankoffshore.
However, net earnings are notmaterially affected by this activity.At 30April 2013, the Bank heldNew
ZealandgovernmentdepositsofNZD1.4billion.
• OperatingexpenditureincurredbytheBank.
Thefive-yearFundingAgreementspecifiestheamountoftheBank’sincomethatmaybeusedtomeet
operatingexpensesineachfinancialyear.
• ThelevelofequityavailableforinvestmentandthedividendpaidbytheBank.
TheBankrequiresequitytoabsorbanylossesthatmayarisefromcarryingoutitsfunctions,andequityis
reviewedannuallytodeterminetheBank’sannualdividend.Thedividendforthe2011–2012yearwas$160
million,andreportedequityat30April2013was$2.7billion.
27Reserve Bank of New Zealand: Statement of Intent
Principal financial risk management considerationsWithmorethan$20billioninassets,theBankfacesawiderangeoffinancialrisks.Thesearisemainly
becauseof theBank’soperations in thedomesticfinancialsystem,and itsholdingsof foreignexchange
reserves.Therisksinclude:
• creditrisksandmarketrisksassociatedwithday-to-daydealingswithfinancialinstitutions,intheprocess
ofmanagingliquidityinthefinancialsystem;
• risksassociatedwiththeBank’sholdingsofforeigncurrencyreserves,includingcreditrisk,liquidityrisk,
interestrateriskandexchangeraterisk;and
• operationalrisksinthetransactionsandprocessingareasoftheBank.
More detailed information on the Bank’s approach to managing these risks is outlined on pages 77–88
in the Annual Report 2011–2012.
Financial projectionsThe following table outlines the Bank’s budgeted income and expenditure for 2013-14. The key
assumptionsunderlyingthebudgetfortheyearended30June2014arethat:
• theBank’scurrentfunctionswillcontinue;
• therearenomaterialchangestothestructureoftheBank’sbalancesheetbetween31January2013and
30June2014;
• projectedinterestandexchangerateswillbethoseadvisedbytheTreasuryforthepurposesofpreparing
theGovernment’sBudgetfor2013–14;
• therewillbenochangeinthecreditworthinessoftheBank’scounterparties;and
• therewillbenomaterialchangestotheBank’sliquiditymanagementoperations.
28 Reserve Bank of New Zealand: Statement of Intent
Budget
For the year ending 30 June 2013-14
$mOperating income:Net investment income 234.1
Other income 9.0
Total operating income 243.1
Operating expenses:Personnel 32.6
Assetmanagement 6.8
Net currency issued 5.0
Other 18.5
Total operating expenses 62.9 Operating surplus 180.2
1 Comprehensive income includes earnings booked to the Bank’s Income Statement and also changes booked directly to Equity. The majority of sensitivity to changes in foreign exchange rates is booked to the Income Statement, whereas the majority of interest rate sensitivity arises on the Bank’s portfolio of New Zealand government securities and is booked directly to Equity. Refer to page 82 of the Bank’s Annual Report 2011-2012 for a detailed sensitivity analysis as at 30 June 2012.
Projectedfinancialperformance2013–2014
Thebudgetisbasedonthekeyassumptionsoutlinedabove.ItisimportanttonotethattheBank’sassets
andliabilitiesaresensitivetochangesininterestratesandexchangerates,andthatactualfinancialresults
coulddiffermateriallyfromthosebudgeted.
Asat31January2013,a10percentappreciationinthevalueoftheNewZealanddollarwouldreduce
the Bank’s comprehensive income1by$219million,andconverselya10percentdepreciationinthevalue
oftheNewZealanddollarwouldadd$267milliontocomprehensiveincome.A1percentacross-the-board
increase in interest rateswould reduce comprehensive income by about $145million, and a 1 percent
across-the-boardreductionininterestrateswouldincreasecomprehensiveincomebyabout$153million.
29Reserve Bank of New Zealand: Statement of Intent
2 Netexpenditurecomprisesoperatingexpenses less incomeearned fromcertainBankoperationsas specified in theFunding Agreement.
Net expenditure6
BudgetFor the year ending 30 June 2013-14
$000sFunctions:Monetary policy formulation 11,442
Domestic market operations 5,674
Macro-financialstability 5,254
Prudential supervision 13,483
Foreign reserves management 6,383
Settlement services (754)
Currency operations 12,446
Netexpenditure 53,928
NetexpenditureprovidedforintheFundingAgreement 55,200
FundingAgreementUnder-Expenditure 1,272
Netexpenditure2budget2013-2014
top related