Leadership reports


The Bank has been active on many fronts. The global economy and financial markets have been challenging for monetary policy, the Bank has an intensive programme of work in respect of prudential oversight and macro-prudential policy; and it also has more major operational projects underway than in recent years.

Nearly 10 years on from the start of the global financial crisis, global economic growth remains disappointingly weak in many regions. Global growth in 2015, at 3 percent, was the weakest since 2008 and well below its long-term average. This was despite unprecedented monetary stimulus and commodity prices that remain well below the levels two years previously. Unfortunately, 2016 has seen further downward revisions of growth forecasts by the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD).

Against a background of large global excess capacity, declining volumes of merchandise trade and rising protectionism in G20 countries during 2016, the New Zealand economy is performing relatively well. The economy is in its eighth year of expansion and annual gross domestic product growth of 3 – 3½ percent is forecast over the next two years. Current economic growth is above trend, employment growth has been strong, labour force participation is high and the unemployment rate continues to decline. Furthermore, real wage growth has been quite strong; until recently, the household savings rate has been rising, and increasing economic growth has not been accompanied by the sharp deterioration in the current account that has characterised previous recoveries. Not least, the cost of living, as measured by the consumers price index (CPI), has been rising slowly.

As with every economy there are also some negative aspects: domestic economic growth has been weaker on a per capita basis; the global dairy market has serious oversupply problems that depress our dairy returns (despite more recent signs of improvement); excessive house price inflation is creating financial stability risks; our exchange rate is too high and affecting the competitiveness of our export and import substitution industries; and headline inflation lies below the target band in the Policy Targets Agreement. In addition, the strongest migration cycle in several decades is creating stresses as well as positives for the economy.

Inflation has remained lower for longer than forecast, primarily because of unforeseen and unforeseeable global events. Inflation in the tradables sector, which accounts for almost half of the CPI regime, has been negative for the past four years. This has been due to the subdued global inflation, falling global commodity prices and the high New Zealand dollar exchange rate. Given the outlook for global inflation and policy interest rates, low tradables inflation appears likely to continue for some time yet. Inflation in the non-tradables sector has averaged 2 percent in the past two years. Reduced government charges, such as the decline in ACC levies, have lowered non-tradables inflation, but we have also seen wage moderation as the surge in net migration since 2012 has increased the labour supply by around 4.5 percent. The Bank’s measures of core inflation currently lie within the lower half of the inflation target band.

In response to the low inflation and high exchange rates, the Reserve Bank’s Governing Committee, which comprises the Bank’s four Governors, lowered the Official Cash Rate six times since June last year. Policy rates are currently at historic lows and this has supported economic growth, and helped to prevent a decline in long-term inflation expectations. However, despite the cuts in the OCR, the trade-weighted exchange rate remains 2½ percent higher than in June last year, and there has been some weakening in short-term inflation expectations. A key rationale for cutting the OCR has been to lower the risk of a further decline in short-term inflation expectations.

At the same time the country is experiencing major imbalances in the housing market. In the past year house prices have increased by 15 percent and house-price-to-income ratios in Auckland, at around 9.5, are among the highest in the world. House-price-to-income ratios average around 5.4 for the rest of the country, but are increasing as annual house price inflation outside Auckland and Christchurch is currently running at 20 percent.


The historic surge in net migration in the past three years, the decline in global interest rates, and policy cuts by the Bank have stimulated housing demand. Even though annual building consents for the country as a whole are at an 11-year high, additional supply is needed. This would be facilitated by addressing issues relating to the costs and delays associated with planning approvals, choices in respect of housing densification within urban limits, and the productivity of the building and construction sector that is linked to scale and other factors.

Our concern is that a severe housing correction would pose substantial risks for financial system stability and the broader economy. The banks are heavily exposed to housing, with mortgages making up around 55 percent of their total assets. Household debt, at 163 percent of household disposable income, is at a record level.

We remain vigilant about financial stability risks arising from imbalances in the housing market. High prices and excessive leverage – both in Auckland and elsewhere – highlight the risk that a major price correction could occur. We deployed macro-prudential policy, in the form of loan-to-value ratio limits, to address some of the financial risks posed by the housing market. These measures have reduced credit risks associated with bank mortgage lending, and in doing so have helped to improve the resilience of bank balance sheets.

Striving to be a high-performing central bank

Innovation is one of the Bank’s core values and central to what we do. We continue to invest heavily in initiatives that strengthen our management, knowledge and technical capabilities while improving efficiency.

The Annual Report outlines the Bank’s vision and strategic direction, our core functions, our 10 strategic priorities and the work programmes that stem from them. As well as outlining the environmental conditions experienced during the year and how the Bank responded, the Report also discusses our success measures and whether we met our goals.

Some of the more significant developments during the year are summarised below.

  • We released the first of the Series 7 Brighter Money banknotes into circulation, and ran a nationwide multi-channel public awareness and education campaign to increase awareness of the new notes and their modern security features. The $5 note was named Banknote of the Year in an international banknote design award.
  • The architecture of the Bank’s financial management systems was finalised and is being implemented. More modern systems will assist in decision-making and reduce operational and market risks by providing market-standard trade valuation, position and collateral management, and enhanced risk and performance reporting.
  • Important progress was made with major projects to replace and improve our payments and settlement systems.
  • The Macro-Financial and Prudential Supervision departments have worked closely with banks to develop a comprehensive stress-testing framework to gauge the resilience of the banking system to adverse shocks. Considerable work was undertaken on loan-to-value and debt-to-income instruments.
  • The Prudential Supervision department has undertaken a major review of bank prudential regulation with industry collaboration, resulting in consultations on an enhanced disclosure framework, as well as more clarity around the policy-making process. It has issued two consultative documents on bank outsourcing; and consulted on potential revisions to the regulatory framework for financial market infrastructure. The department also extended its engagement with boards and senior executives of banks and large insurers.
  • The Bank continued to focus on keeping staff well connected, providing growth opportunities, and recognising performance. We have further developed our high-performance framework and continued to build leadership and management competencies through development programmes for managers and emerging leaders.
  • We extended our outreach programme with external stakeholders – by participating in more than 100 speaking engagements around the country, expanding our use of digital channels, and identifying opportunities to help stakeholders better understand and connect with the Bank.

All of the Bank’s work has been undertaken within the constraints of a tight five-year funding agreement that provides for annual funding increases of around 1 percent a year. This has involved careful expenditure management, several redundancies last year and a major review of the Bank’s space needs. We are currently preparing to lease out an additional three floors of our Wellington building.

The Bank is fortunate to have talented and hardworking staff who are deeply committed to obtaining good outcomes for New Zealand in carrying out their broad range of responsibilities. I wish to thank my Bank colleagues, including the senior management team and my fellow Governors on the Governing Committee for their professionalism and dedication in ensuring that the Bank met high standards in fulfilling its extensive responsibilities.

I wish to pay tribute to the Reserve Bank Board. The Board met 10 times during the year and, under the leadership of Dr Rod Carr, provided strong support and advice while also probing and questioning to ensure that the Bank fully met its responsibilities.

Graeme Wheeler


26 August 2016

Leadership reports


for the year ended 30 June 2016

The Board is pleased to report on the performance of the Reserve Bank for the year to 30 June 2016.

The Bank plays a central role in our economy. The Bank’s responsibility for monetary policy is designed to ensure low and stable rates of inflation over time. Monetary policy operates through short-term interest rates, which in turn influence saving and borrowing behaviour, the exchange rate and the rate of economic growth. The Bank’s responsibility for financial system stability operates through prudential supervision, capital requirements and measures aimed at loan quality. The Reserve Bank oversees New Zealand’s electronic payments system, and operates the Exchange Settlement Account System (ESAS) and NZClear payments and settlement systems, which support payments and salaries flowing smoothly through the economy. It also issues our banknotes and coins.

These activities reflect responsibilities that are spelled out in the Reserve Bank of New Zealand Act 1989 (Reserve Bank Act). With these responsibilities comes accountability. Given such an extensive reach into the economy, the Bank’s policies and activities are quite appropriately subject to public scrutiny.

The Bank’s own account of how it performed its functions in the past financial year, and the wide range of accountability mechanisms to which the Bank is subject, are covered elsewhere in this Annual Report.

The Board of Directors is specifically tasked by the Reserve Bank Act with keeping the performance of the Bank and the Governor under constant review, and with publishing its annual assessment within the Bank’s Annual Report. The Minister of Finance’s first Letter of Expectations addressed to the Board, received in November 2015, has been used to provide structure for our report this year.

With the Bank’s responsibilities also come expectations. Formally, in the case of its primary function – maintaining stability in the general level of prices – expectations are captured contractually in a Policy Targets Agreement (PTA) between the Governor and the Minister of Finance. The PTA is further qualified by the requirement under the Reserve Bank Act for the Bank to formulate and implement monetary policy having regard to the efficiency and soundness of the financial system.

The past year has continued to present challenges for the world’s central banks, and New Zealand is no exception. Internationally, responses to persistent and exceptional levels of monetary stimulus (low interest rates and easy access to credit) have not been as expected. In many countries measures of economic growth have been slower and consequently interest rates lower for longer than expected a year ago. New Zealand may be an island nation but it is deeply connected to the world’s markets for capital, products and services. The performance of the Bank must be assessed in this context, recognising the tools it has as well as the constraints under which it operates in meeting wide-ranging performance objectives. The Board’s overall assessment is that the Bank continues to perform its functions to a high standard, is held in high regard by its international peers and contributes to New Zealand’s stability and prosperity.

Monitoring the performance of monetary policy with respect to the Policy Targets Agreement

The PTA requires the Bank to maintain a price stability target defined as “keeping future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 per cent target midpoint.”

The PTA recognises that the apparent pinpoint precision of the inflation target belies the challenge of manoeuvring monetary policy through many factors beyond the Bank’s control or influence and the need to consider a wider set of implications of its policies. Hence the PTA also recognises circumstances in which pursuing the numerical target may not be achieved for a period of time.

The Bank is operating in an extraordinary global environment. Global economic growth remains significantly below trend, despite unprecedented monetary stimulus. Central banks are faced with the challenges of historically low, and in some cases negative, interest rates. Quantitative easing by central banks is expected to reach record levels in 2016 and is fuelling high asset valuations that are presenting risks to financial stability in many economies.

New Zealand is relatively well placed to cope with this environment, but the future is not without its risks. While tradables sector activity has been dampened by weak global demand and world trade, low prices for commodities such as dairy products, and a strong exchange rate, the New Zealand economy grew by 2.8 percent in the year to March 2016, driven principally by the construction and tourism sectors. Record high net immigration was an important contributor to domestic demand and labour force growth.

CPI outcomes have been below the lower bound of the target, but in every case the projected medium-term inflation outcomes have been consistent with the target on the basis of the information available at the time. The lower CPI inflation results from significant falls in the price of oil, and ongoing weakness in the price of other imports, which, combined with the strength of the New Zealand dollar, have resulted in a sustained period of negative tradable inflation. At the same time, the impact of high net immigration is moderating nominal wage outcomes and reductions in government charges are lowering non-tradable inflation from what it otherwise would have been. With long-term inflation expectations anchored and the output gap estimated to be close to zero, non-tradable inflation has remained close to 2 percent per annum.

During the year the Board regularly monitored the Bank’s thinking on the balance of risks and the judgements the Bank made in setting monetary policy and publishing the projections contained in the Monetary Policy Statement (MPS). It also monitored market and media reaction to the Bank’s announcements.

The Board undertook an ex post review of each MPS and Official Cash Rate (OCR) review, with access to all background papers, including the written advice to the Governor from each member of the Bank’s Monetary Policy Committee.

Papers were made available to the Board summarising the outcome of the Bank’s internal committee discussions, and setting out the Bank’s research on the factors that have resulted in measured CPI inflation being below the target range.

This research has improved the Bank’s and the Board’s understanding of the monetary policy implications of low inflation expectations, the recent high levels of immigration, weak global demand, the high exchange rate, and falling import prices for measured inflation in New Zealand. The Board noted that the Bank is incorporating the key aspects of its research into its modelling framework.

At its meetings the Board discussed papers outlining the Bank’s thinking on the potential impact of different OCR paths and the trade-offs involved with a potentially faster return to the mid-point of the target band. These discussions have highlighted the risks and uncertainties that the Bank is endeavouring to balance, and the judgement that is required in choosing between a number of policy actions that might be consistent with the PTA. Directors also discussed issues raised in the Bank’s recent on-the-record speeches, Bulletin articles and Analytical Notes on current monetary policy developments.

On the basis of the information and advice available to the Governor at the time of his decisions, the Board assessed that the four MPSs and the intervening OCR reviews met the requirements laid out in section 15 of the Reserve Bank Act.

Directors were assisted in their quarterly assessments of MPSs by a written commentary by director Professor Quigley.

Assessing the performance of the Bank in promoting the maintenance of a sound and efficient financial system

The Board reviewed the November 2015 and May 2016 Financial Stability Reports and the Bank’s findings that while the financial system is generally sound, effective and resilient, financial stability risks relating to house prices and household debt have increased, and the dairy sector still faces headwinds.

Directors extensively discussed the housing market and reviewed the Bank’s introduction of tighter loan-to-value ratio (LVR) restrictions on investor-related lending from 1 November 2015. The Board noted the Bank’s evidence that the LVR restrictions overall had the desired effect of lowering the proportion of highly leveraged lending in bank loan portfolios and hence the level of lending risk. It noted that the restrictions had produced results consistent with the Bank’s modelling, although the Bank expected the impact of the measures would diminish over time.

Directors were apprised of the potential need for further macro-prudential intervention, including a debt-to-income-based policy instrument. The Board is being kept informed on the further work required in this regard.

The Board also spent considerable time discussing the global dairy market and the implications of a protracted period of low dairy prices for farm incomes, debt and land prices, as well as for the dairy loan portfolio of the domestic banking system.

These discussions covered the Bank’s analysis of break-even pricing and stress-testing of bank balance sheets. The Board noted the Bank’s encouragement to banks to take a medium-term view of farm viability but a conservative approach to collective provisions (i.e. for loans assessed in pools of similar assets with similar risk characteristics).

The Bank has kept directors informed of other regulatory developments, including increased oversight of financial market infrastructures, the regulatory stocktake, the review of outsourcing policy, and the review of bank capital requirements, as well as the upcoming International Monetary Fund (IMF) Financial Sector Assessment Programme (FSAP) in 2016.

The Board agreed that the November 2015 and May 2016 Financial Stability Reports met the requirements contained in section 165A (2)(a) and (b) of the Reserve Bank Act, and met the reporting and accountability requirements of the Memorandum of Understanding on Macro-Prudential Policy and Operating Guidelines [May 2013].

Directors were assisted in their assessment by a written commentary by director Ms Vautier.

In the course of the year, the Board has initiated work to develop a framework to refine and enhance its monitoring of the Bank’s responsibility to maintain a sound and efficient financial system.

The Bank explained its outreach programme, which was devoted to the key messages in the FSR to stakeholders who included legal, accounting and general business audiences, analysts, Treasury, and the Financial Markets Authority.

With the Governors present, the Board met three of the chairs and a deputy chair of the four major banks for discussions on two key issues: the governance of New Zealand subsidiaries of the large Australian banks; and regulatory issues that are currently front-of-mind for New Zealand bank boards. The banks discussed risks in the dairy and housing sectors and the impact of LVR limits on balance sheet risks. The banks also discussed the review of the Bank’s outsourcing policy and risks associated with possible cyber threats.

Monitoring the Bank's regulatory policy processes

The Board considered a report on the Bank’s regulatory stocktake, including the response to submissions on the Bank’s public consultation. The stocktake reviewed the effectiveness and compliance costs associated with different regulatory policies. Directors were briefed on the design of a proposed dashboard that would replace banks’ off-quarter general disclosure statements and be published on the Reserve Bank’s website.

Preparations for the upcoming IMF FSAP were reviewed and the Board looks forward to meeting with the IMF review team later this year.

Directors were informed of the Bank’s new six-monthly review of its planned regulatory policy work programme, which forms part of the Bank’s commitment to the Minister for transparency in regulation. The present work programme covers outsourcing, the FSAP review, the development of a ‘dashboard’ approach to quarterly disclosure by banks, bank crisis management, issues relating to the implementation of Open Bank Resolution, reviews of bank capital and liquidity requirements, stress-testing of bank balance sheets, and a review of the insurance prudential supervision regime. In each case the Bank is engaged in ongoing consultation with directly affected organisations. Final policy positions have yet to be reached and in a number of cases other Government agencies will contribute advice before final decisions are reached.

The Board has initiated work on a framework to refine and enhance its monitoring of the Bank’s regulatory policy processes.

Monitoring the Bank’s relationships

The Board has also developed a framework for meeting the Minister’s expectation of monitoring the Bank’s relationships. The framework was adopted in June 2016 and enables the Board to increase its consideration of how key Bank relationships are operating in practice.

The key relationships to be monitored are those identified in the Minister’s Letter of Expectations – the Minister, the Treasury, regulated entities and other agencies – while acknowledging the importance of other relationships with financial markets, businesses, the media and educators.

It was noted that the relationship between the Governor and the Minister is defined in the Reserve Bank Act; where the Minister acts as a principal in that relationship the Board’s role as the Minister’s agent is limited.

The Board meets with important stakeholders, often on an issues basis, e.g. housing, and with other organisations over lunch and at outreach functions. It also takes account of the Bank’s speech programme and a comprehensive review undertaken in 2014 of key stakeholder engagements.

During the year the Board hosted meetings with external parties, including the Financial Markets Authority, the four major banks, Wellington high-tech firms, and Canterbury and Waikato business sector leaders, as well as the Bank’s managers.

The Board was briefed by the Governor on the outcome of an investigation by Deloitte relating to a leak of the March OCR release and endorsed the decision taken by the Governor to cease pre-announcement media lock-ups.

The Governor has kept the Board informed of the Bank’s six-monthly briefings of Parliamentary caucuses.

Monitoring of operational functions

In addition to the Board’s monthly review of key indicators of operational performance, the Board’s monitoring includes a six-monthly review of the Bank’s Human Resources function. The Board noted that the Bank’s annual staff engagement survey showed continuing positive trends, despite substantial organisational change in the previous 12 months.

The Board reviewed the Bank’s health and safety policies in the context of the new legislation and advised that these should be reviewed annually and be externally audited.

Directors monitored planning of the arrangements being put in place by the Bank to lease out three more floors of its Wellington building in order to generate income to help meet the Bank’s obligations under the Funding Agreement.

Organisational strategy and financial management

The Board provided input to the drafting of the Bank’s Strategic Priorities for 2016–2017 and is monitoring progress against the Bank’s stated intentions.

The Audit Committee reviewed recent cyber security testing that the Bank had undertaken, one example of a significant and emerging global focus. The Committee also considered the Bank’s replacement for ESAS, the evaluation of the possible sale of NZClear, which was ultimately not proceeded with, changes to the treasury system architecture, and the banknote upgrade.

The monthly Chief Executive’s Report and Balanced Scorecard provided directors with detailed information on the Bank’s risk and financial indicators.

The Board was kept informed of the Bank’s progress against its budget during the year. It noted that underspending in the 2015–16 financial year had been anticipated in the first year of the five-year Funding Agreement due to one-off factors, with several project costs being capitalised, affecting future depreciation charges and overall expenditure in future years.

The Board monitored progress on several major projects: the launch and delivery of the Series 7 banknotes; the selection of the provider of a central securities depository as part of the NZClear upgrade; the trade valuation system implementation project; and work on the building occupancy project.

The Board also conducted a self-evaluation in relation to its own performance, consistent with shareholding Ministers’ expectations of Crown-owned entities.

On behalf of the Board, we would like to thank the Governors and all the staff of the Bank for their professionalism, commitment and individual contributions during the past year.

On behalf of the Board of Directors:

Rod Carr


26 August 2016

Keith Taylor

Deputy Chair

26 August 2016

At these functions, the Governors give a brief off-the-record presentation on the economy consistent with the latest MPS or OCR review, and open the floor to questions. This outreach is a longstanding practice of the Board to ensure visibility of its role among the wider community, and to facilitate directors’ understanding of local economic developments and the wider public’s understanding of the Bank’s policies.


The Board takes special interest in the Bank’s risk management policies and practices. The Board’s sole committee is its Audit Committee. This met four times and held a teleconference during the year to review the Bank’s financial statements and internal and external audit activity, and reported back to the Board.

Keith Taylor chairs this committee, which includes Kerrin Vautier and Bridget Coates. The Bank seeks the Board’s agreement to its recommendation of a dividend to the Government. This recommendation is first reviewed by the Audit Committee.

Leadership reports



The Reserve Bank of New Zealand is the nation’s central bank. A Crown agency, the Bank performs functions across the financial sector derived from several pieces of legislation:

  • the Reserve Bank of New Zealand Act 1989 (RBNZ Act), which specifies the Reserve Bank’s and the Governor’s capacity, functions and powers, as well as its monetary policy and banking supervision functions;

  • the Insurance (Prudential Supervision) Act 2010 (IPSA), which provides for the Bank’s role as prudential supervisor of the insurance sector;

  • the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, which confers responsibility on the Bank as a AML/CFT supervisor; and

  • the Non-bank Deposit Takers Act 2013 (NBDT Act), which establishes the Bank as prudential regulatory and licensing authority for non-bank deposit takers (NBDTs).

These Acts, and regulations made under these Acts, can be viewed electronically on the New Zealand Legislation website.

Under the RBNZ Act, the Bank exercises its authority through the Governor and subject to the:

  • Policy Targets Agreement, a written contract between the Minister of Finance and the Governor detailing the monetary policy outcomes that the Bank is required to achieve (RBNZ Act section 9);

  • Bank’s funding agreement, a five-yearly agreement between the Governor and the Minister of Finance that specifies how much of the Bank’s income can be retained by the Bank to meet its operating costs (RBNZ Act sections 159–161);

  • Memorandum of Understanding with the Minister of Finance in respect of macro-prudential responsibilities.

The Bank also receives an annual letter of expectations from the Minister of Finance setting out expectations of engagement with the Minister through the year.

The RBNZ Act confers considerable day-to-day operational autonomy on the Bank, an important role for the Minister of Finance in some key decisions, and a robust accountability structure in which the Bank’s Board, the Minister and Parliament all have formal roles. The Bank publishes a range of accountability documents including an Annual Report, Statement of Intent (SOI) and Financial Stability Report (FSR). The Bank’s activities are scrutinised by Parliament’s Finance and Expenditure Committee. Typically, hearings are held covering the quarterly Monetary Policy Statements (MPSs), the six-monthly FSRs and the Bank’s annual financial performance.

The Minister

The Minister of Finance has the following functions and powers under the RBNZ Act, IPSA and the NBDT Act:

  • appointing a Governor on the recommendation of the Board;

  • advising the Governor-General to remove a Governor, either on the recommendation of the Board or because statutory criteria for removal are made out;

  • agreeing with the Governor the Policy Targets Agreement and any variation to it;

  • agreeing with the Governor a five-year funding agreement and any variations to it; and

  • various powers under Part 5 of the RBNZ Act, such as consent to the deregistration of, or a direction to a registered bank, and advising the Governor-General to place a registered Bank into statutory management.

Subject to procedures intended to ensure transparency, the Minister of Finance can also:

  • put in place alternative monetary policy targets;

  • direct the Bank to intervene in the foreign exchange market or dealing in foreign exchange within fixed exchange rate bands; and

  • direct the Bank to have regard to government policies relating to the Bank’s prudential functions under the RBNZ Act, IPSA and the NBDT Act.

Board of Directors

Section 53 of the RBNZ Act specifies the duties of the Board, among other things, as being to:

  1. keep under constant review the performance of the Bank in carrying out—

    1. its primary function [monetary policy]; and

    2. its functions relating to promoting the maintenance of a sound and efficient financial system; and

    3. its other functions under this Act or any other enactment:

  2. keep under constant review the performance of the Governor in discharging the responsibilities of that office:

  3. keep under constant review the performance of the Governor in ensuring that the Bank achieves the policy targets agreed to with the Minister [the Policy Targets Agreement]:

  1. determine whether policy statements made pursuant to section 15 [Monetary Policy Statements] are consistent with the Bank’s primary function and the policy targets agreed to with the Minister:

  2. keep under constant review the use of the Bank’s resources.

Section 53 also specifies that the Board may provide advice to the Governor on any matter relating to the performance of the Bank’s functions and the exercise of its powers.

In November 2015, the Board received a letter of expectations from the Minister for the first time, setting out the Minister’s expectations of the Board’s role.

The Board’s Audit Committee reviews the Bank’s financial statements and internal and external audit activities. Each year, the Board writes an assessment of the Bank’s and the Governor’s performance, which is provided as advice to the Minister of Finance and made public later in the Bank’s Annual Report.

The Board makes recommendations to the Minister on the appointment or reappointment of the Governor. The Minister can only appoint a Governor recommended by the Board. The Board can recommend to the Minister that the Governor be dismissed if the Board believes that the Governor’s performance or conduct has been inadequate or inappropriate. The Board appoints the Deputy Governors on the Governor’s recommendation.

Conflicts of interest

The Bank maintains policies and practices to avoid or manage conflicts of interest among all Bank personnel, including Governors and directors. The policy requires that all personnel act honestly and impartially, and in no circumstances reveal or make private use of confidential, market-sensitive information. The policy states that personnel must avoid situations where their integrity might be questioned, and that their best protection is full disclosure of any potential conflicts.

Governors and departmental managers are required to give the Bank quarterly updates about their personal interests so that any potential conflict of interest is recorded. If any other personnel have a particular concern, they can also record their interests in the same way.

Personnel must not be involved, directly or indirectly, in regular trading in wholesale financial markets in which the Bank has, or might have, a significant influence. Bank staff cannot own or control shares in entities (or their parent companies) that the Reserve Bank regulates, or use inside information to benefit when depositing or withdrawing funds from financial institutions, or purchasing or selling bonds or shares, or when changing between fixed and floating rates for a loan. It is unacceptable to use inside information whether to avoid losses or to make gains.

Under sections 56 and 61 of the Reserve Bank Act, the Minister must have regard to the likelihood of conflict of interest in appointing a director to the Board, and directors must disclose their interests in any contract with the Bank. On appointment to the Board, directors sign a declaration that they will observe confidentiality in relation to the affairs of the Bank and will not make use of any confidential information they may acquire regarding Bank operations. They also disclose any other directorships and significant interests to enable the Board Chair and the Governor to manage any conflicts. These interests are updated on a regular basis.

Financial disclosure of the Governor

As the Bank has extensive responsibilities, and in the interests of promoting sound organisational governance and transparency, there is merit in reporting the Governor’s financial disclosure. This is reported in each Annual Report and any changes made during the previous 12 months are highlighted.

  1. Marketable securities, real estate, rights, proprietary and other interests, business and other assets owned during 2015-16 and valued above

    Real property2:

    • Family home, Wellington3

    • Holiday home, Coromandel Peninsula3

    • Section, Coromandel Peninsula3

    Deposits and marketable securities:

    • Deposit at Bank-Fund Staff Federal Credit Union (Washington DC)

    • Deposit at Westpac Bank

    • KiwiSaver Employee and Employer Contribution.

  1. Sources of non-Bank income over NZ$5,000 during 2014-15 (other than from listed investments)

    • World Bank Group Pension

  2. Liabilities over NZ$50,000 owed during 2015-162

    • None

  3. Trading in foreign currency or in financial instruments

    • None.

  4. Positions held outside the Reserve Bank

    • None.

1. All assets and liabilities are jointly owned with spouse.

2. Disclosure has changed from previous year.

3. Purchased prior to joining the Reserve Bank.

Financial management overview

The Bank receives no direct funding through the Parliamentary appropriation process. Instead, the Bank’s main source of income is the return on the substantial investments the Bank holds, which are funded by the issue of currency and by the Bank’s equity. Currency in circulation is a liability on which no interest expense is incurred. The funds received from registered banks when currency is issued to them are invested and earn interest income, which is known as seigniorage4.

Foreign reserves management, New Zealand dollar liquidity management, and currency operations materially affect the size and structure of the Bank’s balance sheet. The Bank’s financial performance is also influenced by: changes in both foreign exchange rates and interest rates; the extent of available funds in the form of equity; and currency in circulation. The Bank’s reported net income will fluctuate from year to year, primarily because the Bank’s unhedged foreign currency reserves will generate profits and losses as foreign exchange rates change.

Under the Reserve Bank Act, the Minister of Finance and the Governor shall enter into a five-year funding agreement which may specify the amount of the Bank’s income that may be used to meet operating expenses in each of those years. Capital expenditure is funded by the Bank, with depreciation of fixed assets included in annual operating expenses.

In 2015, the Governor and the Minister signed a funding agreement for the five years from 1 July 2015 to 30 June 2020.

4. No interest is paid on currency in circulation. When notes and coins are issued to a registered bank, the registered bank will pay for the currency that is issued by paying funds to the Reserve Bank from that bank’s exchange settlement account with the Reserve Bank. The Reserve Bank invests the proceeds it receives, and the earnings on those investments are known as ‘seigniorage’.

Annual distributions paid by the Bank

Under the Reserve Bank Act, the Bank must publish in its Statement of Intent the principles upon which its annual dividend is recommended to the Minister. The following principles have applied:

The amount of the dividend to be paid to the Crown is determined by the Minister of Finance each August on the recommendation of the Bank, having regard to the views of the Board of Directors and its Audit Committee and any other relevant matters.