Priorities & outcomes

STRATEGIC PRIORITIES AND OUTCOMES

1. Continuing to strengthen the Bank’s performance

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Priority one:

Leading change and business improvement

Priority

The new five-year funding agreement required the Bank to find substantial efficiency savings. A number of staffing and business process efficiencies were implemented this year, and further savings will be made in the remaining years of the funding agreement. All business areas were reviewed thoroughly. A change management programme was adopted with a focus on working adaptively. Staff were engaged in seeking continual improvement in business processes.

Outcome

The Bank continues to work towards building a high-performance workplace, maintaining a focus on improving efficiency and business results. Financial outcomes and efficiency initiatives have been reviewed regularly. A building occupancy programme directed at enhancing our utilisation of floor space, strengthening collaboration between colleagues and raising revenue from tenanting additional floors has been instituted and will be implemented in 2016–17. Business transformation is being delivered through substantial investment projects in treasury and payment systems.

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Priority two:

Continuing to improve performance culture

Priority

The Bank’s senior management places considerable emphasis on and resources behind developing managers’ leadership capabilities and performance. Managers will use the Bank’s competency framework, and performance and development process, to lead and develop staff and connect staff objectives and team visions to the Bank’s aspirational goal of being the Best Small Central Bank. Remuneration and performance links will continue to be strengthened and the annual staff engagement survey will help to shape the Bank’s approach to being a high-performing workplace. The Bank will develop a consistent framework to measure performance benchmarks for business plans, so that senior management can improve the way they monitor and manage resources.

Outcome

After a period of organisational change, the Bank further engaged with staff and managers in identifying and promoting continual improvement initiatives that would help to transform the business to be more cost-effective and innovative. Enhancements to the process for discussions on forecasting and to some IT practices were among the results. The emphasis on staff engagement, innovation, leadership and staff development had a positive impact on the level of staff engagement. The third annual staff engagement survey showed that the Bank’s overall engagement index was stable to slightly improving, in a year in which the Bank restructured and downsized. The survey provided management with further insights into what keeps staff engaged and an action plan was developed with staff, focused on keeping staff well connected, providing growth opportunities, and recognising performance and contribution. The Bank implemented a high-performance framework that provides managers and staff with more guidance on desired results and behaviours. The framework has been well-received and will continue to advance the Bank’s performance culture.

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Priority three:

Engaging and communicating with stakeholders

Priority

The Bank will extend its engagement, accessibility, relevance and dialogue with stakeholders to enhance mutual understanding. Its approach will be guided by feedback, especially its external stakeholder engagement surveys. The Bank will communicate broadly on its policies, its reasoning, and the impact of its activities through its proactive on- and off-the-record speech programme, briefings, media engagements and online channels. The production and release of a new series of banknotes will be supported by clear, effective and proactive communication.

Outcome

The Bank continued its extensive outreach programme while monitoring stakeholder relationships and opportunities to help stakeholders better understand and connect with the Bank. As well as a nationwide speech programme of 118 engagements, the Bank extended its media and stakeholder briefings, and publications. 

The wide-reaching public awareness campaign to support the release of the Series 7 Brighter Money banknotes was well received through a wide range of traditional, digital and social media channels.

2. Developing a more integrated approach to the Bank’s policy

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Priority four:

Exploring macro-prudential policy options to manage the financial stability implications of housing cycles.

Priority

The Bank will explore macro-prudential policy options for managing the financial stability implications of housing market cycles. It will continue to investigate the interactions between monetary policy, prudential policy and the objectives of price and financial stability. The Macro-Financial department will lead work through the Macro-Financial Committee and Governing Committee, with support from the Economics and Prudential Supervision departments.

Outcome

The Bank implemented new macro-prudential restrictions on lending to Auckland property investors in November 2015, requiring most to have deposits of at least 30 percent. This requirement was implemented in response to financial stability risks stemming from rising imbalances in the Auckland housing market. Housing market pressures subsequently re-emerged in Auckland and spread to the rest of the country, prompting the Bank to consider further tightening these restrictions. Work is under way to understand better the nature of the risks from high debt-to-income lending, and to consider the implications of any policy action to address these risks.

Analysis based on new data on the debt-to-income ratios of new lending was published in the November 2015 FSR.

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Priority five:

Updating the prudential policy and supervision frameworks

Priority

The Bank will implement changes arising from the regulatory stocktake and will review other key policy settings. These will include banks’ outsourcing requirements, and capital and liquidity settings in light of the revised Basel standards.

Outcome

In December 2015 the Bank announced the recommendations of its regulatory stocktake of prudential regulations for banks and NBDTs, following a series of workshops with banks and the release of a public consultation paper. One of the recommendations from the regulatory stocktake was to carry out further work on the dashboard model for quarterly disclosure. Under this model, information drawn from banks’ public and private reporting would be published on the Bank’s website. We consider that the dashboard could support market discipline by enhancing the usefulness and comparability of banks’ disclosures. We also concluded that the Banking Supervision Handbook should be reorganised, and that various measures should be adopted to enhance the transparency of the Bank’s policy-making process — for example, by publishing a document on the Bank’s policy-making process. Work is under way on the implementation of these measures, and is expected to be completed within the next 12–18 months.

The Bank has initiated reviews of its liquidity and capital adequacy policy frameworks. These reviews are being undertaken in the context of evolving international standards, which are set out by the Basel Committee on Banking Supervision. The nature and timing of these international developments will have a bearing on any changes to the Bank’s capital framework. The liquidity policy review will focus on whether it would be appropriate to harmonise the Bank’s existing policy framework with the finalised international standards, and assess the merits of extending liquidity disclosure requirements to overseas-incorporated banks. The Bank will consult on any proposed changes to its frameworks arising from these reviews.

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Priority six:

Developing a comprehensive stress-testing framework for the New Zealand banking system

Priority

The Macro-Financial and Prudential Supervision departments are developing a comprehensive stress-testing framework to gauge the resilience of the banking system to adverse shocks. The Reserve Bank will work with the banks to identify and implement improvements to the banks’ technical stress-testing frameworks and processes. In addition, the Bank will ensure that stress tests become the centrepiece of banks’ internal risk management and are regularly scrutinised by senior management and boards.

Outcome

The Bank worked with the banking system during the year to improve stress-testing practices. A discussion document was released in May, setting out key principles to which banks are expected to adhere as part of their stress-testing frameworks. The Bank also completed two stress tests of the banking system in 2015. The five largest dairy lenders were asked to complete stress tests of their dairy exposures in response to cash-flow pressure emerging in that sector. The results of this exercise were published in a Bulletin article in March 2016. In addition, in conjunction with the Australian Prudential Regulation Authority, we supplied a scenario to the four largest New Zealand banks to use in their internal stress-testing. We analysed the results of this exercise and provided feedback to banks. The results of this exercise were published in the May 2016 FSR.

3. Improving infrastructure and reducing enterprise risk

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Priority seven:

Implementing the payments system review

Priority

The Bank will select a replacement for the Exchange Settlement Account System (ESAS)/Real Time Gross Settlement (RTGS) technology system and begin implementation. The Bank will decide whether to continue to provide securities settlement (NZClear) services. If the decision is made to exit the business, the Bank will ensure a smooth transition to an alternative provider, and will reshape the way it provides remaining services. If the Bank decides to continue providing securities settlement services, it will begin the selection and implementation of a replacement securities system.

Outcome

Significant progress was made on the RTGS and infrastructure work streams to develop a replacement for ESAS and replacement infrastructure.

In March 2016 the Bank decided to retain the NZClear business. Following an earlier strategic review, the Bank sought interest from potential operators of securities settlement services but concluded the search without attracting suitable bids that met the Bank’s service requirements and commercial terms. The Bank will invest in a new platform to provide this service. The Bank is advanced in its evaluation of a potential solution and members will be consulted before a system is procured.

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Priority eight:

Finalising and implementing the roadmap and architecture for the Bank’s financial management

Priority

Treasury systems support two key policy functions: foreign reserves management (including currency intervention), and the implementation of monetary policy (liquidity management). Systems requirements have evolved significantly since the global financial crisis, and the Bank needs to update key functionality.

Outcome

In early 2016 the Bank selected Numerix as the business partner to modernise the Treasury systems. The Numerix system is regarded as providing best-of-breed financial markets valuation methodology and risk management instruments. Phase one of the modernisation programme is under way and will involve the implementation of a best-practice market valuation methodology and industry-leading cross-asset analytic functionality. Phase one will deliver integration with the Bank’s existing back-office accounting and settlement systems. Phase two will provide enhanced position, performance and collateral management and the addition of a modern user interface for risk management. Phase two is currently in the business requirement specification phase and is scheduled for delivery in 2017.

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Priority nine:

Delivering New Zealand’s new banknotes

Priority

The release of the Series 7 Brighter Money banknotes was scheduled for the end of 2015 and in 2016. The successful release will require continued extensive interactions with the Canadian Bank Note Company and increased engagement with the public, the financial services industry and other key stakeholders.

Outcome

The $5 and $10 banknotes were released in October 2015, with the $20, $50 and $100 banknotes released in May 2016. A public awareness and education campaign accompanied each release utilising print, radio, social and online media. This informed New Zealanders about the release of the Series 7 Brighter Money banknotes and the overt security features incorporated within the note designs.

The banknote-handling industry was consulted in advance of the release of each denomination to ensure that it was adequately prepared for the release. This consultation included hosting industry stakeholder meetings as well as supporting and overseeing extensive equipment calibration, testing and deployment activities.

The Brighter Money banknotes will continue to be issued as Series 6 banknotes are withdrawn from circulation.

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Priority ten:

Developing a plan for future custody and distribution arrangements for currency

Priority

The Bank will review its currency operating model and supporting infrastructure to ensure that the currency needs of New Zealanders will be met in the future. The review will assess the current operating model and identify options for the custody and distribution of currency. The Bank will consult and collaborate with key stakeholders during 2015–16 to ensure that the review’s recommendations are understood and supported.

Outcome

An extensive review was conducted and options were identified. Key stakeholder consultation was rescheduled to allow for a dedicated focus on the Brighter Money banknotes release during 2015–16. The Bank will consult and collaborate with stakeholders during 2016–17 to ensure that the review’s recommendations are understood and supported.