The year in review - Our environment


The New Zealand economy grew by 2.8 percent in the year to March 2016.

Growth was concentrated in construction and the services sector, which benefitted from strong tourism. Net immigration, which reached a new record high, was an important contributor to domestic demand and growth in the labour force. Tradables sector activity continued to be dampened by weak global demand and world trade, low prices for commodities such as dairy products, and a strong exchange rate.

Global growth remained moderate despite very stimulatory monetary policy internationally.

Central banks in most of the developed economies had policy interest rates close to zero, and many major central banks relied on unconventional measures to support demand. This has seen long-term interest rates falling to record lows. At the end of June 2016, Japan, Germany, Switzerland, Denmark and the Netherlands, amongst others, were all experiencing negative 10-year government bond rates.

Slowing growth in China fuelled concerns about the global outlook. Financial risks in China, built up over many years, were highlighted in August 2015 when the Chinese sharemarket collapsed by 35 percent. The Chinese authorities implemented a range of measures to stabilise the sharemarket. Nonetheless, there were further abrupt declines in share prices in early 2016, which significantly destabilised global sharemarkets.

In the United States, where economic activity had been improving, the Federal Reserve was expected to raise policy rates for the first time in six years. In undertook only one interest rate increase, in December 2015, and forestalled further increases. In Japan the monetary authorities introduced negative policy rates in February 2016, while in Europe the European Central Bank introduced a broad package of stimulatory measures in March 2016.

Concerns about the world outlook and excess supply in specific commodity markets saw global commodity prices decline significantly in 2015.

Oil prices reached their lowest levels since 2003, sinking from over USD100 per barrel in mid-2014 to just USD25 per barrel. Dairy prices also declined significantly with dairy production increasing in most of the world’s dairyproducing regions. Since February 2016, some commodity prices have recovered modestly.

New Zealand financial markets have responded to these global trends.

New Zealand’s relatively sound economic activity levels, stable political environment, and yields proved attractive to international capital. Consequently, the New Zealand dollar has proved resilient in the face of global volatility, with the trade weighted index about 6 percent higher at the end of June 2016 compared to a year earlier. This has occurred despite the Bank reducing the Official Cash Rate from 3.5 percent to 2.25 percent during the 2015-16 financial year. New Zealand’s relatively higher yields proved attractive, and 10-year government bond yields fell from over 3.5 percent in June 2015 to a record low of 2.4 percent. Despite periods of heightened global volatility, including in June, after the United Kingdom referendum vote to end membership of the European Union, domestic capital markets operated in an orderly fashion.

Financial stability risks increased due housing market imbalances and weak dairy sector cash flows.

The low global interest rate environment, very strong rates of inward migration and tight supply constraints have contributed to continued house price pressures, particularly in Auckland. Nationwide house price inflation strengthened through 2015 and there was a broadening in house price pressures to most regions across New Zealand. A subsequent correction in the housing market could cause significant loan defaults and risk a severe credit contraction. This risk has been accentuated by a rising share of lending to investors and lending at high debt-to-income ratios.

Lower dairy prices have generated difficult challenges for New Zealand dairy farmers and associated industries. With dairy prices low, many farms have faced cash losses and have been heavily reliant on working capital from banks. The dairy industry is highly indebted, accounting for around 10 percent of bank lending, and levels of problem loans to the sector have begun to rise due to cashflow weakness.

In the face of these challenges, the New Zealand banking system remains sound and well capitalised.

Capital and liquidity buffers for banks are in excess of minimum requirements and stress tests of the banking system suggest that banks will remain solvent in the event of a severe macroeconomic downturn, albeit with a tightening in the supply of credit. Bank capital ratios increased and were comfortably above regulatory requirements. Bank profitability remained strong, although reduced margins and increased provisions for dairy loans affected some banks. Bank lending grew moderately and lending growth was higher than deposit growth.

To mitigate risks to financial stability from an overheated housing market, the Bank adjusted high loan-to-value (LVR) residential mortgage lending speed limits from 1 November 2015. Banks complied with the 10 percent high-LVR residential speed limit that applied prior to November and the new speed limits throughout the remainder of the year.

The non-bank and insurance sectors remain stable and New Zealand’s financial market infrastructures have continued to operate effectively during the year with no disruptions to the processing of transactions.

As of 30 June 2016 there were 31 entities licensed under the NBDT Act 2013. This sector remained stable during the year, with no cancellations or new issues of NBDT licences. None of the regulatory compliance or prudential matters relating to the NBDT sector triggered enforcement action. Meanwhile, all NBDTs have been preparing to comply with the Financial Markets Conduct Act 2013. 

The Bank continues to actively supervise licensed insurers. An emphasis has been placed on reinforcing insurers’ self-discipline to meet the purposes set out in IPSA. There are indications that the insurance sector’s overall solvency and risk governance has strengthened since the conclusion of full licensing in 2013. Competition, distribution channels and settlement of Canterbury earthquake claims are the key areas of focus for general insurers. Challenges around replacement business, adviser remuneration and a low-interest-rate environment dominate our discussions with life insurers.

New Zealand’s currency needs continue to be met as the demand for cash increases.

The Bank meets the currency needs of the public by arranging the procurement, secure storage and issue of New Zealand banknotes and coins, as well as maintaining the quality, and verifying the authenticity, of currency in circulation. The Bank released the new Series 7 Brighter Money banknotes into circulation during the year. Cash remains an important means of undertaking transactions in New Zealand, and continues to grow at a rate in excess of nominal GDP. The value of currency in circulation grew by 7.2 percent to $5.63 billion in the year to 30 June 2016. In the 10 years to June 2016, currency in the hands of the public rose by 76.2 percent.

Year in review - the Bank's response


What we did – success measures

The Bank’s quarterly MPS is the key accountability document for our monetary policy performance, as required by the RBNZ Act. The Bank’s assessment of economic conditions and the level of inflationary pressures, and the rationale for OCR decisions, are explained in the MPS.

Headline CPI inflation was 0.4 percent in the year to June 2016. Declines in international oil prices contributed to a large decline in domestic fuel prices. The elevated exchange rate and low global inflation also dampened tradables inflation.

Non-tradables inflation weakened during 2015 despite economic growth being around average and the unemployment rate trending lower. In part, the fall in non-tradables inflation was due to temporary factors. However, survey measures of inflation expectations fell, with short-term inflation expectations falling below the 2 percent target midpoint. The decline in inflation expectations contributed to a slowing in wage inflation and non-tradables inflation. Nevertheless, long-term inflation expectations remain well-anchored around the target mid-point.

In response to continued global uncertainty, falling commodity prices, the elevated exchange rate and weak inflationary pressures, the Bank moved from a neutral policy stance to an easing stance in the June 2015 MPS. The Bank reduced the OCR by 125 basis points from the start of 2015 and this reduction contributed to declines in floating and fixed mortgage rates. In June 2016 the Bank maintained the OCR at 2.25 percent, but signalled that it was likely to lower the OCR further.

The June MPS projects CPI inflation to return to the target range in late 2016, and to reach the 2 percent midpoint by 2018. The elevated exchange rate is expected to continue to depress tradables inflation, while low interest rates will support economic growth and contribute to an increase in non-tradables inflation in the medium term.

Chart 1: Consumer price inflation. Annual % change, excluding GST

Target range200520062007200820092010201120122013201420152016-4-202468%-4-202468%

Chart 2 Key

Chart 2: OCR, 90-day rate, TWI

Aug 15Oct 15Dec 15Feb 16Apr 16Jun 1665707580Index2.

Chart 2 Kay

What we did — initiatives and strategies

The Bank conducted research on a range of topics and progressed initiatives to support monetary policy formulation.

We devoted considerable attention to enhancing our understanding of price and wage-setting behaviours by firms. The Bank developed new tools for understanding inflation expectations and labour market capacity. Our findings, which supported decision-makers in their deliberations on and communication of monetary policy, were disseminated in research papers, speeches and the MPS.

We continued our research into the interaction between monetary policy and macro-prudential policies. The Bank’s research programme also focused on open economy macroeconomics, which examined issues related to the exchange rate, commodity prices, migration and interest rates.

The Bank changed the MPS publication schedule — which takes effect from August 2016 — to better align with the publication of key economic data. The Bank communicated the new release schedule in August 2015 to give the financial market plenty of time to adjust to this change.

The Bank continued to publish a range of on-the-record speeches relating to monetary policy. Bank research staff presented their research at conferences in New Zealand and overseas, and the Bank hosted presentations by visiting international researchers. In December 2015, the Bank hosted workshops on macroeconomic and macro-econometric modelling.


The objective of the monetary policy formulation function is:

To achieve and maintain stability in the general level of prices. The current Policy Targets Agreement between the Minister of Finance and the Governor requires that the Bank “keep future CPI inflation outcomes between 1 and 3 percent on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint”. It also requires that, “In pursuing its price stability objective, the Bank shall ... seek to avoid unnecessary instability in output, interest rates and the exchange rate”.

Statement of Intent

In our 2015–2018 Statement of Intent we undertook to deliver the following:


Stability in the general level of prices.

Initiatives and strategies
  1. Macro-prudential and monetary policy interface: undertake analysis and develop frameworks to better understand the interaction between macro-prudential and monetary policy.
  2. Support the formulation of monetary policy: understand how events such as a construction and housing boom, fiscal consolidation and international developments will shape the next business cycle.
  3. Monetary policy research: undertake analysis to improve the Bank’s understanding of the New Zealand economy and key monetary policy issues.
  4. Exchange rate analysis: review the Bank’s frameworks for assessing the long-term sustainable level of the exchange rate and analysis of the cyclical impact of the exchange rate on New Zealand economic activity and inflation.

Our performance would be measured by: 

Success measures
  • 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.
  • MPSs are informative and accurately assess the Bank’s performance in meeting the objectives of the Policy Targets Agreement

Year in review - The Bank's response


What we did – success measures

Domestic markets

The Domestic Markets team seeks to maintain short-term wholesale interest rates at levels close to the OCR.

Short-term interest rate markets remained reasonably stable throughout the financial year, although some volatility was evident at quarter ends, in trading outside the New Zealand time-zone and around some central bank rate announcements. The Reserve Bank continued to see declining market liquidity, caused by a reduced risk appetite and the evolving global regulatory landscape. As a result, Domestic Markets assumed a greater intermediating role during times of market volatility, and used FX swaps, repurchase agreements (repos) and Reserve Bank bills to manage this volatility with reasonable success.

Domestic Markets recorded revenue of $14.7 million before operating expenses from its operations for the year, primarily through increased market intermediation activity.

Chart 3: Financial Markets

Jul 15Aug 15Sep 15Oct 15Nov 15Dec 15Jan 16Feb 16Mar 16Apr 16May 16Jun rate %0.600.620.640.660.680.700.720.74Exchange rate %

chart 1 key

Foreign reserves management

A recurring theme during 2015–16 was the synchronised decline in global bond yields, to new records lows for some, and an increasing move into negative yield territory for several major economies. This placed pressure on returns around the globe and drove many investors into various asset and credit markets in search of yield.

While returns are important, the Bank’s highest priority in managing its foreign reserves is to preserve capital and liquidity to support its foreign exchange intervention mandate. This was achieved by maintaining our current structure of holding a mixture of hedged and unhedged reserves in the world’s major currencies (USD, EUR, JPY, GBP, CAD and AUD) and in high-quality government or near-government liquid assets.

Our hedged reserves portfolio seeks to minimise interest rate risk and exchange rate risk and is funded by borrowing foreign currency. The assets in this portfolio are held in short-term instruments of the United States, Europe and Japan. Despite the low yields in these countries, especially in Europe and Japan where interest rates are negative, the hedged reserves portfolio achieved positive returns through the use of cross currency basis swaps. For example, by switching some of our USD assets into JPY we were able to generate excess returns in USD compared with an equivalent return on United States Treasury bills. As of 30 June 2016, 52 percent of hedged reserves were held in USD, 30 percent in EUR and 18 percent in JPY.

Unhedged reserves, which are funded via the sale of NZD, are mostly invested in government bonds of the above-mentioned six major currencies and are benchmarked against an international one- to three-year bond index. The benchmark has an average duration of two years and achieved a return of 1.26 percent. Active management against benchmark underperformed by six basis points largely reflecting positions held in the USD bond portfolio in anticipation that the Federal Reserve would increase United States rates more than once.

The Bank’s unhedged foreign exchange position was reduced by approximately SDR200m to SDR1,400 million, between July and September, when the NZD/TWI exchange rate eased to its lowest level since June 2012. During the financial year the NZD/TWI appreciated by 6.6 percent despite our OCR being reduced by 1 per cent during the period as monetary policy responded to lower inflation outcomes and expectations. New Zealand’s favourable interest rate differential and economic performance continues to be a major driver in supporting the NZD against the global backdrop of declining yields and a search for diversified assets. The rise in the NZD, however, has seen the unhedged foreign exchange position take a revaluation loss of NZD201 million.

What we did – initiatives and strategies

The Financial Markets department is in the process of implementing a new treasury valuation system, partnering with Numerix. This initiative will produce a step change in balance sheet management, enhancing the Bank’s pricing, structuring, modelling and valuations of derivative instruments and portfolios. It will also enable improved performance reporting and analyses of future derivatives risks with speed and accuracy.

Within this project scope, incremental improvements were also made during the year to collateral management and foreign reserves and domestic markets’ operating and risk management structures. These changes will help facilitate the new treasury system implementation, working within a more streamlined business configuration.

Ongoing improvements were made to the department’s international economic and financial market research capabilities. We added resources to and improved coverage in market intelligence to deliver greater value-add research and continue to improve policy collaboration within the Bank.

In June the Bank completed its two-year commitment as Chair of the EMEAP Working Group on Financial Markets (EMEAP is the Executives’ Meeting of East Asia-Pacific Central Banks, a cooperative organisation of central banks and monetary authorities). Achievements during the two years included closing the legacy US dollar Asian Bond Fund (ABF1) and successfully reinvesting those funds into a more appropriate local currency bond fund (ABF2). The Working Group also carried out a survey of derivatives market participants, reviewed the impacts of liquidity regulations on EMEAP markets and commissioned the Bank for International Settlements to produce a report on enhancing Asian corporate bond markets.

What is the economy?


The objectives of the financial markets function are:

To support the implementation of monetary policy; to assist in the efficient functioning of New Zealand’s financial system; to manage official foreign reserves; to implement the Bank’s foreign exchange market intervention policy; to manage the Crown’s financial liquidity; and to maintain crisis intervention capability.

Statement of Intent

In our 2015–2018 Statement of Intent we undertook to deliver the following:

  • Adequate banking system liquidity.

  • Short-term interest rates consistent with monetary policy.

  • Confidence in the efficient functioning of New Zealand’s financial markets.

  • Foreign reserves available for efficient foreign exchange intervention and crisis management.

Initiatives and strategies
  • Supporting two key policy functions, foreign reserves management (including currency intervention) and the implementation of monetary policy (liquidity management), treasury system requirements have evolved significantly since the global financial crisis, and the Bank is required to update key functionality gaps.

  • Finalising and implementing an agreed Treasury Systems (Roadmap) Strategy to provide market-standard trade valuation, position and collateral management, alongside enhanced risk and performance reporting, will aid effective decision-making and reduce key operational and market risks.

  • Performance improvements in financial markets research will be achieved through an expanded and refocused market intelligence function (with increased emphasis on offshore New Zealand dollar [NZD] activity), adding research capabilities in international markets, and increasing connectivity and policy collaboration between wider Bank policy teams.

  • Develop and implement further financial tools and instruments to improve the management of the financial risks to which the Bank is exposed, with specific consideration of whether to set up a stand-alone collateral management desk.

Our performance would be measured by:

Success measures
  • 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.
  • In 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:
  1. the bulk of active foreign exchange purchases (sales) are undertaken around peaks (troughs) in the exchange rate cycle; and

  2. the net return on the non-core open foreign exchange position is positive over the cycle.

Year in review - the Bank's response


What we did – success measures

The Bank has regularly communicated evolving risks in the housing market and dairy sector. The November 2015 FSR discussed the banking system’s progress towards meeting tighter LVR restrictions that were imposed on 1 November. The FSR also provided an analysis of the risks to bank dairy exposures, with a March 2016 Bulletin article providing further information on a stress-test exercise conducted with banks. The May 2016 FSR noted a further re-emergence of housing risks and that the Bank was considering whether further financial policy measures would be necessary to address these risks.

The Bank reviewed the risk indicators used to guide macro-prudential policy decisions, and has been publishing a revised set of these indicators since October 2015. These indicators have been further augmented by new data collections that have been implemented on the debt-to-income ratios of new borrowers and interest-only lending.

The Bank produces and publishes comprehensive statistics on the soundness and efficiency of the financial system. The Bank released several new statistics during the year, providing insights into residential mortgage lending trends and compliance with the LVR restrictions.

What we did – initiatives and strategies

In November 2015 the Bank implemented tighter LVR restrictions for Auckland property investors. The policy improved the resilience of the banking system to a housing downturn by significantly reducing the share of highly leveraged investor loans on their balance sheets. The policy also acted to slow the Auckland housing market temporarily.

The Bank conducted two stress tests of the banking system. The first, in conjunction with the Australian Prudential Regulation Authority, provided the four largest banks with a common scenario to apply in their own internal stress tests. The results of this exercise were published in the May 2016 FSR. The second exercise focused on a specific stress to the dairy sector, and was published in a March 2016 Bulletin article. In addition, the Bank worked with the industry to improve stress-testing practices and published a discussion document on stress-testing methodology in May.

The Bank continues to enhance its reporting on financial system stability. In collaboration with industry we implemented new data collections to improve the understanding of financial system trends:

  • We are quality assuring a comprehensive collection of insurance sector data. A regular publication of insurance sector statistics is expected to commence in 2016–17.

  • We completed the development of a securities database that collates information on all the debt and equity securities issued in the New Zealand market, and statistics will be published from this database in August 2016.

  • We began the final stage of our redevelopment of the banking sector data collection, including bank trials of a draft statistical template. The new collection will focus on improved coverage of bank balance sheet information and enable us to better monitor and report on the health of the banking sector. 

Chart 4: Share of bank mortgage loans at high LVRs


Chart 5 Key

Booms, busts and the way between


The objectives of the macro-financial stability function are:

To promote a sound and efficient financial system that facilitates the effective performance of the economy; to increase the resilience of the domestic financial system and counter instability in the domestic financial system arising from credit, asset price or liquidity shocks; and to analyse and report on the soundness and efficiency of the financial system.

Statement of Intent

In our 2015–2018 Statement of Intent we undertook to deliver the following:

  • A sound and efficient financial system that supports the functioning of the economy.
  • Financial stability, promoted by increased resilience of the domestic financial system and countering instability arising from credit asset price or liquidity conditions, and dampening excessive growth in credit and asset prices.
Initiatives and strategies
  • Explore additional macro-prudential policy options for managing the financial stability implications of housing market cycles.
  • Work with banks to ensure that stress-testing models and processes are robust and central to the banks’ internal risk management.
  • Continue to assess the linkages between monetary and macro-prudential policy to ensure that complementary or opposing effects between the two policy areas are properly taken into account.
  • Continue to enhance the reporting of financial system stability and efficiency, and policy assessments, contained in the FSR and other reports.
  • Review the current suite of financial statistics in consultation with stakeholders to ensure they remain fit for purpose.
  • Complete the implementation of a new data collection for the insurance sector, a new balance sheet data collection for the banking sector, and a new New Zealand securities database.

Our performance would be measured by:

Success measures
  • Significant risks to domestic financial system stability are identified and monitored.
  • Appropriate instruments to counter risks to financial stability are deployed in a timely and effective manner, and any potential impacts on monetary policy are understood.
  • An assessment of the soundness and efficiency of the financial system is published twice yearly in the FSR, including the reasons for, and the impacts of, any use by the Bank of macro-prudential policy instruments.
  • Information on the risk assessment framework, including the macro-prudential indicators that are used to guide policy settings, is published in a manner that assists the assessment of financial stability.
  • Statistics are collected to enable an appraisal of the soundness and efficiency of the financial system, and are published in accordance with the principles and protocols of New Zealand’s Official Statistics System.

Year in review - the Bank's response


What we did – success measures

The prudential oversight of banks, NBDTs, insurance companies and payment systems provides the Bank with early warning indicators of emerging financial distress. During the year, the Bank actively engaged with supervised entities to identify and respond to any emerging stresses.

The Bank continues to supervise entities for Anti-Money Laundering and Countering Financing of Terrorism purposes using a risk-based approach. The entities that represented the highest risk of money laundering and financing of terrorism received closer attention through quarterly meetings and more frequent on-site inspections.

The Bank has been transparent about its policy-making process and has valued stakeholder consultation. As a result of the regulatory stocktake the Bank has committed to consultation periods of 6–10 weeks unless circumstances dictate otherwise. The Reserve Bank will also publish a document to explain its policy-making process in detail.

During the year the Bank issued five new insurance licences and cancelled seven. The total number of licensed insurers reduced to 94 at 30 June 2016. Three out of the 94 insurers remain on provisional licences.

What we did – initiatives and strategies

The Bank maintained a high degree of engagement with the executives and directors of registered banks throughout the year. We will continue to hold regular supervisor engagement meetings at various levels in the banks. These meetings form an important aspect of the Bank’s approach to the supervision of banks.

The Bank completed the regulatory stocktake project. We are now conducting a series of follow-on consultations and are implementing a number of recommendations from the stocktake, to improve the efficiency, clarity and consistency of prudential regimes for banks and NBDTs. One of the key follow-on initiatives is the redevelopment of the Banking Supervision Handbook, which is a collection of documents that describes the regulatory requirements that are applied to registered banks. This will involve drafting a comprehensive ‘Statement of Approach to Policy-Making’ that describes the principles behind our approach. To enhance the efficiency of our disclosure regime we will also consult on the ‘dashboard’ approach to disclosure.

During the third quarter of 2015 we consulted on the recommended legislative changes from the review of the prudential regime for NBDTs. We will continue to work on implementing these legislative changes.

Following two rounds of public consultation, the Bank published a consultation document on the proposed crisis management framework for systemically important financial market infrastructures (SIFMIs). In 2016-17 the Bank will publish the summary of submissions for this proposal, and will seek Cabinet decisions on the proposed new oversight framework for SIFMIs.

The Bank initiated a review of the outsourcing policy that applies to ‘large banks’ (defined as those banks whose New Zealand liabilities, net of amounts due to related parties, exceed $10 billion) following the stocktake of major banks’ outsourcing arrangements. The Bank released a consultation paper on possible revisions to the policy during the second half of 2015 and released a second consultation paper in May 2016. This paper included amendments based on stakeholder feedback, and aimed to provide banks with greater flexibility in achieving the desired policy outcomes. The Bank envisages that the revised policy will be in place in 2017.

The Bank commenced its review of the liquidity policy, which currently applies to all locally incorporated banks. The review followed the finalisation of international standards in the Basel III framework by the Basel Committee on Banking Supervision. The Bank was an early adopter of quantitative prudential liquidity requirements, and its existing framework (introduced in 2010) pre-dates the new international standards. The Bank will be reviewing its policy against the new Basel III requirements to consider the extent, if any, to which it would be appropriate to harmonise with the new international requirements. The Bank will also consider the nature of liquidity disclosure requirements and whether liquidity requirements should apply to banks that operate in New Zealand as branches. The Bank will consult on any proposed changes to its framework arising from the review.

Work is also under way on the Bank’s review of the capital adequacy framework for locally incorporated banks. The review is being undertaken in the context of ongoing reforms of the international capital standards in the Basel III framework, which forms the basis for the Bank’s capital adequacy requirements. The Bank will review its application of the evolving Basel framework, including the scope of internally modelled approaches to capital adequacy and their relationship to the standardised approaches. The timing of the international developments will influence changes to the Bank’s capital framework. The Bank will consult on any proposed changes to its framework arising from the review.

Work continues on amendments to the crisis management powers in the RBNZ Act. The amendments may include: clarifying the legal status of customer payment instructions on a bank’s entry into statutory management; and exemption from criminal or civil liability for bank directors when complying in good faith with a direction from the Reserve Bank.

The Bank continues to develop and implement a structured supervisory framework for the insurance sector. The framework is risk-based with a greater intensity of supervision directed towards those insurers of greatest significance to the purposes of IPSA. Structured risk assessments identify key risks within these insurers. Supervisory action plans set out the Bank’s objectives for the following year. The industry has responded positively to increased interaction with the Bank. To support the implementation of the supervisory framework, the Bank has begun new data collections that provide a range of relevant and timely statistics across the industry. It has also developed a new monitoring system to track the compliance of insurers with regulatory requirements and to assess issues that affect licensed insurers. The Bank has been supportive of efforts by the Financial Markets Authority to explore market conduct issues around the remuneration of advisers. The transfer of insurance business between insurers remains relatively frequent as insurers seek to minimise costs by consolidating or moving business lines that no longer fit their strategies.


The objectives of the prudential supervision function are:

To provide prudential supervision so as to promote a sound and efficient financial system; to limit damage to the system that could arise from institutional failure or other financial system distress; and to contribute to public confidence in the financial system.

Statement of Intent

In our 2015–2018 Statement of Intent we undertook to deliver the following:

  • A sound and efficient financial system that supports the functioning of the economy.
  • International and local confidence in New Zealand’s financial system.
Initiatives and strategies
  • Publish a stress-testing guide with a view to improving the stress-testing practices of New Zealand banks, and continue to develop a comprehensive stress-testing framework for New Zealand banks — a joint initiative with the Macro-Financial department.
  • Complete the regulatory stocktake by consulting on and implementing initial enhancements to improve the efficiency, clarity and targeting of prudential standards for banks and NBDTs, and identifying separate areas for further work.
  • Maintain supervisory engagement with executives and directors of regulated banks.
  • Complete a review of, and consult on, the outsourcing arrangements that currently apply to ‘large banks’.
  • Work closely with banks to ensure timely compliance with new outsourcing requirements.
  • Review the Bank’s existing liquidity policy against finalised international liquidity standards.
  • Review the Bank’s broad suite of capital requirements.
  • Consult on a range of amendments to the statutory management powers in the RBNZ Act to clarify aspects of the legislative framework for the Open Bank Resolution policy.
  • Promote legislative changes recommended by the review of the prudential regime for NBDTs that was completed in 2013.
  • Finalise policy to strengthen the Bank’s oversight of financial market infrastructures.
  • Implement the business-as-usual supervisory framework for licensed insurers.

Our performance would be measured by:

Success measures
  • The bank, NBDT 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 Reserve Bank’s prudential oversight of banks, NBDTs, insurance companies and payment systems identifies emerging financial stresses in a timely manner; and the Bank is prepared, where necessary, to resolve institutional failures effectively in conjunction with the 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 Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) supervisory activities demonstrate an appropriate risk-based approach to supervision of reporting entities within the Bank’s sector.

Year in review - the Bank's response


The settlement system

The Bank provides specialised financial services, mainly to financial institutions. These services comprise operation of ESAS and the operation of the NZClear securities settlement system.

Most major financial institutions have NZD cash accounts with the Bank. These are known as exchange settlement accounts, and they are used by financial institutions to make payments to each other in real time.

ESAS is a designated payment system under the RBNZ Act. It provides legislative backing to the finality of payments effected. This provides certainty to the recipients of those payments, which is important since typically $29 billion or more is paid through this system each day.

One of the account holders in ESAS is the Continuous Linked Settlement Bank (CLS). CLS is an international institution that processes the majority of foreign exchange payments made in major economies. By making payments through CLS, financial institutions can achieve simultaneous settlements of both legs of foreign exchange transactions.

When the CLS service is used, it eliminates settlement risk for foreign exchange transactions — the risk that one party makes a payment to purchase or sell one currency, but the other party fails to meet its obligation to pay the other currency.

NZClear allows buyers and sellers of securities to settle transactions efficiently and securely. The system provides for buyers of NZD-denominated equities and bonds to receive those securities at the same time as payment of cash is made for those purchases. Each transaction is settled individually – there is no netting of obligations.

NZClear also allows financial institutions to make payments of cash to each other. Once a settlement is effected in NZClear, it may not be reversed. NZClear is also a designated settlement system and is subject to joint regulation by the Financial Markets Authority and the Bank’s Prudential Supervision Department. Institutional arrangements are in place to ensure that dealings between the Financial Services Group, which operates both NZClear and ESAS, and the Prudential Supervision Department, occur at arm’s length.

The Bank administers securities on behalf of NZClear system members, with a value totalling more than $220 billion, and each day settlements with a value totalling more than $8 billion are made by members of NZClear. ESAS and NZClear, together with CLS, provide certainty to financial institutions in processing their high-value transactions. This is particularly important during periods of financial instability.

What we did – success measures

Tables 1,2 and 3 set out key statistics for the operation of ESAS and NZClear. NZClear settlement volumes have continued to grow, reflecting continued strong growth in trading volumes on the New Zealand share market. The system was available to users 99.84 percent of core hours, which was under the target of 99.90 percent. System downtime was principally due to one event in April 2016 when the automated delivery of messages from ESAS confirming that settlements of payment instructions had occurred was delayed for two days. The impact of the delay on account holders was limited and there was no need to extend daily processing cut-off times.

In the annual customer survey, users of ESAS and NZClear continued to report very high levels of satisfaction. In 2016 the satisfaction rating was 100 percent (2015: 100 percent).

On the Auditor-General’s behalf, PricewaterhouseCoopers undertakes reviews of the NZClear system, auditing the internal controls for NZClear once each year, and each quarter reviewing the Bank’s securities reconciliation processes for NZClear. Also once each year, the auditor performs an external audit of the internal controls for ESAS. All external audit reports are reviewed by the Bank’s Audit Committee. All opinions expressed by PricewaterhouseCoopers are unqualified and internal controls reports for each system are published on the Bank’s website. Those reports include the results of audit testing of key controls. An annual report for each system is also prepared and is available on the Bank’s website. Improvements designed to enhance the management of risks associated with operating these systems are made on a regular basis, and in particular during the past two years the Bank has made a considerable investment in improving system security. The Bank has also published a self-assessment of ESAS’s compliance with the Principles for Financial Market Infrastructures – international standards promulgated jointly by the Bank for International Settlements’ Committee on Payment and Settlement Systems and the International Organization of Securities Commissions’ Technical Committee.

Table 1

Key ESAS statistics






Average daily transaction volumes






Average daily transaction values






Table 2

Key NZClear statistics






Average daily transaction volumes






Average daily transaction values






Table 3

Key ESAS-NZClear statistics






ESAS-NZClear System availability during core hours





99. 84%

What we did – initiatives and strategies

The Bank has commenced a project to replace the ESAS system. It has contracted with SIA/Perago, a global provider of real-time gross settlement systems, to supply new software. A separate work stream entails the design, implementation and support of new infrastructure. Considerable planning and design work has been completed and implementation effort will commence this coming year.

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 intends to commence contract negotiations for a new system shortly.


The objective of the settlement services function is:

To ensure that payments system infrastructure services support the smooth functioning of the economy, are provided efficiently and reliably, and meet international standards.

Statement of Intent

IIn our 2015–2018 Statement of Intent we undertook to deliver the following:


An efficient, reliable and secure payment system that supports the smooth functioning of the economy.

Initiatives and strategies
  • The Bank will progress the Payment Systems Replacement project involving the procurement and implementation of software to replace the current system used to provide exchange settlement account services, and the potential for securities settlement services to be provided by parties in the private sector, thus allowing the Bank to stop providing the NZClear service.

Our performance would be measured by:

Success measures
  • The availability of ESAS/NZClear during core hours is at least 99.90 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 of ESAS and NZClear.
  • International standards for payment and settlement systems are complied with, subject to variations for local New Zealand conditions.

Year in review - the Bank's response


What we did – success measures

During the year the Bank met all currency orders on schedule and in the denominations requested. The number of counterfeit banknotes in New Zealand remained low by international standards. There were 131 counterfeits (an increase from 111 in the prior year) found in circulation by the Bank, cash-in-transit companies, banks and the New Zealand Police. 

This represented 0.8 counterfeits per million notes in circulation. This was well below the upper limit of 10 per million specified in the success measures.

What we did – initiatives and strategies

A programme of consultation involving banks, equipment manufacturers, retailers and organisations for the visually impaired prepared New Zealand for the release of the Series 7 Brighter Money banknotes. The $5 and $10 banknotes were first issued in October 2015 followed by the $20, $50 and $100 in May 2016. A public awareness and education campaign accompanied each release utilising print, radio, social and online media.

In April the $5 banknote was named Banknote of the Year in a prestigious international competition run by the International Bank Note Society. The annual award recognises outstanding achievement in the design, technical sophistication and security of a banknote or banknote series.

The project to upgrade New Zealand’s banknotes concluded on time and under budget, delivering innovative new banknotes incorporating some of the world’s most advanced security features and beautifully showcasing New Zealand’s history, culture and heritage.

A review of New Zealand’s currency operating model and supporting infrastructure will recommence in the 2016–17 financial year, once the Brighter Money project has been formally closed.

Chart 5: Banknotes in circulation


chart 7 key

Chart 6: Value of notes in circulation


Chart 8 Key

What is money?


The objective of the currency function is:

To meet the currency needs of the public by ensuring, as the sole issuer of currency, the supply and integrity of banknotes and coins.

Statement of Intent

In our 2015–2018 Statement of Intent we undertook to deliver the following:


Legal tender that meets the currency needs of the public.

Initiatives and strategies
  • Continue to plan for the release and distribution of the new banknote series.
  • Communicate and engage with stakeholders on the release of the Series 7 banknotes.
  • Undertake a review of the currency operating model and supporting infrastructure to ensure that the currency needs of New Zealanders will be met in the future.
  • Consult and collaborate with key stakeholders during 2015–16 to ensure that the review’s recommendations are understood and supported.

Our performance would be measured by:

Success measures
  • 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.
  • Stakeholders are well informed and prepared for the introduction of Series 7 banknotes.
  • Currency is available to the public to meet planned and unplanned demand.

Year in review - the Bank's response


People and culture

The Bank is transforming its operations and capabilities  in response to a tighter five-year funding envelope and significant business demands. Changes are underpinned by the principles of continual improvement, collaboration, leadership and engagement, and are aligned with the Bank’s vision of being the best small central bank. The success of the change programme will be observed through business results, staff engagement and financial performance. The Bank continues to engage with staff on ways they can contribute to positive change, and the Bank is committed to continuing to improve and measure its performance culture. The Bank’s vision requires excellence in its people, processes and resources and the quality of management is a critical factor in strengthening the Bank’s performance. 

The Bank has continued building leadership and management competencies through specific development programmes for managers and emerging leaders and staff have structured training and development opportunities. A high level of staff engagement is a key indicator of a high-performing organisation. An annual survey measures the level of staff engagement with the Bank. The overall engagement index has been stable to slightly improving since 2013. The Bank will continue to focus on keeping staff well connected, providing growth opportunities, and recognising performance and contribution. The link between performance and reward will continue to be strengthened through using the Bank’s high-performance framework to encourage appropriate competencies and behaviours.

Health and safety policy and management systems were reviewed and changes implemented to ensure compliance with the new Health and Safety at Work Act 2015. The Bank will continue to embed these changes and encourage excellence in health and safety risk management by all colleagues through the Bank’s enterprise risk management framework.



The Reserve Bank spent $32 million on personnel in 2015–16. This included all forms of remuneration, direct expenditure on training, and redundancy payments. Table 4 shows the number of staff who received over $100,000 in total remuneration5, in bands of $10,000.

Non-executive directors’ remuneration & meeting attendance

Non-executive directors’ remuneration consists of directors’ fees. Directors’ fees represent consideration for services provided to the Bank for acting as directors of the Bank. Certain non-executive directors receive additional remuneration due to their involvement in the Board’s Audit Committee or for special duties including MPS and FSR reviews. All remuneration paid to non-executive directors is included in the following table. There are no fees paid to the Governor, who is an executive director of the Bank.

Table: 4: Remuneration in 2015-16

Total remuneration

Staff numbers 2016

100,000 to 109,999


110,000 to 119,999


120,000 to 129,999


130,000 to 139,999


140,000 to 149,999


150,000 to 159,999


160,000 to 169,999


170,000 to 179,999


180,000 to 189,999


190,000 to 199,999


200,000 to 209,999


210,000 to 219,999


220,000 to 229,999


240,000 to 249,999


260,000 to 269,999


290,000 to 299,999


310,000 to 319,999


320,000 to 329,999


340,000 to 349,999


430,000 to 439,999


490,000 to 499,999


550,000 to 559,999


660,000 to 669,999


Total staff receiving $100,000 or more


Table: 5: Non-executive directors





Non-executive directors 




R Carr (Chair)




K Taylor (Deputy Chair)




N Quigley




K Vautier




J Ross




B Coates




T Simpson




Total non-executive
directors’ remuneration



Table 6

Human resource statistics7








Total staff at 30 June (FTE)








Average years of service at 30 June








Annual staff turnover








5. Total remuneration includes the annual cost to the Reserve Bank of all elements of contracted remuneration (salaries, any benefits provided, fringe benefit tax, superannuation), plus any bonuses and redundancy payments. The information in table 4 sets out the amount unconditionally earned during the financial year. The remuneration of the Governor is set by the Minister of Finance, having regard to the recommendation of the Board's non-executive directors, who also determine the remuneration of the Deputy Governors. The Bank's remuneration policy is to pay all staff on the basis of performance on the job, while having regard to prevailing market conditions based on salary surveys and assessments made by an independent remuneration consultant.

6. These figures represent the cost to the Bank of directors' fees. Where fees are paid to a director who supplies services through a GST-registered entity, a portion of the GST paid by the Bank is unable to be recovered from Inland Revenue because of the Bank's status as a financial institution providing exempt supplies.

7. Full-Time Equivalent numbers do not include vacancies at 30 June. Underlying variations between the years 2010 and 2016 are due to the establishment of the Auckland office in 2011 and restructuring in 2015.

Insurance and indemnity arrangement

Section 179 of the RBNZ Act provides that every officer, employee and director of the Bank is not personally liable for acts done or omitted to be done in the exercise or performance in good faith of that person’s functions, duties or powers under the Act.

Under section 179A of the Act, the Crown provides an indemnity to every officer, employee and director of the Bank and certain other persons for any liability arising as a result of their exercising or failing to exercise any power conferred under the Act, unless the exercise or failure to exercise the power was in bad faith.

The Bank also provides income protection insurance to specified senior executives. For other staff, it provides insurance that extends the cover available from the Accident Compensation Corporation for work-related accidents.


The Communications department continued to support the Bank’s strategic priority of communicating on a broader front, guided by insights from the Bank’s extensive external stakeholder engagement survey in 2014–15 and ongoing monitoring of stakeholder relationships.

The Bank is using an increasing range of channels and forums to extend engagement, accessibility, relevance and dialogue with our key stakeholders, and encourage a deeper understanding of our roles and policies. We published the Bank’s statutory accountability documents, the MPS and FSR, which are subject to hearings by Finance and Expenditure Committee. We facilitated six press conferences, issued 61 news releases, and delivered 118 presentations explaining the Bank’s thinking about a range of topics, including the economy, monetary policy and financial stability. We published 13 Bulletin articles in addition to 10 Analytical Notes and 12 Discussion Papers. We held more than a dozen briefings for media, political and industry stakeholders to share our thinking and aid their understanding of our policies.

The Bank ceased media and analyst lock-ups following a leak of the March OCR by MediaWorks. We continue to hold post-announcement media briefings, which are live-streamed to viewers worldwide.

A nationwide public awareness and education campaign, to coincide with the release of the new Series 7 Brighter Money banknotes in October 2015 and May 2016, provided a unique opportunity for the Bank to connect with a very wide range of stakeholders. The nationwide campaign involved print, broadcast, digital and social media.

As well as responding to more than 1,200 public and media enquiries, the Communications team facilitated responses to more than 60 Official Information Act requests. Many of these responses were published on the Bank’s website to further aid public understanding and transparency. In response to a marked growth in requests requiring considerable research, collation and review, the Bank established a policy on when it will charge for responses to Official Information Act requests. Since the policy was introduced in January 2016, the Bank has sought charges for two complex requests involving very large amounts of information. For the two requests where the bank sought charges, one request was withdrawn and the other was closed when the information became available through Archives New Zealand.

A new online format for the Bank’s Monetary Policy Challenge made the competition more accessible to schools all over New Zealand. More than 200 secondary school students and teachers were involved in the annual competition, which encourages students to assess the economic conditions and decide an appropriate setting for the OCR. The competition was won by King’s College in Auckland, with Waikato Diocesan School for Girls placed second, and Taupo-nui-a-Tia College third.

The Reserve Bank Museum and Education Centre was visited by 11,182 people during the year. New interactive touchscreen displays received positive feedback, further enhancing the Bank’s literacy outreach programme targeting school students from Years 6 to 13.

Internal financial services

Knowledge services

In 2015–16 we continued to enhance the systems and processes needed to manage the Bank’s complex balance sheet and support the Bank’s operations.

We commenced implementation of the Numerix system, which will provide additional functionality for the Bank’s dealers and for the middle office. A number of enhancements were made to our core treasury system, including more streamlined deal capture and improved market data management and collateral management processes.

We completed an upgrade to the financial management information system software in December 2015.

The Knowledge Services department supported a number of the Bank’s strategic priorities, including reducing enterprise risk and strengthening our performance. In addition to this, the department continued to deliver an IT infrastructure that provides a high level of uninterrupted service, functionality and security.

A considered approach to hardware and software asset management resulted in the Bank’s back-end financial systems being upgraded during the year, along with the web content management system that underpins the Bank’s website. Stakeholder feedback on the Bank’s web presence remained favourable.

The Bank’s enterprise risk management framework supported the strengthening of our IT security infrastructure and the ongoing development of security assessment practices. The Bank reviewed its practices against the protective security requirements and undertook a number of security reviews.

Innovative new systems such as the Repository of Securities and Insurance Supervisory Portal continued to drive operational efficiency and improve the integrity and security of information consumed by both internal and external stakeholders. This efficiency focus continued with the Bank’s ITIL-based IT Services Management Transformation programme, which we expect to continue delivering efficient and consistent technology services.

The department will continue to support the delivery of the Bank’s strategic priorities, including the replacement of the core payments system and modernisation of our treasury systems, thereby future proofing these systems for the foreseeable future.

Risk assessment and assurance

The Risk Assessment and Assurance department continued to ensure that enterprise risk management practices were adopted across the Bank, so that the Bank manages risks in a proactive, coordinated, prioritised and efficient manner.

The internal audit plan, developed at the outset of the year, provided comprehensive assurance over the control frameworks that manage key risks. This was undertaken as planned, and any material issues were reported to management, the Audit Committee and the Board.

The Bank continued to make extensive use of services provided by in-house legal counsel in support of all its functions. The legal function provided legal services across a broad range of legal matters of a regulatory, operational and commercial nature.


The Bank owns its building in Wellington, and maintains business continuity services by leasing a small office in Auckland and domestic and offshore facilities for banknote and coin reserves. The Bank also manages security operations to ensure it has secure and appropriate accommodation at all sites. A significant programme to prepare the Bank’s property and security for the new Brighter Money banknote series was concluded during the year. A building occupancy programme was commenced to enhance the utilisation of floor space within the building.

International activities

The Bank continued its regular engagement with a wide range of international organisations, including central banks, prudential regulators and international financial institutions.

The Bank engaged frequently with other central banks and prudential regulators on a range of issues and work streams. The Bank collaborated closely with the Australian Prudential Regulation Authority including on bank stress-testing exercises and other home-host supervisory matters.

Through its involvement in the EMEAP group of central banks and monetary authorities, the Bank collaborates on key economic and financial issues affecting the region. In 2015–16 Deputy Governor Grant Spencer chaired several EMEAP committees. During this period EMEAP agreed to changes to the bond funds it uses to develop local currency bond markets in the region, and also considered how to enhance the contribution of its bond fund to the further development of the region’s bond market. The Bank hosted the 30th annual meeting of Governors of South Pacific central banks in Wellington in December 2015.

The International Monetary Fund (IMF) will undertake a comprehensive review of New Zealand’s financial system in the second half of 2016, under the auspices of the Financial Sector Assessment Programme (FSAP). The publication of the IMF’s findings and recommendations is expected in early 2017. New Zealand authorities have been preparing for the FSAP since September 2015, with the Bank coordinating work on behalf of key agencies including the Financial Markets Authority, the Ministry for Business, Innovation and Employment, and the Treasury. The review will focus primarily on the quality of the regulatory framework for both prudential supervision and market conduct. The last New Zealand FSAP took place in 2003–04.