reserve bank of new zealand statement of intent - rbnz.govt.nz of intent... · 2 reserve bank of...

1Reserve Bank of New Zealand: Statement of Intent

Reserve Bank of New Zealand Statement of Intent For the period 1 July 2013 to 30 June 2016

Contents

What we do 2SOIGovernanceOrganisational Structure

Strategic direction 4Vision and valuesGoal, Outcomes, Functions, Success measures

Environmental setting and strategic priorities 8Reserve Bank strategic priorities for 2013–16 9

Functions – Initiatives Monetary policy formulation 12 Financial market operations 14 Macro-financialstability 16 Prudential supervision 18 Settlement services 20 Currency operations 21

Operations–EnablingtheBank 23

Financial management 25

ISSN 1175-6786Copyright © Reserve Bank of New Zealand 2013

2 Reserve Bank of New Zealand: Statement of Intent

What we doTheReserveBankofNewZealandisthenation’scentralbank.ACrownagency,theBankexercises

powersacrossthefinancialsectorthatarederivedfromseveralpiecesoflegislation:

• TheReserveBankofNewZealandAct1989

• TheInsurance(PrudentialSupervision)Act2010

• TheAnti-MoneyLaunderingandCounteringFinancingofTerrorismAct2009

• TheBillsofExchangeAct1908andChequesAct1960.

TheseActscanbeviewedelectronicallyon theNewZealandLegislationwebsite.Regulationsmade

undertheseActscanbeviewedonthesamesite.

SOIUndersection162AoftheReserveBankofNewZealandAct1989(theAct),theReserveBankmust

provide to the Minister a Statement of Intent(SOI)forthatfinancialyearandatleastthenexttwofinancial

years.ThisSOIcoversthethreeyearsoftheFundingAgreement2013-14–2015-16.

The SOItraversesthreeyearsandissetinthecontextoftheBank’slonger-termplanningandfunding.

The Bank is funded through a five-year funding agreement between the Governor and the Minister of

Finance,whichisratifiedbyParliament.ThefundingagreementspecifieshowmuchoftheBank’sincome

canberetainedbytheBanktomeetitsoperatingcosts.

Governance TheReserveBankActprovidesconsiderableday-to-dayoperationalautonomytotheBank,animportant

role for theMinisterofFinance insomekeydecisions,andarobustaccountabilitystructure inwhichthe

Bank’sBoard, theMinister,andParliament(viatheFinanceandExpenditureCommittee)allhaveformal

roles.Transparencyisanimportantfeatureoftheoverallframework.ForadescriptionofhowtheBank’s

performance is monitored, see the Bank’s Statement of Intent 2012-2015,pages33-35.

The MinisterTheMinisterofFinancehasresponsibilityfor:agreeingwiththeGovernoronthemonetarypolicytarget;

agreeingonchangestothescopeofthesupervisoryregime;approvalofanydecisiontoplaceafailingbank

intostatutorymanagementortogivedirectionstoaregisteredbank;andapprovalofOrders-in-Councilin

relationtobank,non-bankdeposittakerandinsuranceregulation.TheMinistercanalsodirecttheBankto

interveneintheforeignexchangemarketortoimpose,foralimitedperiod,analternativemonetarypolicy

target.Inthesecases,transparentproceduresaresetoutintheAct.

Board of DirectorsThe Reserve Bank has a Board of Directors whose primary function is to review the performance of the

GovernorandtheBank.TheBoardholdsregularmeetingsatwhichitreceivesextensivebriefingsonthe

Bank’sactivities,decisionsandpolicies.Atthesemeetings,theBoardalsoprovidesadvicetotheGovernor

onarangeofBankfunctions.

http://www.legislation.govt.nz/


TheBoard,throughitsAuditCommittee,reviewstheBank’sfinancialstatementsandinternalandexternal

auditactivity.Eachyear,theBoardwritesanassessmentoftheBank’sandtheGovernor’sperformance,

whichisprovidedasadvicetotheMinisterofFinanceandmadepubliclaterintheBank’sAnnual Report.

Whenrequired,theBoardmakesrecommendationstotheMinisterontheappointmentorreappointment

of theGovernor.TheMinistercanonlyappointaGovernor recommendedby theBoard.TheBoardcan

recommend to the Minister that the Governor be dismissed if the Board believes that the Governor’s

performanceorconducthasbeeninadequateorinappropriateinanyoneofvariousrespects.TheBoard

appointstheDeputyGovernorontheGovernor’srecommendation.

TheBoardtypicallymeetsninetimesayear,withprovisionforadditionalmeetings.Fourofthemeetings

take place outsideWellington.At the time ofwriting, theBoard has seven non-executive directors.The

currentBoardmembersareDrArthurGrimes (Chair);MsSueSheldonCNZM (DeputyChair);MrKeith

Taylor(ChairoftheBoard’sAuditCommittee);DrRodCarr;DrChrisEichbaum;ProfessorNeilQuigley;Ms

KerrinVautierCMG;andMrGraemeWheeler(Governor).Boardmembersareappointedforfive-yearterms

andareeligibleforreappointment.Twovacancieswillrequirefillingin2013,followingthedecisionsbyDr

Grimestostepdownafterservingjustover11years,andDrEichbaumnottoseekanotherterm.

Organisational structure

Graeme WheelerGovernor

Geoff Bascand Deputy Governor

& Head of Operations

John McDermottAssistant Governor

& Head of Economics

Grant SpencerDeputy Governor & Head

of Financial Stability

Bernard HodgettsHead of

MacroFinancial Stability

Steve GordonHead of Risk

Assessment & Assurance

Toby FiennesHead of

Prudential Supervision

Mark PerryHead of Financial Markets

Mike WolyncewiczChief Financial Officer

Brian HayrHead of Currency,

Property and Security

Mike HannahHead of Communications

Board Secretary

Lindsay JenkinHead of Human Resources

Tanya HarrisChief Information Officer


Strategic directionVision and Values

The Reserve Bank’s vision is to promote a sound and dynamicmonetary and financial system. It

endeavourstoachievethisvisionbybeingahighperformingsmallcentralbank,withvaluesof:

Integrity–Beingprofessionalandexercisingsoundjudgement

Innovation–Activelyimprovingwhatwedo

Inclusion–WorkingtogetherforamoreeffectiveBank.

The Bank seeks to achieve its vision by developing and implementing highly effective and efficient

monetary,regulatory,andfinancialpoliciesthatarewellsuitedfortheNewZealandeconomyandfinancial

system.TheBankendeavourstoensurethatitsobjectivesandprioritiesaresoundandwellcommunicated

andunderstood,itsbusinessoperationsarewellmanaged,anditinvestswiselyintherecruitment,training,

developmentandretentionofitsstaff.Italsoinvestsheavilyinreviewingandtestingitspolicyframeworks

andpolicysettingsinlightofdomesticandinternationalexperience,andwillensurethatitsindependenceis

balancedbyappropriatepublicdisclosureandaccountability.

OutcomesTheBankcontributestotheGovernment’sgoalofimproving New Zealand’s economic performanceby

targetingthreeoutcomes.ThesearedesignedtofosterconfidenceandstabilityinNewZealand’sfinancial

systemby:

• Maintainingstabilityinthegenerallevelofprices

• Maintainingasoundandefficientfinancialsystem

• Providinglegaltendertomeetthecurrencyneedsofthepublic.

Toachievetheseoutcomes,theBankperformsfunctionscovering:

• Monetarypolicyformulation

• Financialmarketoperations

• Macro-financialstability

• Prudentialsupervision

• Settlementservices

• Currencyoperations.

These functions, the linksbetween them through theoutcomes targeted,and themeasuresused to

evaluateperformance,areshowninthefollowingtables.


The

Res

erve

Ban

k - G

oal,

Out

com

es, F

unct

ions

and

Ope

ratio

ns

Goa

l

Out

com

es

Soun

d an

d ef

ficie

nt fi

nanc

ial s

yste

m

Pric

e st

abili

ty

Lega

l ten

der m

eets

cu

rren

cy n

eeds

of t

he

publ

ic

Func

tions

C

urre

ncy

Ope

ratio

ns

Mon

etar

y Po

licy

Form

ulat

ion

Mac

ro-F

inan

cial

St

abili

ty

Prud

entia

l Su

perv

isio

n Se

ttlem

ent

Serv

ices

Fi

nanc

ial M

arke

t O

pera

tions

Ope

ratio

ns

Hum

an R

esou

rces

– K

now

ledg

e Se

rvic

es –

Fin

anci

al S

ervi

ces

– C

omm

unic

atio

ns –

Ris

k A

sses

smen

t & A

ssur

ance

– P

rope

rty

& S

ecur

ity

Impr

oved

Eco

nom

ic P

erfo

rman

ce


Goal, Organisational outcomes, Functions, Functional outcomes, Success measures

IMPR

OVE

D E

CO

NO

MIC

PER

FOR

MA

NC

E

PRIC

E ST

AB

ILIT

Y M

AIN

TAIN

ED

FUNCTION FUNCTIONAL OUTCOMES SUCCESS MEASURES

Monetary

Policy Formulation

• Stability in the general level of prices

Monetary Policy Formulation • Reserve Bank forecasts of annual CPI inflation should be comfortably within the target range in the

second half of the forecast horizon, and near the 2 percent target midpoint. • Measures of underlying inflation should generally remain within the target range. • Unnecessary instability in output, interest rates and the exchange rate should be avoided. • Monetary Policy Statements are informative and accurately assess the Bank’s performance in meeting

the objectives of the Policy Targets Agreement.

Financial Markets

• Adequate banking system liquidity

• Short-term interest rates consistent with monetary policy • Confidence in the efficient functioning of New Zealand financial markets • Foreign reserves available for efficient foreign exchange intervention and crisis

management.

Financial Markets • Short-term wholesale interest rates are maintained at levels close to the OCR. • No evidence of payment disruptions due to a shortage of settlement cash in the system, e.g., persistent

accessing of the Overnight Reverse Repo Facility. • Over the medium term, domestic market operations generate a positive return. • Foreign reserves are maintained at target levels, with liquidity and credit standards met throughout. • The Foreign Reserves Management portfolio yields a net return on assets that meets or exceeds the

benchmark portfolio. • The foreign exchange open position is managed such that:

a. the bulk of active foreign exchange purchases (sales) are undertaken around peaks (troughs) in the exchange rate cycle; and

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

SOU

ND

AN

D E

FFIC

IEN

T FI

NA

NC

IAL

SYST

EM

MA

INTA

INED

Macro-Financial Stability

Macro-Financial Stability • Financial stability, promoted by:

- increased resilience of the financial system during periods of extreme credit growth and rising leverage or abundant liquidity; and

- dampening of excessive growth in credit and asset prices.

• A sound and efficient financial system that supports the functioning of the economy.

• International and local confidence in

New Zealand’s financial system.

Settlement Services • An efficient, reliable and secure payments

system that supports the smooth functioning of the economy

• The Bank maintains, publishes and monitors a comprehensive set of indicators to assess vulnerability and stress in the financial system.

• Any measures taken to reduce financial system risks, including the use of macro-prudential instruments, are explained in the FSR, and their net benefits for financial system stability are assessed.

• All statistics are published in accordance with the dates published six months in advance on the RBNZ website.

• Statistics are relevant and meet international standards.


• The bank, non-bank deposit taker and insurance regulatory regimes, and in particular the regulatory changes implemented during the year, promote the soundness and efficiency of the financial system in a cost-effective manner, as demonstrated by sound regulatory impact analysis.

• The prudential oversight function for banks, non-bank deposit takers, insurance companies and payment systems shows: vigilance in its monitoring activities; it is capable of identifying emerging financial stresses in a timely manner; and it is prepared, where necessary, to effectively resolve institutional failures in conjunction with government.

• The Bank demonstrates a consultative and transparent approach to its policy development, supported by robust analysis that is understood by regulated institutions and stakeholders.

• In its decisions on whether to grant licences to new applicants, the Bank takes a consistent approach within the legislative framework, without successful challenges.

• The Bank’s AML/CFT supervisory activities demonstrate an appropriate risk-based approach to supervision of reporting entities within the Bank’s sector.

• The FSRs provide a comprehensive assessment of the health of the New Zealand financial system.

Settlement Services

• Availability of ESAS/NZClear during core hours is at least 99.95 percent, as measured over a year. • Customer satisfaction with operations and with system development is demonstrated through an annual

customer survey in which an approval level of 90 percent or more is achieved. • All risks are well managed, as demonstrated by external audits for ESAS and NZClear. • International standards for payment and settlement systems (CPSS and IOSCO) are complied with,

subject to variations for local New Zealand conditions.

CU

RR

ENC

Y N

EED

S O

F TH

E PU

BLI

C A

RE

MET

Currency Operations

• Legal tender that meets the currency needs of the public

• All orders for notes and coins from banks that meet the Reserve Bank’s guidelines are supplied within agreed times.

• Notes and coins in general circulation are of a good quality as indicated by surveys of the condition of currency in circulation.

• The number of counterfeit notes in circulation should be fewer than 10 per million notes in circulation. • The business continuity exercise planned by the Senior Management Group for 2013 will incorporate

currency distribution from contingency reserves.


Environmental setting and strategic prioritiesDespite continued strains in Europe and disappointing growth in many of the advanced economies,

globalfinancialmarketsentimenthasimproved.Themedium-termoutlookforNewZealand’stradingpartner

GDPgrowthremainsfirm.RecentIMFforecastssuggestthatgrowthintheglobaleconomywillaccelerate

in2014.

TheNewZealandeconomyhasbeengrowingmorerapidlythanmanyotheradvancedeconomies,but

alsofacesseveralchallenges.TheelevatedNewZealanddollarisdampeningcompetitivenessintheexport

and import-competing sectors, and farming has been adversely affected by drought. Government fiscal

consolidationcanbeexpectedtoaffectdemand.

TheChristchurchrebuildwillhavepronouncedeffectsontheNewZealandeconomyforseveralyears,

andthescaleandpaceofreconstructionandtheconsequencesforgrowthandinflationwillrequirecareful

monitoring.

Atthesametime,householdsandpartsofthefarmingsectorremainhighlyleveraged,privatesector

creditgrowthhasbeguntoincrease,andhousepricesarerisingstronglyinAucklandandCanterbury.

Theseconditionshaveheightenedriskstothebalancesheetsofhouseholds,banks,non-bankdeposit

takers,andinsurers,andpointtoincreasingriskstofinancialstabilityinNewZealand.

Overall,however,thebankingsystemiswellcapitalised.GiventheAustraliandominanceofownership

ofNewZealandbanks,andtheirimportance,albeitalesserone,inownershipoftheinsuranceindustry,the

ReserveBankmaintainsacloserelationshipwithAPRA,theAustralianPrudentialRegulatoryAuthority.In

addition,regulardiscussionstakeplaceintheTrans-TasmanBankingCouncil.

Strategic prioritiesThe Bank has adopted 10 strategic priorities for 2013-16 to enhance its capacity to respond to this

challengingenvironment.Manyofthesestrategicprioritiesrunacrossseveralfunctionsanddepartments.

Describedinmoredetailonpages8-10,theyhavethreekeyobjectives:

• ContinuingtostrengthentheBank’sperformance

• DevelopingamoreintegratedBankapproachtotheBank’spolicy

• Improvinginfrastructureandreducingenterpriserisk.

Informing GovernmentThe Bank keeps the Minister of Finance regularly informed about its thinking on significant policy

developments, especially where Cabinet decisions and legislationmay be required. This includes early

notificationoftheBank’sthinkingonregulatoryandrelatedpolicydevelopmentsandanycaseswherethe

Ministermayneed toexercisehispowers.TheBankalsoadviseson the regulatory impactofproposed

policydevelopments.

In terms of the 2013-16 SOI,thiswouldincludeinformationon:

• NewZealand’skeyeconomicissues,especiallythedriversandimpactsofthepersistentlyhighexchange

rate,andimprovingtheBank’smeasurementandunderstandingofNewZealand’ssavingbehaviour;

• measurestomitigatecontingentgovernmentliabilities,suchascouldarisefromthebankingsector;

• ongoingmacro-prudentialarrangements,especiallyastheymightaffectthehousingsector;and

• insurance sector supervision and the wider prudential regime, including the review of prudential

supervisionregimefornon-bankdeposittakers.


Reserve Bank strategic priorities for 2013-16I. Continuing to strengthen the RBNZ’s performance

Priority Explanation 1. Strengthening the

support for decision making in the Bank

2. Continuing to improve performance culture

3. Communicating on abroaderfront

AcommitteecomprisingthefourGovernorsoftheRBNZunderthechairmanshipoftheGovernorhasbeenestablished.Thecommittee will assist the Governor in all major monetary, regulatoryandfinancialpolicydecisionsthatfallundertheRBNZresponsibilities.TherationaleforthecommitteeliesinthebroadrangeofresponsibilitiesoftheBank,theextensiveworkprogrammeunderwayonfinancialstability,thebenefitsofdecisionmakingthrough a committee structure, and the use of similar decision-makingbodiesinseveralcentralbanks.TheGovernorisresponsibleandaccountableforalldecisionsmadebythecommittee.

The Senior Management Group will continue to make all important managementdecisions.ThreenewmemberswilljointheOfficialCashRateAdvisoryGroup,whichwillberenamedtheMonetaryPolicyCommittee.

ThequalityoftheBank’smanagementisacriticalfactorincontinuingtostrengthentheBank’sperformance.Well-definedcorecompetencieswillbeestablishedforeachmanagerialcategoryandgreateremphasiswillbeplacedupondevelopingleadershipandmanagerialskills,andrewardingstrongmanagerialperformance.Similarly,therewillbegreaterdifferentiationincompensationforperformanceinthetechnicalstreams.Thetermsofreferenceandperformanceofcommitteeswillbereviewedtoimprovetheeffectiveness of the committees, and an annual review of staff developmentplansandworkforceplanswillbeintroducedtodeterminetheirconsistencywiththeBank’sstrategy.

To enhance understanding of the Bank’s policy choices in a challengingeconomicenvironment,theBankwillbeaproactivecommunicator,explainingitsroles,andwhatitcanandcannotbeexpectedtodo,inmonetarypolicy,prudentialsupervision,macro-prudentialpolicyandotherfunctions.Itwillinformpublicunderstanding through a focused programme, using a wider range ofmediatokeyaudiences.TheBankwillusemorespeakersanddeliver more on-the-record speeches, while off-the-record speeches willbefewer,butmoretargeted.


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

Priority Explanation 4. Establishinganew

Macro-Financial Department

5. Developing the Macro-Prudential Policy framework

6. Understanding the monetary policy / macro-prudential interface

7. Implementing a sound and comprehensive prudential regulatory regime

Consistentwiththegrowingemphasisonmacro-financialstability,theBankrecentlysignedaMemorandumofAgreementonMacro-PrudentialPolicywiththeMinisterofFinance.TheMOUprovidesgovernance arrangements for the use of macro-prudential tools thataredesignedtopromotegreaterfinancialsystemstability.TheBankhasestablishedanewMacro-FinancialDepartment,basedonthemacro-financialanalysissection,currentlywithintheFinancial Markets Department, and drawing in the Statistics Unit fromtheEconomicsDepartment.ThenewdepartmentwillplayanimportantroleinoverseeingthestabilityofNewZealand’smacro-financialsystem,andwilldesignandimplementmacro-prudentialinstruments.Itwillcollectanddisseminatefinancialstatistics,andundertake analysis and research in support of the Bank’s macro-prudentialpolicyfunction.ThedepartmentwillberesponsibleforcoordinatingtheproductionoftheBank’ssix-monthlyFinancialStabilityReport.ItwillhavecloselinkstotheBank’sotherpolicydepartmentsandwillreporttotheHeadofFinancialStability.

The Bank’s initial framework for the implementation of macro-prudentialpolicywasreleasedforpublicconsultationinMarch2013.Furtherworkwillbeneededtooperationalisethisframeworkinthelightofon-goinganalysisandexperienceinmacro-prudentialimplementation.ThisworkwillbeledbytheMacro-FinancialCommittee and the new Macro-Financial Department, with contributionsfromEconomics,FinancialMarketsDepartmentandPrudentialSupervisionDepartment.

TheBankwillexpanditsresearchaimedatbetterunderstandingthelinksbetweenmonetaryandfinancialstabilitypolicies,andthe implications for decision making across these two main policy functions.ThiswillbeajointinitiativeledbytheEconomicsDepartment,withcontributionsfromtheMacro-FinancialDepartment, Financial Markets Department and Prudential SupervisionDepartment.

The Bank is progressing towards its goal of delivering a modern, efficientandcomprehensiveprudentialregulatoryregimeacrossallthesectorsforwhichitisresponsible.Thefollowinginitiativesover2013-16willmovetheBanksignificantlytowardsthatend-point:Open Bank Resolution, licensing of insurance companies, and thelicensingandreviewofnon-bankdeposittakers.Inaddition,the Bank will complete a fundamental review of the legislative framework for the payments and settlement system regulation, undertakeanti-moneylaunderingon-sitevisitstoanumberofentities,includingthoseidentifiedaspotentially“high-risk”,andimplement a supervisory monitoring framework for the insurance sectorpost-licensing.


III. Improving infrastructure and reducing enterprise risk

Priority Explanation 8. Further developing

operational systems

9. Strengtheningbusinesscontinuity

10. Re-examiningCurrency,Property and Security

The Bank will continue its investment in systems architecture andcontractstoensureamorerobustoperatingenvironment,reduce potential reputational risk, and develop new products and instruments.Prioritiesontheportfoliosidewillincludeimplementingtwo-way collateral for swaps, improving end-of-day processes andprioritisedbusinessimprovementproposals.Inaddition,enhancementswillbeundertakenontheFINDURtreasurysystem,financialmanagementsystems,andthepaymentssystems.

TheBankwillcontinuetestingandenhancingitsbusinesscontinuityresilience.Towardstheendof2013,theSeniorManagementGroupexpectstoundertakeacomprehensivebusinesscontinuityexerciserelatingtoasignificantregionalevent.Theexercisescenariowillplacestressonthepaymentssystem,financialmarketsandstaff.ItisintendedthattheexercisewillactivatetheAucklandofficeasheadoffice,andinvolvetheBank’sBoard,theTreasury,theMinisterofFinance’sofficeandotherkeystakeholders.

The Bank will take a fresh look at all aspects of the operations of the Currency,PropertyandSecurityDepartment.ThiswillincludetheBank’s procedures and controls around its currency management, and the management of its property assets, and the security arrangements.TheBanknoteupgraderemainsanimportantpriority.


Price stability

Refer to Strategic Priorities:

I. ContinuingtostrengthentheRBNZ’sperformance

1. StrengtheningthesupportfordecisionmakingintheBank

3. Communicatingonabroaderfront

II. DevelopingamoreintegratedapproachtotheBank’spolicy

5. DevelopingtheMacro-PrudentialPolicyframework

6. Understandingthemonetarypolicy/macro-prudentialinterface

Monetary policy formulation

Objective

Toachieveandmaintainstabilityinthegenerallevelofprices.

APolicyTargetsAgreement(PTA)specifiesthemonetarypolicytargetagreedbytheGovernorandthe

MinisterofFinance.ThecurrentPTArequiresthattheBank“keepfutureCPIinflationoutcomesbetween1

and3percentonaverageoverthemediumterm,withafocusonkeepingfutureaverageinflationnearthe2

percenttargetmidpoint”.Italsorequiresthat:“Inpursuingitspricestabilityobjective,theBankshall...seek

toavoidunnecessaryinstabilityinoutput,interestratesandtheexchangerate.”

Scope of operations

Tomeet thisobjective, theBankundertakes researchandanalysisofmacro-economicconditions to

enableitto:

• SetanOfficialCashRate(OCR)eighttimesayear,orasrequired,withtheaimofkeepinginflationwithin

thetargetband.

• PublishthequarterlyMonetary Policy Statements (MPSs)atthesametimeasfouroftheOCRdecisions.

The MPSssetouttheBank’sviewsontheeconomyandinflationarypressures,andthebasisforthe

OCRdecision.

• AnnouncetheotherfourOCRdecisionsaboutsixweeksaftereachMPS.

• Whereappropriateandfeasible,interveneintheforeignexchangemarkettoinfluencethelevelofthe

exchangerate,consistentwiththeobjectivesofthePTA.


Environment and policy issues

Whileeconomicgrowthhasstrengthenedrecently,underpinnedbyconstructionandhouseholdsector

activity, the economy continues to face some near-term headwinds, including the high New Zealand dollar,

thedrought,andongoingfiscalconsolidation.AnnualCPI inflation iscurrently low, reflectingsoft trading

partnerinflation,thehighNewZealanddollarandsomemoderationininflationinthenon-tradablesector.

Despitetheheadwinds,economicgrowthandinflationareprojectedtoriseoverthenextfewyears.Post-

earthquakereconstructionandrepairsareboostinginvestment,andconsumptionandresidentialinvestment

areincreasing,inpartduetotheaccommodatingmonetarypolicy.Growthintheinternationaleconomyis

expectedtoincreaseoverthenexttwoyears.

Withinthisenvironment,keyissuesformonetarypolicyare:

• ThescaleandpaceofreconstructioninCanterbury,andtheconsequencesforinflationandgrowth.

• The factorsbehind thecontinuedstrengthof theNewZealanddollarand the impactof thecurrency

appreciationonthetradablessector.

• TheimplicationsformonetarypolicyofasignificantconsolidationintheGovernment’sfiscalposition.

• The effect of a resurgence in credit growth and strong asset price increases on existing economic

imbalances.

Theglobalfinancialcrisishaschallengedmonetarypolicyframeworks,includingpolicyobjectivesand

thechoiceofpolicyinstruments.TheBankwillcontinuetoreviewinternationalexperience,andensurethat

monetaryandmacro-prudentialframeworksareframedappropriately.

Initiatives and strategies

Toaddresstheseissues,theBankwill:

• Undertake research to increase understanding of future economic and financial cycles and develop

bettertoolsandanalyticalframeworkstoimprovefuturemonetaryandmacroprudentialpolicies.

• Developanddisseminatehighqualityanalysisofmonetarypolicyissuesandincorporatethisanalysis

intoawiderexternalengagementandcommunicationsstrategy.

• ImplementandembedtheneweconomicmodelintotheBank’sforecastingframework.

• Investigatepotentialstructuralchangesintheeconomyfollowingtheglobalfinancialcrisis.

Success measures

Seepage5.


Price stability








III. Improvinginfrastructureandreducingenterpriserisk

8. Furtherdevelopingoperationalsystems


Financial market operations• Domestic markets• Foreign reserves management

Sound and efficient financial system

Financial markets

Objectives

Tosupporttheimplementationofmonetarypolicy;toassistintheefficientfunctioningofNewZealand’s

financial system; tomanage official foreign reserves; to implement theBank’s foreign exchangemarket

interventionpolicy;tomanagetheCrown’sfinancialliquidity;andtomaintaincrisisinterventioncapability.

Scope of operations

TheBank:

• Providesadviceonfinancialmarketissuesanddevelopmentsfortheformulationofmonetarypolicy.

• Manages official foreign reserves for use in times of financial distress or when foreign exchange

interventionisneededformonetarypolicypurposes.

• Implementsmonetarypolicythroughmarketoperationsthatensuremarketinterestratesareconsistent

withtheOCR.

• Managesliquidityinthebankingsystem.

• ProvidesandmanagestheCrownSettlementAccount.

• Actsaslenderoflastresorttothefinancialsystemifnecessary,aswellasassistingintheresolutionof

anyfinancialmarketorbankingcrisis.



GlobalfinancialmarketshavebecomelessturbulentaspoliciesinEuropetoaddressfinancialimbalances

areactedon.ThishasmadeiteasierforNewZealandbankstoaccessfunding,comparedwiththe2008-12

period,andtheReserveBank’sdomesticmarketsfunctionisreturningtoamorenormalenvironment.

TheprevailinglowinternationalinterestratesresultinlowreturnsontheForeignReservesportfolio.The

domesticandforeignreservesoperationsarebeingimplementedinanenvironmentwherecentralbanks

andotherfinancialregulatorsareadoptingtheG20FinancialStabilityBoard’snewregulatoryframework.

ThekeypolicyissuesfacingtheBank’sFinancialMarketsfunctionarethat:

• Significantrisksremaininkeyeconomies,andinternationalmarketuncertaintyandvolatilityarelikely

to persist. TheBank is, however, well placed to provide liquidity facilities for NewZealand banks if

conditionsdeteriorateseverely.

• ReturnsontheBank’sforeignreservesarelikelytoremainlowandvolatile inanenvironmentof low

globalinterestratesandwherethevalueoftheNewZealanddollarisinfluencedbyboutsofinternational

riskseekingandriskaversion.

• FurtherdeteriorationsincreditratingswouldmeantheBankwouldhavefewercounterpartieswithwhom

totransact.



• Modifyitsagreementswithcounterpartiestofacilitatetransactionsasnewregulationscomeintoforcein

manyofthejurisdictionsinwhichtheReserveBankinvests.

• Investigatewhethertomakeuseofcentralcounterpartiesforclearingtransactionsand,ifappropriate,

appointoneormoreagentstofacilitatecentralcounterpartyclearing.

• DevelopfurthertoolstomonitorandinformBankmanagementaboutthefinancialrisksthattheBankis

exposedto.

Success measures

Seepage5.










Macro-financialstability

Objectives

To promote financial stability by increasing the resilience of the financial system during periods of

extreme credit growth and rising leverage or abundant liquidity; and by dampening excessive growth in

creditandassetprices.

Toanalyseandreportonthesoundnessandefficiencyofthefinancialsystem,andtoproduceaccurate

andtimelydataandstatisticsthataretrustedandusedtoinformdecisionmaking.

Scope of operations

TheBank:

• Monitorsandreportsontherisksfacingthefinancialsystem,includingthosearisingfromthecreditcycle,

highindebtednessorexternalsectorimbalances.

• PublishesregularFinancial Stability Reports (FSRs)assessingthesoundnessandefficiencyoftheNew

Zealandfinancialsystem.

• Advises on the deployment or adjustment of macro-prudential instruments and the macro-financial

implicationsofotherReserveBankpolicies.

• Producesandpublishesaccurateandtimelystatistics,fromRBNZstatisticalsurveysandexternaldata

tosupporttheBank’spolicyfunctions.


Thebenefitsofmacro-prudentialpolicyinstrumentscomefromreducingtheriskstothefinancialsystem

thatcanarisefromunsustainablecreditandassetpricegrowth,andrisinghouseholdorbusinesssector

leverage.Asmanycountrieshaveexperiencedinrecentyears,boom-bustcyclesincreditandassetprices

canbeextremelydestabilising forbankingsystemsandcancreate largeeconomiccosts.Theycanalso

poseasignificantfiscalburdenforthegovernment.

WhileNewZealandwasfortunatenottohaveexperiencedthemajorupheavalinitsfinancialsystem

seen in some countries, macro-prudential policy represents an important step in reducing the financial


system’svulnerabilitytoanysuchinstabilityinthefuture.NewZealand’snetfinancialliabilitiesremainhigh

byinternationalstandards,reflectingasustainedperiodofcurrentaccountdeficits,financedbyborrowing

primarilythroughthebankingsystem.

These developments result in more demands for accurate and timely statistical data that meet

internationalstandards,whilebeingsensitivetothereportingburdenonbusiness.

Thekeypolicyissuesformacro-financialstabilityare:

• Highleverageinthehouseholdsectorandpartsofthefarmingsector.

• Increasingriskstofinancialstabilityarisingfromdevelopmentsinprivatesectorcreditandthehousing

market.

• Assessingwhenbesttooperationalisemacro-prudentialpoliciesandthecostsandbenefitsofdoingso.

• Re-examiningmacroeconomicstabilisationpolicyandhowprudentialpolicymightsupportandinteract

withmonetarypolicy.

• Determininghowbest tomeetagrowingdemand for timelyandaccuratedata to informmicro-and

macro-prudentialpolicies.



• Continuetodeveloptheimplementationframeworkformacro-prudentialpolicy.

• Expanditsreportingandanalysisofcreditmarketimbalances,andthecostsandbenefitsthatarisefrom

theuseofmacro-prudentialinstruments,andreflectthisanalysisinregularFinancial Stability Reports.

• Assess the implicationsofchanges inhouseholdandbusinesssectorbehaviourandfinancialsector

operating conditions forNewZealand’s savingsand investment imbalance, and for the conduct and

interactionofmonetaryandfinancialstabilitypolicies.

• Progressworkondevelopingflowoffundsandfinancialaccountstoproduceafullsuiteofasystemof

national accounts statistics for New Zealand, and work with Statistics NZ to improve data collection in the

financialsector.

Success measures

Seepage5.










7. Implementingasoundandcomprehensiveprudentialregulatoryregime

Prudential supervision

Objectives

Toprovideprudentialsupervisionsoastopromoteasoundandefficientfinancialsystem;tolimitdamage

tothesystemthatcouldarisefrominstitutionalfailureorotherfinancialsystemdistress;andtocontributeto

publicconfidenceinthefinancialsystem.

ActionswillberelevanttoNewZealand,withacost-effectivebalancebetweenregulatoryrequirements

andself-andmarket-discipline.

Scope of operations

TheBank:

• Registersandsupervisesbanks,settingandapplyingappropriateprudentialcriteria.

• Setsandoverseescriteriafordesignationofpaymentandsettlementsystems.

• Implementstheprudentialregulatoryframeworkfornon-bankdeposittakersandinsurers.

• WillsupervisereportingentitieswithintheBank’ssectorforAnti-MoneyLaunderingandCounteringthe

FinancingofTerrorism(AML/CFT).

• Appliesaframeworkforundertakingenforcementactionintheeventofidentifiednon-compliance.


NewZealand’sfinancialsystem isheavily relianton the fourmajorAustralianbankinggroups,anda

close relationship ismaintainedwith theAustralian parent banks and theAustralian financial regulatory

authorities.

The global economy and Canterbury earthquakes have heightened risks to the balance sheets

of banks, non-bank deposit takers, and insurers.Governments and international regulators are seeking

promptresolutionframeworksthatpreventfailingfinancial institutionsandfinancialmarket infrastructures

fromdestabilisingthefinancialsystemandexposingthetaxpayertoriskof loss.Inaddition, international

regulatorsarestrengtheningfinancialmarketinfrastructurethroughrevisedstandards.


HousingpricesarerisingrapidlyinAucklandandChristchurch,andhousingloanswithahighloan-to-

valueratiohavebeenincreasingasashareoftotalnewlendingforsomebanks.

TheNon-bankDepositTakersBill isexpectedtobepassedin2013,introducinglicensingandfurther

prudentialrequirements.AllinsurersarenowrequiredtobelicensedandaresubjecttotheBank’sregulatory

and supervisory regime.Reporting entitieswithin the sector supervised by theBankmust now formally

complywithAML/CFTstatutoryobligations.

ThekeypolicyissuesfacingPrudentialSupervisionare:

• TheadjustmentrequiredbytheBankandsupervisedinstitutionstomeetenhancedprudentialpolicies

andstandards.

• StrengtheningtheBank’scapacitytorespondtofinancialcrises,includingwiththeimplementationofthe

OpenBankResolution(OBR)policy.

• Reviewinghowprudentialpolicymaysupportandinteractwithmonetarypolicy.

• Reviewingtheexistingpaymentoversightpowersandhowtheycouldbestrengthened.

• CoordinatingwithotherAML/CFTsupervisorstoensureconsistencyinapproachandguidance.



• Enhanceitsmonitoringofriskstobankbalancesheetsandprofitability.

• InitiateamendmentstothestatutorymanagementpowersintheReserveBankofNewZealandAct1989

toclarifyaspectsofthelegislativeframeworkforOBR.

• Startthelicensingprocessfornon-bankdeposittakers(assumingenactmentoftheNon-BankDeposit

TakersBillin2013).

• Completethereviewofbankcapitaladequacyrequirementsforresidentialmortgageloans.

• Progressthenewlegislativeframeworkfortheformaloversightofpaymentandsettlementsystemsof

systemicimportance.

• FurtherrefinetheBank’scrisispreparedness,focusingoncoordinationwithotherfinancialregulators,

particularlytrans-Tasman.

• Monitor the financial soundness of all insurers as they move from provisional to full licensing by

September2013,andasCanterburyearthquakeclaimsdevelopandaresettled.

• DevelopandimplementtheAML/CFTsupervisoryregime.

• Completetherequiredreviewoftheprudentialregimefornon-bankdeposittakersbySeptember2013.

Success measures

Seepage5.







Settlement services

Objective

To ensure that payments system infrastructure services support the smooth functioning of the economy,

areprovidedefficientlyandreliably,andmeetinternationalstandards.

Scope of operations

TheBank:

• Operates theExchangeSettlementAccountSystem (ESAS)and theNewZealandcentral securities

depositorysystem(NZClear).

• Operates the infrastructure required for settlement of interbank payments (Settlement Before

Interchange),andthatrequiredforforeignexchangetransactionsthroughContinuousLinkedSettlement

Bank.

Environment and issues

International standards for system performance and resilience of systemically important payment

systemshavebeenlifted.

ThekeypolicyissuesfacingSettlementServicesaretheneedto:

• Improvebusinesscontinuityplanninganddisasterrecoverycapabilities.

• Respondtohigherinternationaloperatingstandards.



• ContinuetoenhanceandupgradeNZClearandESAS,asagreedwithindustry.

• Developaback-upsystemforESASprovidingadditionalcontingencycapability.

• Continuouslyimproveresilience,includingintegrationofday-to-dayAucklandoperationswithWellington,

andtheabilityofAucklandoperationstostandalone.

• Workwithindustrytoimprovetheoperationoftheclearingandsettlementinfrastructure.

Success measures

Seepage5.


Legal tender meets currency needs of the public



10.Re-examiningCurrency,PropertyandSecurity

Currency operations

Objective

Tomeetthecurrencyneedsofthepublicbyensuring,asthesole issuerofcurrency,thesupplyand

integrityofbanknotesandcoins.

Scope of operations

TheBank:

• Procures,stores,processesandissuesbanknotesandcoinstothebankingsystem.

• Maintainsthequality,andverifiestheauthenticity,ofcurrencyincirculation.

• Issueslegaltendercollectors’currencythroughanoutsourcingarrangement.

Environment and issues

Demandfornotesandcoinscontinuestogroweachyear.Cashremainsanimportantmeansofmaking

payments in New Zealand. Given the heavy use of cash as amedium of exchange, the issues facing

CurrencyOperationsaretheneedto:

• EnsuretheefficiencyandsecurityoftheBank’scashoperations.

• Maintainthequalityofheavilyusedbanknotes.

• Avert counterfeiting risks, given the current polymer banknote series is 13 years old and the rapid

innovationincopyingandprinting.

• Reviewthelevelsandlocationsofcontingencyreserves,andtheappropriatenessofbusinesscontinuity

plans, in lightofnaturaldisasters in recent years,and theplanneddevelopmentofanewbanknote

series.

• Improvebanknoteprocessingworkflow,processandmanagementinformationtooptimiseoperational

efficiencyandcontrols,beforethenewbanknotesarereceived.

• Improvecurrencyinventorymanagementandforecastingofthecashcycle.




• Continueplanningforthereleaseanddistributionofanewbanknoteseries.

• Continuetoaddressqualityissuesrelatingto$5notesincirculation.

• Reviewbanknoteprocessingworkflow,process,andmanagementinformationrequirements.

• Evaluate new currency forecasting tools, methodologies, and industry benchmarks to identify best

practice.

• Further develop and fully utilise the Currency Management System for the efficient and secure

managementofcurrencyoperations.

• Reviewandimplementanychangestothelevelsandlocationofcontingencycurrencyreserves.

Success measures

Seepage5.


Operations–enablingtheBank








10.Re-examiningCurrency,PropertyandSecurity

People and cultureThe Bank’s vision of being a high performing small central bank requires excellence in its people,

processesandresources.TheBankiscommittedtocontinuingtoimproveitsperformanceculture.

The quality of the Bank’smanagement is a critical factor in strengthening the Bank’s performance.

TheBankwillcontinuebuildingleadershipandmanagementcompetenciesthroughspecificdevelopment

programmes;andstaffwillhavebank-widetraininganddevelopmentopportunities.Akeyinitiativein2013

willbetoprovideamentoringprogrammeforearly-careerstaff.

Anannualreviewofthealignmentanddeliveryofstaffobjectivesanddevelopmentplansprovidesan

opportunitytoevaluatetheeffectivenessofperformancemanagement.Thelinkbetweenperformanceand

rewardwillbestrengthenedtoencourageappropriatecompetenciesandbehaviours,andadditionalfocus

willbeplacedonmanagingkey-personrisk.

CommunicationsThechallengingeconomicenvironmenthasheightenedpublicawarenessoftheBank’spolicyrolesand

operations,underliningtheneedtoenhanceunderstandingoftheBank’spolicychoices.

TheBankwillbeaproactivecommunicator,explainingitsroles,andwhatitcanandcannotbeexpected

todo,inmonetarypolicy,prudentialsupervision,macro-prudentialpolicy,andotherfunctions.Itwillinform

publicunderstandingthroughafocusedprogramme,usingawiderrangeofmediatokeyaudiences.The

Bank will use more speakers and deliver more on-the-record speeches, while off-the-record speeches will

befewer,butmoretargeted.

Knowledge servicesThe Bank requires technology that provides a high level of uninterrupted service, functionality and

security,aswellaseasyaccesstoabroadrangeofrelevantinformationsources.

Animportantinitiativewillbetoimplementacommonplatformtosupportsupervisoryfunctionsacross

theinsurance,non-bankdeposittakerandbankingsectors,andtheBank’sroleinanti-moneylaundering

andcounteringthefinancingofterrorism.

Asecondpriorityistofurtherdevelopandupgradekeyoperationalsystemsinfinancialmanagement,

treasury,currencyandthepaymentsarea.


AthirdpriorityistoenhanceandtesttheBank’sbusinesscontinuityinfrastructureforcriticalfunctions,

and further develop the capacity and functionality in theBank’sAuckland office.TheBank’s IT security

systemswillbemaintainedatindustrybestpracticeandwillbereadytorespondtoanincreasingthreatfrom

externalsources.

The Bank will continue to improve its electronic delivery of information, and support critical statistical

needs through the implementation of the Financial Sector Information System project, which integrates the

Bank’sstatisticaldata.

Internal financial servicesHighqualityfinancialsystemsandprocessesareneededtomanagetheBank’scomplexbalancesheet.

Thesesystemssupportworkflows,andreportsandprocessesforfinancialoperations,currencyoperations

andsecuritiestransactions.

The Bank is upgrading its treasury system, and also changing systems and processes for settlement

and reportingof financial instruments, to complywith international initiatives (suchas theuseof central

counterpartiesforsettlementofderivativetransactions).

From1July2014,theBankwillberequiredtoadoptanewfinancialreportingregime.AsaPublicBenefit

Entity,theBankwillberequiredtoapplyNewZealandEquivalentstoInternationalPublicSectorAccounting

Standards(NZ-IPSAS)ratherthanInternationalFinancialReportingStandards(IFRS).

Risk assessment and assuranceTheBankfacesawiderangeofrisks,somegeneralandothersuniquetocentralbanks.Theidentification,

management,andmonitoringoftheserisksiskeytomaintainingasoundanddynamicmonetaryfinancial

system.Inaddition,therecontinuetobesignificantchangesintheglobalenvironmentandwithintheBank

intermsofprojectsunderwayandrecentlyacquiredfunctions.Theseintroducenewrisksthatneedtobe

effectivelymanaged.

TheBank’sapproachtoaddressingenterpriserisksistoensuretheyarebeingidentifiedandmanaged

in a proactive, coordinated, prioritised and cost-effective manner. Risk assurance operations will focus

particularlyonfurtherdevelopingoperationalsystems,strengtheningbusinesscontinuityplanning,andthe

operationsoftheCurrency,PropertyandSecuritydepartment.

Increased automation and supporting software across the audit and risk management functions will help

tomaximiseoveralleffectiveness.TheBankwillalsoseektoidentifyandmanagetheincreasedexposureto

legalrisksfromtheexpandedprudentialregulatoryregimes.

Property, securityBankmanagementisreviewingtheoperationalcontrolsaroundpropertymanagementandsecurity.The

Bankrequirestheinfrastructureofthepropertiestobemaintainedatalevelthatpromotesefficiencyanda

safeandsecureenvironmentforallstaff,tenantsandvisitors.

Forsecurity reasons, theBankoperatesandmaintainsmodern, reliablesecurityaccessandcontrol

systems.Forefficiencyandenvironmentalreasons,theBankwillcontinuetoseektomaintainandextend

energy-savingandrecyclingprogrammes.


Financial managementFinancial structureBalance sheet overview and funding of the Bank’s operations

The Reserve Bank receives no direct funding through the central government budgetary process.

Instead,theBank’smainsourceofincomeisthereturnonthesubstantialinvestmentstheBankholds,which

arefundedbytheissueofcurrencyandbytheBank’sequity.Currencyincirculationisaliabilityonwhich

nointerestexpenseisincurred.Thefundsreceivedwhencurrencyisissuedareinvestedandearninterest

income,whichisknownasseigniorage.

Thenatureandextentof theBank’sprincipalactivities thataffect itsbalancesheetaredescribed in

the Annual Report 2011–2012 (pages64–65).Foreignreservesmanagement,NewZealanddollarliquidity

management,andcurrencyoperationsmateriallyaffectthesizeandstructureoftheBank’sbalancesheet.

UndertheReserveBankAct,theMinisterandtheGovernorarerequiredtoenterintoafive-yearfunding

agreement tospecify theamountof theBank’s incomethatmaybeusedtomeetoperatingexpenses in

eachfinancialyear.TheBankreportsitsexpenditureagainsttheFundingAgreementinitsAnnual Report.

ThecurrentFundingAgreementcoversthefive-yearperiodending30June2015.Itprovidesfundingof

$47.8millioninthefirstyear(2010–11)increasingto$56.4millioninyearfive(2014–15).

Annual distributions paid by the BankUndertheReserveBankAct,theBank’sannualdividendisdeterminedusingthefollowingprinciples:

Statement of dividend principlesThe Bank shouldmaintain sufficient equity for the financial risks associated with

performing its functions.Equity inexcessof that required to cover those riskswill be

distributedtotheCrown.

Ingeneral,unrealisedgainsshouldberetainedbytheBankuntiltheyarerealisedin

NewZealanddollars.However,theBankmayrecommendthedistributionofunrealised

gainswheretheBankbelievesthattheprobabilityofthegainbeingrealisedishigh.

TheamountofthedividendtobepaidtotheGovernmentisdeterminedbytheMinisterofFinanceeach

AugustontherecommendationoftheBank,havingregardtotheviewsoftheBoardofDirectorsandany

otherrelevantmatters.

Drivers of the Bank’s financial performance and financial positionThe Bank prepares its financial statements by applying International Financial Reporting Standards

(IFRS).From1July2014,theBankwillberequiredtoapplyNewZealandEquivalentstoInternationalPublic

SectorAccountingStandards(NZ-IPSAS).Atthistime,thechangeinfinancialreportingframeworkisnot

expectedtohaveasignificantimpactontheBank’sfinancialreporting,althoughNZ-IPSASandIFRScould

divergeovertime.

TheprincipaldriversoftheBank’sfinancialperformanceandfinancialpositionare:

• Thevalueofcurrencyincirculation.

Currencyincirculationisanon-interest-bearingliability.Tradingbanksarechargedforcurrencyissued


tothemandtheBankearnsinterest,knownasseigniorage,oninvestmentoftheseamountspaidbytrading

banks.At30April2013,currencyincirculationwas$4.6billion.

ThesizeoftheBank’sopenforeignexchangepositionandrelatedchangesinforeignexchangerates.

TheBankhasapolicyofholdingsomeof its foreigncurrency reservesonanunhedgedbasis.This

allowsittomoreeffectivelyrespondtoaforeignexchangecrisis,andtosmoothmoreextremeexchangerate

movements.TheBankhasabenchmarkholdingofSDR1.0billionunhedgedforeigncurrencyreserves,with

theabilitytoholdmoreorlessthanthebenchmarkovertheexchangeratecycle.

HoldingunhedgedforeignreservesmeansthattheBank’snetequitywillfluctuatewithchangesinthe

exchangerate:foreignexchangeslossesmaybeincurredwhentheNewZealanddollarisstrong,andgains

mayberecordedwhentheNewZealanddollarisweak.Theunhedgedpositionincreasesvolatilityinthe

Bank’sfinancialperformanceandfinancialposition.

At30April2013,theBankheldanopenforeignexchangepositionofSDR1.5billion(NZD2.6billion),

upfromSDR1.1billion(NZD2.2billion)at30June2012.

• InterestratesearnedontheBank’sinvestmentingovernmentsecuritiesandother

securities.

UndertheNewZealandEquivalentstoInternationalFinancialReportingStandards(NZIFRS),theBank’s

holdings of New Zealand government securities are valued at market value, with unrealised gains and losses

onthoseholdingsbookedtoequity.InterestincomeisrecognisedintheBank’sIncomeStatement.

• ThesizeandperformanceoftheBank’sforeignreservemanagementandmarket

operationsfunctions.

TheBankholdsforeignreservesthatcanbeliquidatedatshortnoticetosupportitsfunctions,including

monetary policy objectives and the maintenance of orderly markets. At 30 April 2013, the Bank had

foreignreserveassetsequivalentinvaluetoNZD8.5billion,whichprovidetheBankwithforeigncurrency

interventioncapacity.

• NewZealandgovernmentdepositsheldattheBank.

TheBank provides a settlement account facility to theNewZealandGovernment.The size ofNew

Zealandgovernmentdepositsheld in theCrownSettlementAccount (CSA) isabigdriverof theBank’s

balancesheet.LargerCSAdepositsareswappedintoforeigncurrencyandinvestedbytheBankoffshore.

However, net earnings are notmaterially affected by this activity.At 30April 2013, the Bank heldNew

ZealandgovernmentdepositsofNZD1.4billion.

• OperatingexpenditureincurredbytheBank.

Thefive-yearFundingAgreementspecifiestheamountoftheBank’sincomethatmaybeusedtomeet

operatingexpensesineachfinancialyear.

• ThelevelofequityavailableforinvestmentandthedividendpaidbytheBank.

TheBankrequiresequitytoabsorbanylossesthatmayarisefromcarryingoutitsfunctions,andequityis

reviewedannuallytodeterminetheBank’sannualdividend.Thedividendforthe2011–2012yearwas$160

million,andreportedequityat30April2013was$2.7billion.


Principal financial risk management considerationsWithmorethan$20billioninassets,theBankfacesawiderangeoffinancialrisks.Thesearisemainly

becauseof theBank’soperations in thedomesticfinancialsystem,and itsholdingsof foreignexchange

reserves.Therisksinclude:

• creditrisksandmarketrisksassociatedwithday-to-daydealingswithfinancialinstitutions,intheprocess

ofmanagingliquidityinthefinancialsystem;

• risksassociatedwiththeBank’sholdingsofforeigncurrencyreserves,includingcreditrisk,liquidityrisk,

interestrateriskandexchangeraterisk;and

• operationalrisksinthetransactionsandprocessingareasoftheBank.

More detailed information on the Bank’s approach to managing these risks is outlined on pages 77–88

in the Annual Report 2011–2012.

Financial projectionsThe following table outlines the Bank’s budgeted income and expenditure for 2013-14. The key

assumptionsunderlyingthebudgetfortheyearended30June2014arethat:

• theBank’scurrentfunctionswillcontinue;

• therearenomaterialchangestothestructureoftheBank’sbalancesheetbetween31January2013and

30June2014;

• projectedinterestandexchangerateswillbethoseadvisedbytheTreasuryforthepurposesofpreparing

theGovernment’sBudgetfor2013–14;

• therewillbenochangeinthecreditworthinessoftheBank’scounterparties;and

• therewillbenomaterialchangestotheBank’sliquiditymanagementoperations.


Budget

For the year ending 30 June 2013-14

$mOperating income:Net investment income 234.1

Other income 9.0

Total operating income 243.1

Operating expenses:Personnel 32.6

Assetmanagement 6.8

Net currency issued 5.0

Other 18.5

Total operating expenses 62.9 Operating surplus 180.2

1 Comprehensive income includes earnings booked to the Bank’s Income Statement and also changes booked directly to Equity. The majority of sensitivity to changes in foreign exchange rates is booked to the Income Statement, whereas the majority of interest rate sensitivity arises on the Bank’s portfolio of New Zealand government securities and is booked directly to Equity. Refer to page 82 of the Bank’s Annual Report 2011-2012 for a detailed sensitivity analysis as at 30 June 2012.

Projectedfinancialperformance2013–2014

Thebudgetisbasedonthekeyassumptionsoutlinedabove.ItisimportanttonotethattheBank’sassets

andliabilitiesaresensitivetochangesininterestratesandexchangerates,andthatactualfinancialresults

coulddiffermateriallyfromthosebudgeted.

Asat31January2013,a10percentappreciationinthevalueoftheNewZealanddollarwouldreduce

the Bank’s comprehensive income1by$219million,andconverselya10percentdepreciationinthevalue

oftheNewZealanddollarwouldadd$267milliontocomprehensiveincome.A1percentacross-the-board

increase in interest rateswould reduce comprehensive income by about $145million, and a 1 percent

across-the-boardreductionininterestrateswouldincreasecomprehensiveincomebyabout$153million.


2 Netexpenditurecomprisesoperatingexpenses less incomeearned fromcertainBankoperationsas specified in theFunding Agreement.

Net expenditure6

BudgetFor the year ending 30 June 2013-14

$000sFunctions:Monetary policy formulation 11,442

Domestic market operations 5,674

Macro-financialstability 5,254

Prudential supervision 13,483

Foreign reserves management 6,383

Settlement services (754)

Currency operations 12,446

Netexpenditure 53,928

NetexpenditureprovidedforintheFundingAgreement 55,200

FundingAgreementUnder-Expenditure 1,272

Netexpenditure2budget2013-2014

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