Reserve Bank of New Zealand Statement of Intent · The Governing Committee is operating well and we have reviewed the terms of reference and composition of ... understanding of the

1Reserve Bank of New Zealand: Statement of Intent

Reserve Bank of New Zealand Statement of Intent For the period 1 July 2014 to 30 June 2017

Contents

Foreword 3

What we do 5SOIGovernanceOrganisational structure

Strategic direction 8Vision and valuesGoal, outcomes, functions, success measures

Environmental setting and strategic priorities 12Reserve Bank strategic priorities for 2014–17 14

Functions – initiatives Monetary policy formulation 17 Financial market operations 19 Macro-financialstability 21 Prudential supervision 23 Settlement services 25 Currency operations 26

Operations–EnablingtheBank 27

Financial management 30

ISSN 1175-6786Copyright © Reserve Bank of New Zealand 2014

2 Reserve Bank of New Zealand: Statement of Intent


ForewordThe New Zealand economy is performing well, with output, employment and investment growing strongly

andbusinessandconsumerconfidenceathighlevels.Thisstrongperformancelookssettocontinue,with

realGDPexpectedtogrowbyaround3.5percentthisyear.

TheBankhasplayedamajorroleincatalysingthecurrenteconomicexpansion.Sixyearsofstimulatory

monetary policy that led to the lowest interest rates in 50 years, moderated New Zealand’s recession in 2008

and2009andprovidedaplatformforthecurrenteconomicrecovery.

But with strong impetus also from commodity export prices, residential and commercial construction and

net immigration, theeconomy isnowgrowingsignificantly faster thanthegrowthrateofpotentialoutput,

and inflationarypressures in thenon-tradablessectorare increasing.Withdrawingsomeof themonetary

stimulusbyraisinginterestratesclosertomorenormallevelswillstarttomoderategrowthofoveralldemand

and avoid the damaging impact of high inflation on competitiveness, real incomes and output growth.

Ensuringthatinflationpressureiscontained,andthatoutputgrowsinlinewiththepotentialgrowthrateof

theeconomy,willhelptopromoteamoresustainableexpansion.

Buttherearemanychallenges.Thefactorsdrivingourstrongeconomicperformancealsoattractlarge

portfolioflowsintoNewZealanddollars,andtheresultingupwardpressureonourexchangeratediminishes

thecompetitivenessofexportand import competingfirms thatarenotexposed tosectorsenjoyinghigh

internationalprices.Housepricesareovervaluedonseveralmeasuresandhouseholddebtlevelsarehigh.

Annualinflationinthenon-tradablesectorisrunningat3percent,andpricingpressuresintheconstruction

sectorandsomeserviceindustriescontinuetoincrease.

Onthefinancialstabilityside,NewZealand’sfinancialsystemremainssoundandwellplacedtosupport

economicexpansion.Thebankingsystemiswellcapitalised,fundingandliquiditybuffersareaboverequired

minimums,andnon-performingloanscontinuetodecline.Therearesignsthathousingpressuresareeasing

butrisksremain.

WeareworkingtobestpositiontheBanktofacethechallengesahead,andthestrategicprioritiesinthe

Statement of Intent reflectthis.TheBank’sstrategicprioritiesareframedaroundthreethemes:continuing

to strengthen the Bank’s performance, developing a more integrated approach to the Bank’s policy, and

improvinginfrastructureandreducingenterpriserisk.

WeareworkingtostrengthentheBank’soverallperformancebystrengtheningthesupportfordecision

makingintheBank,continuingtoimprovetheperformanceculture,andbycommunicatingmorebroadly.

The Governing Committee is operating well and we have reviewed the terms of reference and composition of

ourpolicyandmanagementcommittees.TheBankcontinuestoworkonbuildingitsmanagementcapability

andstaffengagement,andextendingitscommunicationsacrossabroadfront,includingseekingfeedback

throughacomprehensivestakeholdersurvey.

SeveralinitiativesfallunderdevelopingamoreintegratedapproachtotheBank’spolicysetting.Having

crediblemonetarypolicyandwell-anchoredinflationexpectationsmeanthattheBankisabletorespondto

economicshocksbyadjustinginterestrateslessthanotherwisewouldbethecase.Continuingtobuildour

understandingofthemonetarypolicy/macro-prudentialinterfaceisanimportantpartofourobjectives.Itwill

alsobeimportanttomaintaincloselinkswithfiscalpolicysettings.

TheBankhas significant responsibilities in relation to the supervisionand regulationof banks, non-

deposittakingfinanceentities,andinsuranceproviders,aswellastheanti-moneylaunderingactivitiesof


banks.Maintainingtheappropriatebalancebetweenself-responsibilityoffinancialentities,marketdiscipline,

andregulatoryoversightisanongoingchallenge.Weintendtoconductastocktakeoftheexistingregulatory

approach,withaviewtoconsultingonenhancementsthatcouldimprovetheefficiency,clarityandtargeting

of our prudential standards.Wewill also develop a stress-testing framework for the banking system, to

assessitsresiliencetopossiblefutureshocks.

Improving the organisation’s infrastructure and reducing enterprise risk is a further focus for the years

ahead.Thisinvolvesassessingourfutureneedsandarchitecturearoundthetreasurymanagementsystem

and payments system, delivering a new series of more secure banknotes, and improving the facilities

managementandlogisticsassociatedwithcurrencyprovision.

TheReserve Bank faces a full agenda in the years ahead as it seeks to fulfil its vision of being a

high performing central bank, and best positioning theNew Zealand economy and financial system for

sustainableexpansion.

Graeme Wheeler

Governor


What we doTheReserveBankofNewZealandisNewZealand’scentralbank.ACrownagency,theBankexercises

powersacrossthefinancialsectorthatarederivedfromseveralpiecesoflegislation:

• The Reserve Bank of New Zealand Act 1989

• The Insurance (Prudential Supervision) Act 2010

• The Anti-Money Laundering and Countering Financing of Terrorism Act 2009

• TheBillsofExchangeAct1908andChequesAct1960.

TheseActscanbeviewedelectronicallyon theNewZealandLegislationwebsite.Regulationsmade

undertheseActscanbeviewedonthesamesite.

SOIUnder section 162A of the Reserve Bank of New Zealand Act 1989 (the Act), the Reserve Bank must

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

years.TheSOI isset in thecontextof theBank’s longer-termplanningandfunding.TheBank is funded

throughafive-yearfundingagreementbetweentheMinisterofFinanceandtheGovernor,whichisratified

byParliament.ThefundingagreementspecifieshowmuchoftheBank’sincomecanberetainedbytheBank

tomeetitsoperatingcosts.

This SOIcoversthethreeyears2014/15–2016/17,ofwhichthefirstyear,2014/15,iscoveredunder

thecurrentFundingAgreement.ThenextFundingAgreementistobeagreedbeforethe2015/16financial

yearcommences.

Governance The Act provides day-to-day operational autonomy to the Bank under the direction of the Governor, an

importantrolefortheMinisterofFinanceinsomekeydecisions,andarobustaccountabilitystructurethat

involves formal roles for the Bank’s Board, the Minister, and Parliament (via the Finance and Expenditure

Committee).Transparency isan important featureof the framework.ForadescriptionofhowtheBank’s

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

The MinisterTheMinisterofFinancehasresponsibilityfor:agreeingthemonetarypolicytargetwiththeGovernor;

agreeingonchangestothescopeofthesupervisoryregime;approvinganydecisiontoplaceafailingbank

intostatutorymanagementor togivedirections toaregisteredbank;andapprovingOrders-in-Council in

relationtobank,non-bankdeposittakerandinsuranceregulation.TheMinistercanalsodirecttheBankto

intervene in the foreign exchange market or to impose, for a limited period, an alternative monetary policy

target. In these cases, transparent proceduresare set out in theAct.AMemorandumofUnderstanding

betweentheMinisterandtheGovernor,dated13May2013,requirestheBanktoconsultwiththeMinister

andtheTreasurybeforeimplementingmacro-prudentialtools.

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


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

BankandtheGovernor incarryingouttheirstatutoryfunctions.TheBoardmeetsninetimesayear,with

fiveofthemeetingstakingplaceoutsideWellington.TheBoardreceivesbriefingsontheBank’sactivities,

policies, decisions, performance indicators, financial and other risks, and about the performance of the

Bank’sstatutoryfunctionsandtheexerciseofitspowers.Atthesemeetings,theBoardalsoprovidesadvice

totheGovernorontheBank’sfunctionsandtheexerciseofitspowers.

Each year, the Board prepares a report setting out its assessment of the Bank’s and the Governor’s

performance,which isprovidedasadvice to theMinisterofFinanceandmadepublic later in theBank’s

Annual Report.ThroughitsAuditCommittee,theBoardreviewstheBank’sfinancialstatementsandinternal

andexternalaudit.

Whenrequired,theBoardmakesrecommendationstotheMinisterontheappointmentorreappointment

of theGovernor.TheMinistercanonlyappointaGovernor recommendedby theBoard.TheBoardcan

recommendtotheMinisterthattheGovernorbedismissedifitbelievesthattheGovernor’sperformanceor

conducthasbeeninadequateorinappropriateinanyoneofvariousrespectssetoutintheAct.TheBoard

appointsDeputyGovernorsontheGovernor’srecommendation.

At the time of writing, the Board has six non-executive directors, and the Governor is an executive

memberoftheBoard.ThecurrentBoardmembersareDrRodCarr(Chair);MrKeithTaylor(Chairofthe

Board’sAuditCommittee);MsBridgetLiddell;ProfessorNeilQuigley;MrJonathanRoss;MsKerrinVautier

CMG;MsTaniaSimpsonandMrGraemeWheeler(Governor).Boardmembersareappointedforfive-year

termsandareeligibleforreappointment.


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

Organisational structure


Strategic directionVision and values

TheReserveBank’svisionistopromoteasoundanddynamicmonetaryandfinancialsystem.Itseeks

toachievethisvisionbybeingahigh-performingsmallcentralbank,withvaluesof:

Integrity – Being professional and exercising sound judgement

Innovation – Actively improving what we do

Inclusion–WorkingtogetherforamoreeffectiveBank.

TheBankaimstodevelopandimplementhighlyeffectiveandefficientmonetary,regulatory,andfinancial

policiesthatarewellsuitedfortheNewZealandeconomyandfinancialsystem.Itendeavourstoensure

that theBank’s objectives andpriorities are sound, clearly communicated, andunderstood; its business

operationsarewellmanaged;anditinvestswiselyintherecruitment,training,developmentandretentionof

itsstaff.TheBankalsoinvestsheavilyinreviewingandtestingitspolicyframeworksandpolicysettingsin

lightofdomesticandinternationalexperience,andensuresthatitsindependenceisbalancedbyappropriate

publicdisclosureandaccountability.

OutcomesTheBankcontributestotheGovernment’sgoalofimprovingNewZealand’seconomicperformanceby

targetingthreestatutoryrequirementsdesignedtofosterconfidenceandstabilityinNewZealand’sfinancial

system,by:

• Maintainingstabilityinthegenerallevelofprices

• Maintainingasoundandefficientfinancialsystem

• Providinglegaltendertomeetthecurrencyneedsofthepublic.

Toachievetheseoutcomes,theBankperformsfunctionscovering:

• Monetary policy formulation

• Financial market operations

• Macro-financialstability

• Prudential supervision

• Settlement services

• Currencyoperations.

The links between these functions and through the outcomes targeted, and the measures used to

evaluateperformance,areshowninthefollowingtables.


The

Res

erve

Ban

k - g

oal,

outc

omes

, fun

ctio

ns a

nd o

pera

tions

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

Sup

porte

d by

ope

ratio

ns


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 • Stabilityinthegenerallevelofprices

Monetary Policy Formulation• ReserveBankforecastsofannualCPIinflationshouldbecomfortablywithinthetargetrangeinthesecondhalfoftheforecasthorizon,

andnearthe2percenttargetmidpoint.• Measuresofunderlyinginflationshouldgenerallyremainwithinthetargetrange.• Unnecessaryinstabilityinoutput,interestratesandtheexchangerateshouldbeavoided.• Monetary Policy StatementsareinformativeandaccuratelyassesstheBank’sperformanceinmeetingtheobjectivesofthePolicy

TargetsAgreement.

Financial Markets

• Adequatebankingsystemliquidity

• Short-term interest rates consistent with monetary policy

• ConfidenceintheefficientfunctioningofNewZealandfinancialmarkets

• Foreignreservesavailableforefficientforeignexchangeinterventionandcrisismanagement.

Financial Markets• Short-termwholesaleinterestratesaremaintainedatlevelsclosetotheOCR.• Noevidenceofpaymentdisruptionsduetoashortageofsettlementcashinthesystem,e.g.,persistentaccessingoftheOvernight

ReverseRepoFacility.• Overthemediumterm,domesticmarketoperationsgenerateapositivereturn.• Foreignreservesaremaintainedattargetlevels,withliquidityandcreditstandardsmetthroughout.• TheForeignReservesManagementportfolioyieldsanetreturnonassetsthatmeetsorexceedsthebenchmarkportfolio.• Theforeignexchangeopenpositionismanagedsuchthat:

(a)thebulkofactiveforeignexchangepurchases(sales)areundertakenaroundpeaks(troughs)intheexchangeratecycle;and (b)thenetreturnonthenon-coreopenforeignexchangepositionispositiveoverthecycle.

SoU

nd a

nd e

ffic

ien

t fi

na

nc

ial

SySt

emm

ain

tain

ed

Macro-Financial Stability

Macro-Financial Stability• Financialstability,promotedby:

- increasedresilienceofthefinancialsystemduringperiods of extreme credit growth and rising leverage orabundantliquidity;and

- dampening of excessive growth in credit and asset prices.

• Asoundandefficientfinancialsystem that supports the functioningoftheeconomy.

• InternationalandlocalconfidenceinNewZealand’sfinancialsystem.

Settlement Services• Anefficient,reliableandsecurepaymentssystemthat

supports the smooth functioning of the economy

• Significantriskstodomesticfinancialsystemsstabilityareidentifiedandmonitored.• Appropriateandeffectivepolicyinstrumentstocounterriskstofinancialstabilityaredeployedinatimelymanner,andanypotential

impactsonmonetarypolicyareunderstood.• AnassessmentofthesoundnessandefficiencyofthefinancialsystemispublishedtwiceyearlyintheFinancial Stability Report,

includingthereasonsfor,andtheimpactof,anyusebytheBankofmacro-prudentialpolicyinstruments.• Information on the risk assessment framework, including the macro-prudential indicators that are used to guide policy settings, is

publishedinamannerthatassiststheassessmentoffinancialstability.• Statisticsarecollectedthatenableanappraisalofthesoundnessandefficiencyofthefinancialsystem,andarepublishedin

accordancewiththedatespublishedontheRBNZwebsite.


• Thebank,non-bankdeposittakerandinsuranceregulatoryregimes,andinparticulartheregulatorychangesimplementedduringtheyear,promotethesoundnessandefficiencyofthefinancialsysteminacost-effectivemanner,asdemonstratedbysoundregulatoryimpactanalysis.

• TheReserveBank’sprudentialoversightofbanks,non-bankdeposittakers,insurancecompaniesandpaymentsystemsidentifiesemergingfinancialstressesinatimelymanner;andtheBankisprepared,wherenecessary,toeffectivelyresolveinstitutionalfailuresinconjunctionwithGovernment.

• TheBankdemonstratesaconsultativeandtransparentapproachtoitspolicydevelopment,supportedbyrobustanalysisthatisunderstoodbyregulatedinstitutionsandstakeholders.

• In its decisions on whether to grant licences to new applicants, the Bank takes a consistent approach within the legislative framework, withoutsuccessfulchallenges.

• TheBank’sAML/CFTsupervisoryactivitiesdemonstrateanappropriaterisk-basedapproachtosupervisionofreportingentitieswithintheBank’ssector.

• The FSRsprovideacomprehensiveassessmentofthehealthoftheNewZealandfinancialsystem.

Settlement Services

• AvailabilityofESAS/NZClearduringcorehoursisatleast99.90percent1,asmeasuredoverayear.• Customer satisfaction with operations and with system development is demonstrated through an annual customer survey in which an

approvallevelof90percentormoreisachieved.• Allrisksarewellmanaged,asdemonstratedbyexternalauditsforESASandNZClear.• Internationalstandardsforpaymentandsettlementsystems(CPSSandIOSCO)arecompliedwith,subjecttovariationsforlocalNew

Zealandconditions.

cU

rr

enc

y n

eed

S o

f th

e pU

bli

c a

re

met

Currency Operations

• Legaltenderthatmeetsthecurrencyneedsofthepublic

• AllordersfornotesandcoinsfrombanksthatmeettheReserveBank’sguidelinesaresuppliedwithinagreedtimes.• Notesandcoinsingeneralcirculationareofagoodqualityasindicatedbysurveysoftheconditionofcurrencyincirculation.• Thenumberofcounterfeitnotesincirculationshouldbefewerthan10permillionnotesincirculation.• Stakeholders are well informed and prepared for the introduction of Series 7banknotes.

1 ThisisthetargetavailabilityspecifiedintheESAStermsandconditions.


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 • Stabilityinthegenerallevelofprices

Monetary Policy Formulation• ReserveBankforecastsofannualCPIinflationshouldbecomfortablywithinthetargetrangeinthesecondhalfoftheforecasthorizon,

andnearthe2percenttargetmidpoint.• Measuresofunderlyinginflationshouldgenerallyremainwithinthetargetrange.• Unnecessaryinstabilityinoutput,interestratesandtheexchangerateshouldbeavoided.• Monetary Policy StatementsareinformativeandaccuratelyassesstheBank’sperformanceinmeetingtheobjectivesofthePolicy

TargetsAgreement.

Financial Markets

• Adequatebankingsystemliquidity

• Short-term interest rates consistent with monetary policy

• ConfidenceintheefficientfunctioningofNewZealandfinancialmarkets

• Foreignreservesavailableforefficientforeignexchangeinterventionandcrisismanagement.

Financial Markets• Short-termwholesaleinterestratesaremaintainedatlevelsclosetotheOCR.• Noevidenceofpaymentdisruptionsduetoashortageofsettlementcashinthesystem,e.g.,persistentaccessingoftheOvernight

ReverseRepoFacility.• Overthemediumterm,domesticmarketoperationsgenerateapositivereturn.• Foreignreservesaremaintainedattargetlevels,withliquidityandcreditstandardsmetthroughout.• TheForeignReservesManagementportfolioyieldsanetreturnonassetsthatmeetsorexceedsthebenchmarkportfolio.• Theforeignexchangeopenpositionismanagedsuchthat:

(a)thebulkofactiveforeignexchangepurchases(sales)areundertakenaroundpeaks(troughs)intheexchangeratecycle;and (b)thenetreturnonthenon-coreopenforeignexchangepositionispositiveoverthecycle.

SoU

nd a

nd e

ffic

ien

t fi

na

nc

ial

SySt

emm

ain

tain

ed

Macro-Financial Stability

Macro-Financial Stability• Financialstability,promotedby:

- increasedresilienceofthefinancialsystemduringperiods of extreme credit growth and rising leverage orabundantliquidity;and

- dampening of excessive growth in credit and asset prices.

• Asoundandefficientfinancialsystem that supports the functioningoftheeconomy.

• InternationalandlocalconfidenceinNewZealand’sfinancialsystem.

Settlement Services• Anefficient,reliableandsecurepaymentssystemthat

supports the smooth functioning of the economy

• Significantriskstodomesticfinancialsystemsstabilityareidentifiedandmonitored.• Appropriateandeffectivepolicyinstrumentstocounterriskstofinancialstabilityaredeployedinatimelymanner,andanypotential

impactsonmonetarypolicyareunderstood.• AnassessmentofthesoundnessandefficiencyofthefinancialsystemispublishedtwiceyearlyintheFinancial Stability Report,

includingthereasonsfor,andtheimpactof,anyusebytheBankofmacro-prudentialpolicyinstruments.• Information on the risk assessment framework, including the macro-prudential indicators that are used to guide policy settings, is

publishedinamannerthatassiststheassessmentoffinancialstability.• Statisticsarecollectedthatenableanappraisalofthesoundnessandefficiencyofthefinancialsystem,andarepublishedin

accordancewiththedatespublishedontheRBNZwebsite.


• Thebank,non-bankdeposittakerandinsuranceregulatoryregimes,andinparticulartheregulatorychangesimplementedduringtheyear,promotethesoundnessandefficiencyofthefinancialsysteminacost-effectivemanner,asdemonstratedbysoundregulatoryimpactanalysis.

• TheReserveBank’sprudentialoversightofbanks,non-bankdeposittakers,insurancecompaniesandpaymentsystemsidentifiesemergingfinancialstressesinatimelymanner;andtheBankisprepared,wherenecessary,toeffectivelyresolveinstitutionalfailuresinconjunctionwithGovernment.

• TheBankdemonstratesaconsultativeandtransparentapproachtoitspolicydevelopment,supportedbyrobustanalysisthatisunderstoodbyregulatedinstitutionsandstakeholders.

• In its decisions on whether to grant licences to new applicants, the Bank takes a consistent approach within the legislative framework, withoutsuccessfulchallenges.

• TheBank’sAML/CFTsupervisoryactivitiesdemonstrateanappropriaterisk-basedapproachtosupervisionofreportingentitieswithintheBank’ssector.

• The FSRsprovideacomprehensiveassessmentofthehealthoftheNewZealandfinancialsystem.

Settlement Services

• AvailabilityofESAS/NZClearduringcorehoursisatleast99.90percent1,asmeasuredoverayear.• Customer satisfaction with operations and with system development is demonstrated through an annual customer survey in which an

approvallevelof90percentormoreisachieved.• Allrisksarewellmanaged,asdemonstratedbyexternalauditsforESASandNZClear.• Internationalstandardsforpaymentandsettlementsystems(CPSSandIOSCO)arecompliedwith,subjecttovariationsforlocalNew

Zealandconditions.

cU

rr

enc

y n

eed

S o

f th

e p U

bli

c a

re

met

Currency Operations

• Legaltenderthatmeetsthecurrencyneedsofthepublic

• AllordersfornotesandcoinsfrombanksthatmeettheReserveBank’sguidelinesaresuppliedwithinagreedtimes.• Notesandcoinsingeneralcirculationareofagoodqualityasindicatedbysurveysoftheconditionofcurrencyincirculation.• Thenumberofcounterfeitnotesincirculationshouldbefewerthan10permillionnotesincirculation.• Stakeholders are well informed and prepared for the introduction of Series 7banknotes.


Environmental setting and strategic prioritiesOver the past two years the New Zealand economy has outperformed most of the world’s advanced

economies. NewZealand’sgrowthrateover the twoyears toDecember2013averaged2.6percent,or

aroundtwicetheaverageofthegroupof35advancedeconomiesintheIMFclassificationoverthisperiod.

NewZealand’seconomicexpansionhasconsiderablemomentum,withrealGDPexpectedtogrowby

over3.5percentovercalendar2014.Severalfactorsarecontributingtotheexpansion.Theseincludethe

Reserve Bank’s accommodative monetary policy that has helped to generate the lowest retail interest rates in

60years.Otherimportantfactorsarethehighlevelofexportprices,togetherwithlowinternationalinflation,

thatresultedinthestrongesttermsoftradesince1973;the40percentgrowthinresidentialinvestmentover

thepasttwoyears(muchofitduetobuildingactivityinChristchurchandAuckland);andthelargeincrease

innetimmigration,whichhasincreasedby32,000intheyeartoMarch2014.

Nevertheless, some key policy challenges remain. The exchange rate remains overvalued and

continues tobeaheadwind for theexportand importcompetingsectors; thecurrentaccount remains in

deficit despite the strong terms of trade; housingmarket imbalances continue to need addressing; and

inflationarypressures,althoughmoderate,areexpectedtoincreaseoverthenext18months.

TheNewZealand financial system remains sound andwell placed to support the expansion of the

economy.Thebankingsystemiswellcapitalised,fundingandliquiditybuffersarecomfortablyaboverequired

minimums,andnon-performingloanscontinuetodecline.Atthesametime,somerisksarealsoapparent.

Housepricesareovervaluedonseveralmeasures,andlevelsofdebt inthehouseholdsectorrelativeto

incomearehighandrising.

The Bank considers that monetary policy and prudential settings remain appropriate at this stage for the

economicandfinancialrisksfacingNewZealand,takingintoaccountrestrictionsonhighloan-to-valueratio

residentialmortgagelendingandtheadjustmentstointerestratesunderway.

Strategic prioritiesThe Bank adopted 10 strategic priorities for 2014-17 to enhance its capacity to respond to this challenging

environment.Manyofthesestrategicprioritiesrunacrossseveralfunctionsanddepartments.

Thesestrategicpriorities,whicharedescribedinmoredetailonpages9-11,areframedaroundthree

broadthemes:

• Continuing to strengthen the Bank’s performance

• Developing a more integrated Bank approach to the Bank’s policies

• Improvinginfrastructureandreducingenterpriserisk.

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

developments,especiallywhereCabinetdecisions,legislationorregulationmayberequired.Thisincludes

earlynotificationoftheBank’sthinkingonregulatoryandrelatedpolicydevelopmentsandcaseswherethe

Ministermayneed toexercisehispowers.TheBankalsoadviseson the regulatory impactofproposed

policydevelopments.


Thisinformationincludes:

• macroeconomic management over the coming economic cycle, including implementation of monetary

policyandpoliciesdirectedtowardsfinancialstabilityandtheir interactionwithfiscalandwiderpolicy

settings;

• ongoing macro-prudential arrangements, including work to increase transparency and public

understanding about macro-prudential tools, and having regard to the interaction between macro-

prudentialtoolsandeffortstoincreasetheresponsivenessofhousingsupply;

• continuedcollaborationwiththeTreasuryinareasofjointinterest,includingcoordinated(althoughnot

necessarilyagreed)advice;

• developmentsintheinternationaleconomyandfinancialmarkets;

• NewZealand’skeyeconomic issues,especially thoseaffecting theexchangerate, inflation,savings,

externalbalanceandfinancialstability;

• prudentialoversightofNewZealand’sbanks,insurancecompaniesandnon-bankdeposittakers.


Reserve Bank strategic priorities for 2014-17I. Continuing to strengthen the Bank’s performance

Priority Explanation 1. Strengthening the

support for decision making in the Bank

2. Continuing to improve performance culture

3. Communicating on abroaderfront

TheBankwillcontinuetorefineitsdecision-makingprocessesandstructurestosupporthighqualitydecision-making.WithgrowthoftheBank’sregulatoryresponsibilities,andtheestablishmentin2013of the Governing Committee, managers are conscious of the need tocoordinatepoliciesandprocesses.TheBankhasthereforebeenreviewingdecision-makingresponsibilitiesandprocessesforallcommittees.ThisyeartheBank’spolicycommitteeswilloperatewithnewtermsofreference,membership,andexpectationsonhowbesttocontributetotheBank’sdecisions.Managementcommittees,includingtheSeniorManagementGroup,havealsobeenreviewedandwillbetaskedwithstrengtheningcommunicationinsideandoutsidetheBank.

TheBank’sseniormanagementplacessignificantemphasisondevelopingmanagers’leadershipcapabilityandperformance.ManagerswillusetheclearperformanceobjectivesandtheBank’s competency framework to monitor staff performance and provideappropriatedevelopmentopportunities.Thelinksbetweenperformanceandremunerationwillcontinuetobestrengthened.The Bank’s recent Staff Engagement Survey gives management further insight into what is needed to raise staff engagement levels andbeahighperformingworkplace.Threekeyareastofocuson,Feelingvalued,FeelingconnectedandBeingabletoperformandgrow,havebeenidentifiedandsevenkeyactionswillbeimplementedintheseareas.Theseactionswillbehighlightedandtracked through the Bank’s internal communications programme and completedbytheendofDecember2014.

The Bank will ensure that it communicates clearly and effectively to improveunderstandingofandsupportforitspolicychoices.Itwillfurther expand its programme of on- and off-the-record speeches byawiderrangeofspeakers,tomanysectorsandregionalaudiences,aswellasbriefings,mediainterviews,andvideosontheBank’soperationsandpolicystatements.TheBankwillbuildits understanding of stakeholders’ perceptions of the Bank’s roles, policy decisions and performance through many sources, including audiencefeedbacktothelargeoff-the-recordspeechprogramme,thenewsmedia,abiannualStakeholdersurvey,andpotentialonlineengagementchannels.Theproductionandreleaseofanewseriesofbanknoteswillbeaparticularfocusforclear,effectiveandproactivecommunication.


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

Priority Explanation 4. Understanding the

monetary policy / macro-prudential interface

5. Reviewing, streamlining and improving the prudential regulatory framework

6. Developing a comprehensive stress-testing framework for the New Zealand bankingsystem

The Bank will continue a programme of research to increase its understandingofthelinkagesbetweenmonetaryandfinancialstabilitypolicies,andtheimplicationsfordecision-makingacrossthesetwopolicyfunctions.Aspectsoftheworkprogrammewillincludepolicycoordination,theimpactofinterestratesonfinancialstabilityandthemodellingoftheinteractionsbetweenmonetarypolicy,prudentialpolicyinstruments,andtheeconomy.Theworkwill also seek to draw insights for internal policy processes within the Bank.ThisresearchprogrammewillbeajointinitiativeledbytheEconomicsDepartmentandtheMacro-FinancialDepartment.

The Bank will complete a stocktake of prudential regulations for banksandnon-bankdeposittakers,andoftheinsurancesolvencystandards.FollowingthestocktaketheBankwillconsultonenhancementsthatitconsiderswillimprovetheefficiency,clarityandtargetingoftheBank’sprudentialstandards.

The Macro-Financial and Prudential Supervision departments will undertake a programme of work towards the development of a comprehensivestresstestingframeworkthatcanbeusedtogaugetheresilienceofthebankingsystemtoabroadrangeofeconomicandfinancialshocks.Aspartofthisinitiative,theBankwillworkthisyearwiththedomestically-ownedbankstocompletestresstestsoftheircreditportfolios;andwiththeAustralianPrudentialRegulationAuthorityandthemajorAustralianbankstostress-testtheirbalancesheets.ThelatterexercisefurtherdevelopsearlierstresstestsundertakenincollaborationwiththeAustralianPrudentialRegulationAuthorityin2010and2012.


III. Improving infrastructure and reducing enterprise risk

Priority Explanation 7. Researching appropriate

infrastructure for offshore market intelligence, transactions and risk management

8. Developing a roadmap and architecture for theBank’sfinancialmanagement and payments systems

9. Delivering New Zealand’s newbanknotes

10. Developingaplanforoptimising the facilities management and logistics for currency

Given the range of currencies in which the Bank’s foreign reserves areheld,managedandtraded,theBankrequiresexcellentrelationshipsandtimelyandaccuratemarketintelligence.TheBankwillreviewwhetheritssolelyNewZealand-basedoperatingmodelis the optimal operating structure, and in particular will assess if offshore infrastructure can enhance risk management and return, alongside improved market intelligence and enhanced professional development.

The Bank operates payment systems that are critical to the operation of the economy, and also operates an internal treasury system that supports decision-making and accounting for transactions undertaken for the foreign reserves, domestic markets, andcurrencyfunctions.Theeffectivenessofthesesystemsisaffectedbydevelopmentsininternationalsettlementnormsandvaluation methodologies, changes to the settlements landscape in NewZealand,andrapidtechnologicalchange.

The Bank will develop a set of options for changes to the architecture of these systems, including a roadmap for future investmentandsupport.Inthecaseofpaymentsystems,theBankwillconsultwithusers.

ThereleaseofSeries7banknotesin2015remainsanimportantpriorityfortheBank.Aftersecuringaprintingcontractandconfirmingprintschedulesandsubsequentreleasedates,thebanknoteupgradeprojectwillmoveintoitsnextmajorphase(phasethree).Thiswillinvolvebanknotedevelopment,printtrials,qualityassurance,andproduction.Itwillalsoinvolveincreasedpublicawareness, extensive communications, stakeholder engagement andindustrypreparednessthrough2015.TheBankwillbeconcurrentlyrefurbishingitsWellingtonprocessingfacilitiesandplanttomanagethesignificantgrowthinactivityfrom2015throughto2018.

TheBankwillre-evaluateitslong-termrequirementsandplansforprocessing facilities and property, to support the custody, reserves management,distributionandlogisticsofcurrency.TheBankhasreviewed risks associated with its current vaults in the Wellington buildingandhasidentifiedaneedtoreplacethem.Duetodesignconstraintsthereisnopracticalpossibilitytoupgradethefacility.Thisriskhasbeenmagnifiedwithlastyear’sseismicactivity.

Overthenextfiveyears,astheBankintroducesthenewSeries7banknotes,itwillbetransitioningcurrencyreservesbetweeneightsites,includingWellingtonandfiveoffshoresites.Thecomplexityofmanaging currency in multiple sites, and the impact on enterprise risk,operationalefficiencyandeffectiveness,willbeincorporatedintotheplanningfornewfacilities.TheBankhasdevelopedanewcurrency reserves policy that sets the framework for mitigating these enterpriserisks.Thisyear,planningwillfocusondevelopinglonger-termfacilitiesoptionsandbusinesscases,ifrequired,forinclusionintheBank’sfive-yearfundingproposal.


Price stability

Refer to Strategic Priorities, pp. 14-15.

I. ContinuingtostrengthentheBank’sperformance

1. StrengtheningthesupportfordecisionmakingintheBank

3. Communicatingonabroaderfront

II. DevelopingamoreintegratedapproachtotheBank’spolicies

4. Understandingthemonetarypolicy/macro-prudentialinterface

Monetary policy formulation

Objective

Toachieveandmaintainstabilityinthegenerallevelofprices.

ThecurrentPolicyTargetsAgreement(PTA)betweentheMinisterofFinanceandtheGovernorrequires

thattheBank“keepfutureCPIinflationoutcomesbetween1and3percentonaverageoverthemedium

term,withafocusonkeepingfutureaverageinflationnearthe2percenttargetmidpoint”.Italsorequires

that:“Inpursuingitspricestabilityobjective,theBankshall...seektoavoidunnecessaryinstabilityinoutput,

interestratesandtheexchangerate.”

Scope of operations

TheBankundertakesresearchandanalysisofmacro-economicconditionstoenableitto:

• SetanOfficialCashRate(OCR)eighttimesayear,orasrequired,withtheaimofkeepinginflationnear

themid-pointwithinthetargetband.

• PublishthequarterlyMonetary Policy Statements(MPSs)atthesametimeasfouroftheOCRdecisions.

The MPSssetouttheBank’sviewsontheeconomyandinflationarypressures,andthebasisforthe

OCRdecision.

• AnnouncetheotherfourOCRdecisionsaboutsixweeksaftereachMPS.

• Whereappropriateandfeasible,interveneintheforeignexchangemarkettoinfluencethelevelofthe

exchangerate,consistentwiththeobjectivesofthePTA.

Functions - initiatives


Environment and policy issues

NewZealand’seconomicexpansionisbecomingmorebroad-basedandhasconsiderablemomentum.

The key drivers of economic growth include a period of record prices for New Zealand’s export commodities,

continuedstronggrowthinconstructionsectoractivity,largenetimmigrationflows,andanextendedperiod

of low interest rates. Growth is gradually increasing in New Zealand’s trading partners, although these

improvementsinmajoreconomieshaverequiredexceptionalsupportfrommonetarypolicy.

Whileheadlineinflationhasbeenmoderatetodate,theprojectedstrongeconomicexpansionisexpected

toleadtoincreasesininflationpressurethatwillrequireincreasesininterestratestowardslevelsatwhich

theyarenolongeraddingtodemandpressures.

TherehasbeensomeimprovementinNewZealand’smacro-imbalancessincetheglobalfinancialcrisis.

TheGovernment’s fiscal position has improved, as havehousehold savings and the size of the current

accountdeficitrelativetoGDP.Severalchallengesremain,asoutlinedonpage12.

TheBankhasexpandeditstoolkitbydeployingselectedmacro-prudentialinstrumentstobettertarget

macro-imbalancesandtheriskstheyposeforfinancialstability.

Withinthisenvironment,keyissuesformonetarypolicyare:

• ThescaleandpaceofreconstructioninCanterbury,andtheconsequencesforinflationandgrowth.

• The factors behind the continued strength of the New Zealand dollar and the impact of currency

appreciationonthetradablessector.

• Thedemand-supplyimbalanceinthehousingmarket,particularlyinAucklandandChristchurch.

• Howpolicycoordinationmayaffecttheimplementationofmonetaryandmacroprudentialpolicies.

Initiatives and strategies

TheBank’sEconomicsDepartmenthasfivekeyworkstreamsfor2014.Theyare:

1. Macroprudential and monetary policy interface:undertakeanalysisanddevelop frameworks tobetter

understandtheinteractionbetweenmacroprudentialandmonetarypolicy.

2. Best-practice institutional frameworks: undertake analysis to inform on best-practice institutional

arrangementsgoverningmonetaryandmacroprudentialpolicies.

3. Support the formulation of monetary policy: understand how events such as a construction and housing

boom,fiscalconsolidationandinternationaldevelopmentswillshapethenextbusinesscycle.

4. Monetary policy research: undertake analysis to improve the Bank’s understanding of the New Zealand

economyandkeymonetarypolicyissues.

5. Exchange rate analysis:reviewingtheBank’sframeworksforassessingthelong-termsustainablelevel

of the exchange rate and analysis on the cyclical impact of the exchange rate on New Zealand economic

activityandinflation.

Success measures

Seepage11.


Price stability





III. Improvinginfrastructureandreducingenterpriserisk

7. Research appropriate infrastructure for offshore market intelligence,

transactions and risk management

8. Develop a future roadmap and architecture for the Bank’s financial

management and payments systems

Financial market operations• Domestic markets• Foreign reserves management

Sound and efficient financial system

Financial markets

Objectives

Tosupport the implementationofmonetarypolicy; toassist in theefficient functioningofNewZealand’s

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

interventionpolicy;tomanagetheCrown’sfinancialliquidity;andtomaintaincrisisinterventioncapability.

Scope of operations

TheBank:

• Providesadviceonfinancialmarketissuesanddevelopmentsfortheformulationofmonetarypolicy.

• Implements monetary policy through market operations to ensure that market interest rates are consistent

withtheOCR.

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

interventionisneededformonetarypolicypurposes.

• Managesliquidityinthebankingsystem.

• ManagestheCrownSettlementAccount.

• Actsaslenderoflastresorttothefinancialsystemifnecessary,aswellasassistingintheresolutionof

anyfinancialmarketorbankingcrisis.



StabilityinglobalfinancialmarketshasledtorelativelybenignfundingconditionsforNewZealandbanks

andinstitutions,inbothdomesticandoffshoremarkets.

Interest rates are forecast to gradually increase in some advanced economies (apart from Europe) in the

2015calendaryear,butremainsignificantlybelowrecenthistoricallevels.Thisaccountsforthelowreturns

beingachievedontheBank’sforeignreservesportfolio.

Financial regulatorsarepushingaheadwithwide-rangingbanking reforms,emanating from theG20

Financial Stability Board’s new regulatory framework, tomake the financial systemmore resilient. New

Zealandbanksareincreasinglyrequiredtocomplywiththeseglobalrules,aswellastheBank’sdomestic

regulatoryframework.

ThekeypolicyissuesfacingtheBank’sFinancialMarketsfunctionare:

• ProvidingrobustliquidityfacilitiesforNewZealandbanks,inthecontextofaglobalregulatoryenvironment

thatrequiresfullcollateralisationand/orcentralclearingandtradereportingofover-the-counter(OTC)

derivatives.

• ImprovingreturnsontheBank’sforeignreserves,wherethevalueoftheNewZealanddollarisinfluenced

byboutsofinternationalrisk-seekingandriskaversion.

• Monitoringandrespondingtotheglobalupwardtrendininterestrates(outsideoftheEU)asmonetary

policiesinmajoreconomiesarenormalised.


• ReviewwhethertheBank’ssolelyNewZealand-basedoperatingmodelformanagingforeignexchange

reserves is theoptimaloperatingstructure. Indoingso, itwillassesswhether riskmanagementand

returncanbeenhancedthroughafull-timeEuropeanpresence.

• Developasetofoptionsforchangestothearchitectureoftreasuryandassociatedfinancialsystemsthat

willresultinarobust,future-orientatedoperatingplatform.

• Developandimplementfurtherfinancialtoolsandinstrumentstoimprovemanagementofthefinancial

risksthattheBankisexposedto,withspecificconsiderationofwhethertosetupastand-alonecollateral

managementdesk.

Success measures

Seepage11.







II. DevelopingamoreintegratedapproachtotheBank’spolicy

4. Understandingthemonetarypolicy/macro-prudentialinterface

6. DevelopingacomprehensivestresstestingframeworkfortheNewZealand

bankingsystem.

Macro-financialstability

Objectives

Promotethefinancialstabilityofthedomesticfinancialsystemby:

• identifyingandassessingemergingsystemrisksinatimelymanner;

• advising on the deployment of macro-prudential policy instruments that may help dampen system risks,

includingextremesincreditcycles,assetprices,andliquidityconditions;

• analysingandreportingonthesoundnessandefficiencyofthefinancialsystem;and,

• collectingandpublishingaccurateandtimelystatisticsthatenableinformeddecisionmaking.

Scope of operations

TheBank:

• Identifies,monitorsand reportson the risks facing thefinancial system, including thosearising from

creditcycles,assetprices,andliquidityconditions.

• PublishesaFinancial Stability Report (FSR) twice a year, and other reports, assessing the soundness

andefficiencyoftheNewZealandfinancialsystem.

• Implementsmacro-prudentialpolicy;considersitsinteractionswithmonetarypolicy;andreportsonthe

effectivenessoftheinstrumentsdeployed.

• Producesandpublishesaccurateand timely statisticson thefinancial system tosupport theBank’s

policyfunctions.


Macro-prudentialpolicy isaimedatreducingtheriskstofinancialsystemstability thatcanarisefrom

factors such as unsustainable credit and asset price growth, and rising household or business sector

leverage.Manycountriesexperiencedboom-bustcyclesincreditandassetpricesinrecentyears,which

wereextremelydestabilising forbankingsystemsandcreated largeeconomiccosts.Theyalsoposeda

significantfiscalburdenforgovernments.

During 2013, the Bank deployedmacro-prudential policy for the first time – in the form of loan-to-

valuerestrictions–tocontainemergingrisksinthehousingsector.Experienceisnowbeinggainedonthe


effectivenessoftheinstrument,howitrelatestomonetarypolicysettings,andwhenitwillbeappropriateto

withdrawtheinstrument.Thisexperiencewillhelpinformtheappraisalandfuturedeploymentofthisand

othermacro-prudentialinstruments.

Inrecentyears,theBank’sprudentialsupervisionmandatehasbeenexpandedtotheinsuranceandnon-

bankdeposittakingsectors.This,alongwiththeneedtocontinuetoenhancetheanalysisofthewiderrisks

tofinancialstability,requiresthecollectionofabroaderandricherrangeoffinancialdata.Thisrequirement

needstobeachievedinamannerthatdoesnotresultinunnecessaryreportingcostsforreportingentities.

Thekeypolicyissuesformacro-financialstabilityare:

• Theongoingneedtounderstandtherisksandthreatsfacingthefinancialsystem,andtheresilienceof

thefinancialsystemtoemergingrisks.

• Understandingtheinterfacebetweenmacro-prudentialpolicyandmonetarypolicy,sothateachpolicy

coordinateswiththeother,whilefocusingonitsprimaryobjective.

• Monitoring the effect of loan-to-value restrictions on the housing market and assessing when their

removalmaybeappropriate.

• Expanding existing financial system data collections, in order tomeet current and future prudential,

policyandstatisticalneeds.


Toaddresstheseissues,theBankwill:

• Continue to develop the implementation framework for macro-prudential policy by researching the

circumstanceswhenthedeploymentofothermacro-prudentialinstrumentsmightbeappropriate.

• Completetheprogrammeofworktounderstandthelinkagesbetweenmonetaryandmacro-prudential

policies,andtheimplicationsfordecisionmakingacrossthetwopolicies.

• Developacomprehensivestress-testingframeworkfortheNewZealandbankingsystemthatcanbe

usedtogaugetheresilienceofthesystemtoabroadrangeofeconomicandfinancialrisks.

• Monitor the effectiveness of the loan-to-value restrictions, and advise on their withdrawal when judged

appropriate.

• Continue toenhance thereportingoffinancialsystemstabilityandefficiency,and theassessmentof

policy, as contained in the Financial Stability Report andotherreports.

• Expandthecollectionoffinancialmarketstatistics,includingdevelopinganinsurancesectorstatistical

survey;enhancingthecollectionofmanagedfundsdata;developingaNewZealandsecuritiesdatabase;

andcompletingtheimplementationofnewbalancesheetdataforthebankingsector.

Success measures

Seepage11.







II. DevelopingamoreintegratedapproachtotheBank’spolicy

5. Reviewing,streamliningandimprovingtheprudentialregulatoryframework

6. Developingacomprehensivestress-testingframeworkfortheNewZealand

bankingsystem

Prudential supervision

Objectives

Toprovideprudentialsupervisionsoastopromoteasoundandefficientfinancialsystem;tolimitdamage

tothesystemthatcouldarisefrominstitutionalfailureorotherfinancialsystemdistress;andtocontributeto

publicconfidenceinthefinancialsystem.

Scope of operations

TheBank:

• Registersandsupervisesbanks,settingandapplyingappropriateprudentialcriteria.

• Licensesandsupervisesinsurers,settingandapplyingappropriateprudentialcriteria.

• Licensesandmonitorsnon-bankdeposit takers (NBDTs),settingandapplyingappropriateprudential

criteria.

• Setsandoverseescriteriafordesignationofpaymentandsettlementsystems.

• Implementstheprudentialregulatoryframeworkfornon-bankdeposittakersandinsurers.

• Supervises reporting entities within the Bank’s sector under the Anti-Money Laundering and Countering

theFinancingofTerrorism(AML/CFT)legislation.

• Appliesaframeworkforundertakingenforcementactionintheeventofidentifiednon-compliance.


New Zealand’s financial system is sound and well placed to support growth in the economy. New

Zealand’sbanksarewell-capitalisedandareadjustingtonew,tougherBaselIIIprudentialrequirements.

New Zealand’s financial system is heavily reliant on the fourmajorAustralian banking groups, and

wemaintainaclose relationshipwith theAustralianparentbanksand theAustralianfinancial regulatory

authorities.

The Non-bank Deposit TakersAct was passed in 2013, introducing licensing and further prudential

requirements. Implementation is nowunderway. Insurers are now fully subject to theBank’s regulatory

andsupervisoryregime.Reportingentitieswithinthebank,insuranceandnon-bankdeposittakingsector,


supervisedbytheBank,mustnowformallycomplywithstatutoryAML/CFTobligations.

ThekeypolicyissuesfacingtheBank’sPrudentialSupervisiondepartmentare:

• Assessingthescopetobetterstreamlineandimprovetheprudentialregulatoryframework.

• IncreasingtheBank’ssupervisoryactivitytoimproveriskanalysiswithinandacrossthebankingsector.

• StrengtheningtheBank’scapacitytorespondtofinancialcrises,includingwiththeimplementationofthe

OpenBankResolution(OBR)policy.

• ContinuingtodeveloppolicytostrengthentheBank’soversightoffinancialmarketinfrastructures.

• CoordinatingwithotherAML/CFTsupervisorstoensureconsistencyinapproachandguidance.



• Developandcompleteacomprehensivestress-testingframeworkforNewZealandbanks,andcoordinate

withtheAustralianPrudentialRegulatoryAuthorityonAustralian-ownedbanks.

• Complete a stocktake of prudential regulations for banks and non-bank deposit takers, and of the

insurance solvency standards, then consult on enhancements to improve the efficiency, clarity and

targetingofprudentialstandards.

• Increasesupervisoryengagementwithexecutivesanddirectorsofregulatedbanks.

• Complete the reviewofbanks’outsourcingarrangementsandconsidermeritsofchanging thepolicy

settings.

• Initiate amendments to the statutory management powers in the Reserve Bank of New Zealand Act 1989

toclarifyaspectsofthelegislativeframeworkforOBR.

• Assessanddetermine licenceapplications for non-bankdeposit takersunder theNon-bankDeposit

TakersAct2013,andprogresschangesrecommendedbythereviewoftheprudentialregimeforNon-

bankDepositTakersthatwascompletedin2013.

• Workonproposalsforamodifiedframeworkfortheformaloversightofpaymentandsettlementsystems

thatareofsystemicimportance.

• Developandimplementthesupervisoryregimeforinsurers.

Success measures

Seepage11.



Refer to Strategic Priorities. p. 16.


8. Developing a roadmap and architecture for the Bank’s financial

management and payments systems

Settlement services

Objective

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

areprovidedefficientlyandreliably,andmeetinternationalstandards.

Scope of operations

TheBank:

• Operates the Exchange Settlement Account System (ESAS) and the New Zealand central securities

depositorysystem(NZClear).

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

Interchange),andthatrequiredforforeignexchangetransactionsthroughCLSBank.

Environment and issues

TheBankoperatespaymentssystemsthatarecriticaltotheoperationoftheeconomy.Maintainingthese

systems involves responding to developments in international settlement norms, changes in the settlements

landscapeinNewZealandandrapidtechnologicalchange.

ThekeyissuesfacingtheBank’sSettlementServicesaretheneedto:

• EnsurecontinuityoftheinterfacebetweentheSWIFTpaymentsystemandtheBank’ssystem,asthe

currentinterfacewillnotbesupportedbeyondlate2015.

• Determinethepotentialfutureprovisionofservicesandinvestmentinsystems.

• Plantoupgradepaymentsystemsincomingyears.Technologyischangingquicklyandexistingsystems

arecomplexandneedtobeupgradedinordertosupportdevelopmentsinthepaymentsindustry.Aplan

willbepreparedtoensuresystemsaredevelopedtomeetevolvingrequirements.



• UpgradetheinterfacebetweentheSWIFTsystemandtheBank’ssystem.

• ConsultwiththepaymentsindustryontheirserviceandsystemsrequirementsoftheBank’spayment

operations, and develop a roadmap for the design and delivery of the Bank’s payment and settlement

servicesandsystems.

Success measures

Seepage11.


Legal tender that meets the currency needs of the public

Refer to Strategic Priorities, p. 16.


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:

• Avert counterfeiting risks, given the current polymer banknote series is 14 years old and the rapid

innovationincopyingandprinting.

• Manage a significant change programme as the Bank prepares to launch Series 7 banknotes and

preparesitsexistingfacilitiesandexternalstakeholders.

• Ensurethatthesecurity,safetyandoperationalefficiencyofthecashoperationsarenotcompromised

duringaperiodofsignificantactivity(2015-2018).

• Ensureappropriatelong-termsecurepremisesfortheBank’scurrencyholdings.



• Continuetoplanforthereleaseanddistributionofthenewbanknoteseries.

• CommunicateandengagewithstakeholdersonthereleaseoftheSeries7banknotes.

• PreparetheWellingtonsiteforSeries7banknotes.

• TheBankwillre-evaluateitslong-termrequirementsandplansforprocessingfacilitiesandproperty,to

supportthecustody,reservesmanagement,distributionandlogisticsofcurrency.

Success measures

Seepage11.


Refer to Strategic Priorities, p 14.



2. Continuingtoimproveperformanceculture.

The 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.

A high level of staff engagement is a key indicator of a high-performing organisation. An annual

EngagementsurveyisundertakentomeasurethelevelofstaffengagementwiththeBank.TheBankwill

continue to focus on keeping staff well connected, developing staff, and recognising performance and

contribution. The link between performance and reward will continue to be strengthened to encourage

appropriatecompetenciesandbehaviours.

CommunicationsRefer to Strategic Priorities, pp. 14, 16.



2. Continuingtoimproveperformanceculture



9. DeliveringNewZealand’snewbanknotes

The Bank will ensure that it communicates clearly and effectively to improve understanding of, and

supportfor,itspolicychoicesinachallengingeconomicenvironment.Itwillfurtherexpanditsprogrammeof

speechestomanysectoralandregionalaudiences,aswellasbriefings,mediainterviews,andonlinevideos

andpublicationsontheBank’soperationsandpolicystatements.

The Bank will use its internal communications programme as an integral part of its work to improve

performanceculture.

TheBankwillbuildonitsunderstandingofstakeholders’perceptionsoftheBank’sroles,policydecisions

andperformancethroughseveralsources,includingabiannualStakeholdersurvey,newsmediacoverage,

Operations - enabling the Bank

People and culture


andaudiencefeedbacktoourspeechprogramme;andwillinvestigatepotentialonlineengagementchannels.

TheproductionandreleaseofSeries7banknoteswillbeaparticularfocusforclear,effectiveandproactive

communication.

Knowledge servicesRefer to Strategic Priorities, pp. 14, 16.




8. DevelopingaroadmapandarchitecturefortheBank’sfinancialmanagementandpaymentssystems

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

security,aswellaseasyaccesstoabroadrangeofrelevantinformationsources.

Keyinitiativesforthedepartmentthisyearwillbeto:

• provideprojectmanagementsupportfortheintroductionofthenewSeries7banknotes;

• developastrategyroadmapfortheBank’streasurysystem;

• supportthereviewofthepaymentsystems;

• strengthen the reliability of its information technology systems, including the business continuity

infrastructureforcriticalfunctions,itsITSecurityFramework,andanewITback-upsystem;

• improve the electronic delivery of information, and refresh theBank’sweb contentmanagement

system.

Internal financial servicesRefer to Strategic Priorities, p. 16.

III.Improvinginfrastructureandreducingenterpriserisk

8.DevelopingaroadmapandarchitecturefortheBank’sfinancialmanagementandpaymentssystem

High-qualityfinancialsystemsandprocessesareneededtomanagetheBank’scomplexbalancesheet.

Thesesystemssupportworkflows,reportsandprocessesforoperationsinfinancialmarketsandcurrency

operations.

In2013-14,theBanksuccessfullycompletedanupgradeofitstreasurysystem.TheBankwill:

• developaroadmapforthedesignandarchitectureofitstreasurysystems;

• implementsystemschangestomeetnewinternationalrequirementsforsettlementandrecordingof

derivativetransactionsandrelatedcollateralmanagement;and,

• prepare a plan and financial forecasts to support the Bank’s negotiations for the next five-year

FundingAgreementthatcommenceson1July2015.

From1July2014,theBankwillberequiredtoapplyNewZealandEquivalentstoInternationalPublic

SectorAccountingStandards(NZ-IPSAS)ratherthanInternationalFinancialReportingStandards(IFRS).

The change in financial reporting framework will not have a significant impact on the Bank’s financial

reporting,althoughNZ-IPSASandIFRScoulddivergeovertime.


Risk assessment and assuranceRefer to Strategic Priorities, p. 16.

III.Improvinginfrastructureandreducingenterpriserisk

8. DevelopingaroadmapandarchitecturefortheBank’sfinancialmanagementandpaymentssystem

10.Re-examiningCurrency,PropertyandSecurity

TheBankfacesawiderangeofrisks,somegeneralandothersuniquetocentralbanks.Theidentification,

management,andmonitoringoftheserisksiskeytomaintainingasoundanddynamicmonetaryfinancial

system. Inaddition, therecontinue tobedevelopments in theglobalenvironmentandwithin theBank in

termsofnewinitiativesandprojectactivity.Theseintroducenewrisksthatneedtobeeffectivelymanaged.

TheBank’sapproachtoaddressingenterpriserisksistoensuretheyarebeingidentifiedandmanaged

inaproactive,coordinated,prioritisedandcost-effectivemanner.Riskassessmentandassurancewillplace

strongfocusonfinancialandpaymentsystemsarchitecture,deliveringNewZealand’snewbanknotes,and

optimisingthefacilitiesmanagementandlogisticsforcurrency.

The Internal Audit function will deliver assurance for control frameworks over the Bank’s operations,

throughthecompletionoftheannualauditplan.Thelegalfunctionseekstooverseethebroadrangeoflegal

risksfacingtheBankfrombothaprudentialandoperationalperspective.

Property, securityRefer to Strategic Priorities, p. 16.


10.Developingaplanforoptimisingfacilitiesmanagementandlogisticsforcurrency

Bankmanagementisreviewingtheoperationalrequirementsaroundpropertymanagementandsecurity,

soastomaintaintheinfrastructureofthepropertiesatalevelthatpromotesefficiencyandasafeandsecure

environmentforallstaff,tenantsandvisitors.

Forsecurity reasons, theBankoperatesandmaintainsmodern, reliablesecurityaccessandcontrol

systems.Forefficiencyandenvironmentalreasons,theBankwillcontinuetoseektomaintainandextend

energy-savingandrecyclingprogrammes.


Financial managementFinancial structure

Balance sheet overview and funding of the Bank’s operations

TheBankreceivesnodirect fundingthroughthecentralgovernmentbudgetaryprocess. Instead, the

Bank’smainsourceofincomeisthereturnonthesubstantialinvestmentstheBankholds,whicharefunded

bytheissueofcurrencyandbytheBank’sequity.

ThenatureandextentoftheBank’sprincipalactivitiesthataffectitsbalancesheetaredescribedinthe

Annual Report 2012 – 2013(pages56to57).Foreignreservesmanagement,NewZealanddollarliquidity

management,andcurrencyoperationsmateriallyaffectthesizeandstructureoftheBank’sbalancesheet.

UndertheReserveBankAct,theMinisterandtheGovernorarerequiredtoenterintoafive-yearfunding

agreement tospecify theamountof theBank’s incomethatmaybeusedtomeetoperatingexpenses in

eachfinancialyear.TheBankreportsitsexpenditureagainsttheFundingAgreementinitsAnnual Report.

ThecurrentFundingAgreementcoversthefive-yearperiodending30June2015.Itprovidesfundingof

$55.2millionfor2013/14and$56.4millionfor2014/15.

Annual distributions paid by the BankTheBank’sannualdividendisdeterminedusingthefollowingprinciples,whichareacombinationofwhat

isrequiredundertheReserveBankActandthisStatement of Intent:

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.

TheamountofthedividendtobepaidtotheCrownisdeterminedbytheMinisterof

Finance each August on the recommendation of the Bank, having regard to the views of

theBoardofDirectorsandanyotherrelevantmatters.

Accounting standardsFrom1July2014,theBankwillberequiredtoapplyNewZealandEquivalentstoInternationalPublic

SectorAccountingStandards(NZ-IPSAS)ratherthanInternationalFinancialReportingStandards(IFRS).

The change in financial reporting framework will not have a significant impact on the Bank’s financial

reporting,althoughNZ-IPSASandIFRScoulddivergeovertime.


Drivers of the Bank’s financial performance and financial positionTheprincipaldriversoftheBank’sfinancialperformanceandfinancialpositionare:

• The value of currency in circulation.

Currencyincirculationisanon-interest-bearingliability.Tradingbanksarechargedforcurrency

issued to them and the Bank earns interest, known as seigniorage, on investment of these amounts paid

bytradingbanks.At30April2014,currencyincirculationwas$5.1billion.

• The size of the Bank’s open foreign exchange position and related changes in foreign exchange rates.

TheBankhasapolicyofholdingsomeofitsforeigncurrencyreservesonanunhedgedbasis.This

allows it to more effectively respond to a foreign exchange crisis, and to smooth more extreme exchange

ratemovements.TheBank has a benchmark holding ofSDR1.0 billion unhedged foreign currency

reserves,withtheabilitytoholdmoreorlessthanthebenchmarkovertheexchangeratecycle.

HoldingunhedgedforeignreservesmeansthattheBank’snetequitywillfluctuatewithchanges

intheexchangerate:foreignexchangeslossesmaybeincurredwhentheNewZealanddollarisstrong,

andgainsmayberecordedwhentheNewZealanddollar isweak.Theunhedgedposition increases

volatilityintheBank’sfinancialperformanceandfinancialposition.

At30April2014,theBankheldanopenforeignexchangepositionofSDR1.39billion(NZ$2.5

billion).At30June2013,theopenforeignexchangepositionwasSDR1.36billion(NZ$2.6billion)at30

June2013.

• Interest rates earned on the Bank’s investment in government securities and other securities.

The Bank’s holdings of New Zealand government securities are valued at market value, with

unrealisedgainsandlossesonthoseholdingsbookedtoequity.Interestincomeandrealisedgainsand

lossesondisposalofNewZealandgovernmentsecuritiesarebookedtotheBank’sIncomeStatement.

• The size and performance of the Bank’s foreign reserve management and market operations functions.

TheBankholds foreign reserves thatcanbe liquidatedatshortnotice tosupport its functions,

includingmonetarypolicyobjectivesand themaintenanceof orderlymarkets. Foreign reservesare

valuedatmarketvalue.Changestoforeignexchangeratesandinternationalinterestrateswillaffectthe

marketvalueofthosereserves,andvaluationchangesarebookedtotheBank’sIncomeStatement.

At30April2014,theBankhadforeignreserveassetsequivalentinvaluetoNZ$8.4billion.

• New Zealand government deposits held at the Bank.

TheBankprovidesasettlementaccountfacilitytotheCrown.ThesizeofNewZealandgovernment

deposits held in the Crown SettlementAccount (CSA) is a big driver of the Bank’s balance sheet.

LargerCSAdepositsareswappedintoforeigncurrencyandinvestedbytheBankoffshore.However,

netearningsarenotmateriallyaffectedbythisactivity.At30April2014,theBankheldNewZealand

governmentdepositsofNZ$2.7billion.


• Operating expenditure incurred by the Bank.

Thefive-yearFundingAgreementspecifiestheamountoftheBank’sincomethatmaybeusedtomeet

operatingexpensesineachfinancialyear.

• The level of equity available for investment and the dividend paid by the Bank.

TheBankrequiresequitytoabsorbanylossesthatmayarisefromcarryingoutitsfunctions,andequity

isreviewedannuallytodeterminetheBank’sannualdividend.Thedividendforthe2012-2013yearwas

$175million,andreportedequityat30April2014was$2.5billion.

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

because of theBank’s operations in the domestic financial system, and its holdings of foreign currency

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 68-79 in

the Annual Report 2012-2013.

Financial projectionsThe following table outlines the Bank’s budgeted income and expenditure for 2014/15. The key

assumptionsunderlyingthebudgetfortheyearended30June2015arethat:

• theBank’scurrentfunctionswillcontinue;

• therearenomaterialchangestothestructureoftheBank’sbalancesheetbetween31January2014and

30June2015;

• projectedinterestandexchangerateswillbethoseadvisedbytheTreasuryforthepurposesofpreparing

theGovernment’sBudgetfor2014/15;

• therewillbenochangeinthecreditworthinessoftheBank’scounterparties;and

• therewillbenomaterialchangestotheBank’sliquiditymanagementoperations.


Budget

For the year ending 30 June 2014-15 $mOperating income:Net investment income 244.3

Other income 10.6

Total operating income 254.9

Operating expenses:Personnel 34.6

Asset management 6.8

Net currency issued 7.0

Professional and contract services 8.0

Other 12.0

Total operating expenses 68.4 Operating surplus 186.5

2 ComprehensiveincomeincludesearningsbookedtotheBank’sIncomeStatementandalsochangesbookeddirectlytoEquity.ThemajorityofsensitivitytochangesinforeignexchangeratesisbookedtotheIncomeStatement,whereasthemajorityofinterestratesensitivityarisesontheBank’sportfolioofNewZealandgovernmentsecuritiesandisbookeddirectlytoEquity.Refertopage73oftheBank’sAnnual Report 2012-2013foradetailedsensitivityanalysisasat30June2013.

Projectedfinancialperformance2014–2015

Thebudgetisbasedonthekeyassumptionsoutlinedabove.ItisimportanttonotethattheBank’sassets

andliabilitiesaresensitivetochangesininterestratesandexchangerates,andthatactualfinancialresults

coulddiffermateriallyfromthosebudgeted.

As at 31 January 2014, a 10 percent appreciation in the value of the New Zealand dollar would reduce

the Bank’s comprehensive income2by$233million,andconverselya10percentdepreciationinthevalue

oftheNewZealanddollarwouldadd$284milliontocomprehensiveincome.A1percentacross-the-board

increase in interest rateswould reduce comprehensive income by about $202million, and a 1 percent

across-the-boardreductionininterestrateswouldincreasecomprehensiveincomebyabout$216million.


3 Netexpenditurecomprisesoperatingexpenses less incomeearned fromcertainBankoperationsas specified in theFundingAgreement.

Net expenditure

BudgetFor the year ending 30 June 2014-15

$000sFunctions:Monetary Policy formulation 11,192

Domestic market operations 5,497

Macro-financialstability 8,124

Prudential supervision 13,249

Foreign reserves management 6,148

Settlement services (1,340)

Currency operations 14,901

Net expenditure 57,771

Net expenditure provided for in the Funding Agreement 56,400

Funding Agreement over-expenditure (1,371)

Net expenditure3budget2014-2015

Budgetednetoperatingexpenditurefor2014/15of$57.8millionexceedstheamountof$56.4million

providedinthefundingagreement.Thisreflectsthestrategicpriorityofimprovinginfrastructureandreducing

enterpriserisks,particularlyintheBank’scurrencyoperations,whichrequiressubstantialinvestment.This

includes holding additional contingency reserves out of Wellington as well as modernising the facilities and

purchasingnewnoteprocessingmachinesinadvanceofintroducingSeries7banknotesin2015/16.Higher

levelsofoperatingexpenditureinourcurrencyoperationsreflectsignificantlyincreasedissuancecostsas

thevolumeofcurrencyonissuehasexpanded.Fortheyearended30April2014,thevalueofcurrencyin

circulationincreasedby9.6percent.Thebudgetfor2014/15alsoincludesprovisionforacommunications

andeducationcampaignforthelaunchofSeries7banknotes,whichwilloccurinthe2015/16financialyear.

Cumulative net operating expenditure will be less than the cumulative amount provided for in the

fundingagreement for thefiveyearperiodended30June2015.For thefirst threeyearsof that funding

agreement, cumulativenetoperatingexpenditurewas$8.6million less than theamountprovided in the

fundingagreementforthatthreeyearperiod.

Documents

Reserve Bank of New Zealand Statement of Intent · The Governing Committee is operating well and we have reviewed the terms of reference and composition of ... understanding of the