Feedback sought on Liquidity Policy Review

The Reserve Bank of New Zealand – Te Pūtea Matua is seeking feedback on proposed changes to our liquidity policy for registered banks.

Liquidity is a measure of the cash and other assets that can be quickly sold at a reliable price to pay bills and meet other financial obligations. Liquidity risk is the risk that a business will not be able to meet these financial obligations as they fall due. If liquidity risk crystallises, this can quickly lead to loss of confidence in a business, and in some cases, default or failure.

The objective of our liquidity policy is to strengthen financial stability by lowering the likelihood of liquidity problems affecting banks, and improve their ability to manage such problems, Deputy Governor and General Manager of Financial Stability Christian Hawkesby says.

“Although we believe our existing liquidity policy remains broadly fit for purpose, it has not been comprehensively reviewed since it was implemented in 2010. Since that time, an international liquidity framework has been developed and implemented overseas.

“There have been a number of significant developments that support the case for reviewing the policy now, including our recent Liquidity Thematic Review and Liquidity Stress Tests, as well as the COVID-19 pandemic,” Mr Hawkesby says.

Moving forward, we plan to consider whether our liquidity policy should also capture banks that are operating in New Zealand as branches, and, in due course, how it should apply to a broader set of deposit takers under the upcoming Deposit Takers Act.

This is the first consultation paper for the Liquidity Policy Review, which sets out the proposed issues and scope for the review. It also contains the principles we propose be used to guide the review and our decision-making. We intend to issue at least three more consultation papers as part of the review, with the entire review spanning approximately three years. The second and third consultation papers will seek feedback on a number of fundamental issues related to our liquidity policy, with a fourth consultation paper expected to contain the proposed final liquidity policy text. We welcome submissions on this first consultation until 14 April 2022.

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