NBDT Consultation Paper - Liquidity Policy

Ref #3888319 NBDT Consultation Document: Liquidity Policy Consultation Paper The Reserve Bank invites submissions on this Consultation Paper by 15th of March 2010. Submissions and enquiries about the consultation should be addressed, in the first instance, to: Gillian Lawrence Analyst, Financial System Policy Prudential Supervision Department Reserve Bank of New Zealand PO Box 2498 Wellington 6140 Email: gillian.lawrence@rbnz.govt.nz Or Ian Woolford Manager, Financial System Policy Prudential Supervision Department Reserve Bank of New Zealand PO Box 2498 Wellington 6140 Email:

woolfordi@rbnz.govt.nz Please note that submissions may be published. If you think any part of your submission should properly be withheld on the grounds of commercial sensitivity or for any other reason, you should indicate this clearly. February 2010

2 Ref #3888319 NBDT Consultation Document: Liquidity Policy

1. INTRODUCTION 1 The pa ssing of t he R eserve Bank of N ew Z ealand A mendment A ct 2008 established a new Part 5D of the Reserve Bank of New Zealand Act 1989 (the Act). Part 5D provides the Reserve Bank with powers to develop a prudential regulatory regime for the purposes of: (a) promoting the maintenance of a sound and efficient financial system; or, (b) avoiding s ignificant da mage t o t he f inancial s ystem t hat c ould r esult from the failure of a deposit taker. 2 Section 157M of t he Act, which came i nto f orce on 1 S eptember 2009 , requires all non-bank deposit takers (NBDTs) to have and comply with a risk management pl an w hich i ncludes pr ocedures f or m anaging l iquidity risk. Guidelines released by the Reserve Bank, for the purpose of interpreting risk categories, identify the elements for managing liquidity risk as: (a) identifying any funding gaps; (b) managing sources of regular funding; and, (c) maintaining sources of emergency back-up liquidity.

3 In a ddition, s ection 157 Z o f t he A ct p rovides f or r egulations t o be m ade t o require that liquidity requirements are included in trust deeds. The regulations may prescribe one or more of the following liquidity requirements: (a) assets that qualify as liquid assets for the purposes of the regulations; (b) minimum amounts of li quid assets r elative to liabilities tha t mus t be maintained by deposit takers; (c) requirements concerning matching maturity of assets and liabilities; (d) requirements in respect of a deposit taker that require the liquidity of the borrowing group of which the deposit taker is part to be taken into account; and, (e) other measures to better ensure that a deposit taker maintains prudent cash f lows and a l evel of l iquid a ssets s ufficient t o e nable i t t o withstand a pl ausible r ange of l iquidity s hocks (for example, events that r esult in it e xperiencing a s ignificantly r educed inflow of liqui d assets). 4 This consultation paper outlines the policy options being considered in relation to section 157Z. Key matters and principles to take into account in recommending regulations 5 Under s ection 157F , t he R eserve B ank m ust t ake i nto a ccount a num ber of principles in recommending regulations to the minister under Part 5D of the Act:

3 Ref #3888319 (a) the desirability for consistency in the treatment of similar institutions, regardless of matters such as their corporate form; (b) the importance of recognising– (i) that it is not the pur pose of thi s P art to eliminate a ll r isk in relation t o t he pe rformance of de posit t akers or t o l imit diversity among deposit takers; and, (ii) that depositors are responsible for assessing risk in relation to potential investments and for their own investment choices; (c) the de sirability of pr oviding t o de positors a dequate i nformation t o enable the m to assess r isk in relation to pot ential inve stments a nd to distinguish between high-risk and low-risk deposit takers; (d) the desirability of sound governance of deposit takers; (e) the desirability of effective risk management by deposit takers; (f) the need to avoid unnecessary compliance costs; and, (g) the need to maintain competition within the deposit taking sector. 6 We will take into account all of these principles when finalising the liquidity policy, w ith f ocus on ( a), ( c), ( e) a nd ( f) w hich w e c onsider pa rticularly relevant. 7 Following consultation, the Reserve Bank intends putting recommendations to Cabinet, and developing draft regulations. The recommendations will include a Regulatory Impact Statement. Therefore, while this consultation paper asks a number of specific questions, we are also interested in receiving compliance cost estimates.

8 The i ntention i s t o make policy recommendations t o C abinet in the second quarter of 2010, engaging in further consultation with industry if required. 2. BACKGROUND Nature of the NBDT sector 9 The cor e N BDT s ector i n New Zealand cons ists of t wo s eparate bus iness models: bank-like savings institutions and deposit-taking finance companies. 1 Savings institutions comprise mainly building societies and credit unions. Like banks, a k ey pa rt of bu siness f or t hese e ntities is pr oviding d epositors with transaction ba lances. C onsequently t hey hold s ignificant a mounts of f unding on call and at short term maturities, and the liquidity risks for these firms are mainly from the excessive withdrawal of call funding. Their liquidity strategy is generally to hold high levels of liquid assets. 10 Deposit-taking finance companies operate a different business model offering longer term savings instruments. As a result, a larger amount of their funding is at longer maturities and the liquidity management strategy is to match the

1 The NBDT sector as a whole includes entities beyond those primarily referred to in this document.

4 Ref #3888319 maturities of f unding t o t hat of l ending. The l iquidity r isks t hat f inance companies face is in a maturity mismatch occurring. Before the recent period of stress on finance companies, where short term funding mismatches became evident f inance com panies w ere c apable of r eadily r aising n ew de posits t o meet outflows. This ability to attract new funding was premised on high levels of investor confidence coupled with seemingly high investment yields be ing offered. Figure one p resents t he pe rcentage o f t otal N ew Zealand Dollar (NZD) funding at di fferent m aturities, on a ggregate, f or bui lding s ocieties, credit unions and finance companies. For credit unions and building societies nearly all funding received is in NZD. For finance companies, on aggregate at least 80% of total funding is in NZD. Figure 1 Maturity profile of New Zealand Dollar funding within the NBDT sector as at 31 October 2009. 11 The di fferences in liquidity r isks a re reflected in the di fferent liqui dity requirements i n NBDT’s t rust deeds. R equirements va ry f rom t he more traditional liqui d asset r equirements in bank-like s avings ins titutions’ trust deeds, t o m ore i ndirect l iquidity r equirements in s ome f inance companies’ trust deeds which simply encourage holding liquid assets. Traditional liquidity requirements are usually on the basis of a specified percentage of liquid assets to be held against total tangible assets. For many finance companies, liquidity requirements are not included in their trust deeds. 12 In addition t o l iquidity requirements i mposed on N BDTs t hrough t heir trust deeds, there are al so l egislative requirements o n trustees and directors. T he Reserve Bank of New Zealand Amendment Act 2008 imposes obligations on the t rustees of N BDTs to i nform t he Reserve Bank i f t he d eposit ta ker is 0% 5% 10% 15% 20% 25% 30% 35% 40% Transaction call - cheque EFTPOS less chq Other call 1 < 90 days 90 days < 1 year 1 year < 2 years 2 years < 3 years 3 years < 4 years 4 years < 5 years 5 years + Finance companies Building Societies Credit Unions

5 Ref #3888319 unlikely to pa y its debts as they come due in the normal course of business. Similarly, unde r s ecurities r egulation, di rectors are required t o confirm i n prospectuses that the borrowing group of an issuer are able to pay liabilities that are due in the next 12 months. The solvency constraint includes liquidity elements. 13 Liquidity ma nagement by N BDTs to some e xtent r eflects the di scipline imposed by the existing liquidity requirements outlined above. From the onset of r ecent f inance company failures a nd s ubsequent di minishing i nvestor confidence, finance companies’ ability to raise new funding was limited and their ability to meet liqui dity r equirements was predominately d ependent on the successful repayment of their loan book assets. 14 During this pe riod, f inance c ompanies within t he c onsumer f inancing s ector have s hown s ome s uccess i n t heir ability t o meet de posit out flows with matching m aturities of t heir l oan book. H owever, f inance companies w ithin the property financing sector have been more vulnerable to liquidity shortfalls as their loan book assets have proven to be highly illiquid in a stressed market. Saving institutions have generally held high levels of depositor confidence and accordingly l iquidity ha s be en m anaged b y t he r eliance on hi gh l evels of reinvestment. 15 The i ntroduction of t he retail D eposit G uarantee S cheme (DGS) i n October 2008 a lleviated l iquidity pressures in t he s ector, a nd e ncouraged i nvestor confidence. There is some evidence that the availability of the guarantee has had an impact on the funding maturity profile of finance companies, and that some finance companies may not currently be match funded. As a result, there may b e inc reased liquidity r isks f rom exiting the D GS w hich NBDTs will have to manage in the short term. The liquidity risks will be mitigated by some of t he f eatures of t he e xtended guarantee s cheme w here ent ities ar e a ble t o issue both guaranteed and non-guaranteed funding. 16 In this regard, our starting point is to recognise that the problems in the NBDT sector w ere primarily related to asset qu ality, rather th an liquidity mismanagement. While there w ere ( and to some ex tent, are) s ome i ssues i n liquidity m anagement t hey w ere not pe rvasive across t he s ector a nd c ould arguably be a ddressed by non -regulatory s olutions. T his s ituation c ontrasts with the inadequate capitalisation of some parts of the sector. In light of this, the rationale for proposing liquidity requirements is set out below. The need for additional liquidity requirements 17 Liquidity risk can be thought of as having two main components: the risk that an entity cannot meet its obligations as they fall due (including risks stemming from both the asset and liability side of the balance sheet); and the risk to an entity’s pr ofitability of being a ble to meet its obl igation only a t a n elevated cost. 18 Although t here i s no obvi ous s ingle m easure t o de termine t he a mount of liquidity risk an entity is exposed to, it is essential that a deposit taker sets up a

6 Ref #3888319 number of indicators of liquidity risk to monitor and to limit. At the least, a regulator s hould b e s atisfied t hat a ll de posit t akers h ave a l iquidity risk management f ramework i n place. The r equirement f or a r isk management program unde r s ection 157M , a nd t he a ccompanying guidelines on l iquidity risk management, provide some high level guidance to deposit takers. 19 However, there are arguments for the Reserve Bank to go further than simply requiring that there be a liquidity risk management framework in place. The main argument here is that the failure of a deposit taker in benign times due to a sudden large liquidity shock could significantly affect confidence in similar entities. A deposit taker’s management would not typically factor this public cost into their decision on how much to spend on liquidity protection, and as a result prescription of liquidity requirements could provide reasonable comfort that t he de gree of l iquidity r isk would be l ower t han i t w ould be w ithout intervention. 20 We can contrast this conceptual situation with the recent sustained period of stress that finance companies experienced, where liquidity management for the most pa rt pr oved a dequate e xcept f or vul nerabilities i n r elation t o pr operty financing companies. The main difference here is that, in the recent period, the stress de veloped ove r t ime allowing de posit ta kers the time to respond a nd manage stresses as they developed. Another crucial difference is that the stress mainly af fected the f inance com pany s ector w here t he l ong t erm na ture of funding pr evented l arge s cale w ithdrawals of call f unding. T his argument would suggest that there is potential for NBDTs’ appetite for liquidity risk to be higher than socially optimal in normal times (unlike the current period), but it is not immediately obvious that it has been, or if it was, significantly so. 21 Prescribed l iquidity requirements c an a lso be j ustified f rom t he pur pose of NBDT p rudential r egulation m ore generally, t hat i s, t o a void s ignificant damage to the financial system that could result from the failure of a deposit taker. While N BDTs a re not s ystemic to the f inancial s ystem, they a re systemic to a local group of similar entities. Since similar entities have similar business m odels ( particularly i n t erms of l ending) t he f ailure of a n e ntity would have an impact on the availability of funding to particular segments of the economy. 22 However, as s tated above, the econom ic a rgument f or pr ecise qua ntitative liquidity requirements is not as strong as the case for capital or related party requirements, a nd issuing f urther non -binding g uidelines c ould potentially address s ome of t he current l iquidity i ssues. In t his c ase t here are still arguments for prescriptive requirements to be set to achieve consistency across the sector and to prevent liquidity management presenting relative competitive advantages o r di sadvantages a cross t he s ector. S hort of pr escribing quantitative liqui dity r equirements, prescribing me asurement f rameworks could also achieve some amount of consistency across the sector and could fill gaps identified in the current framework.

7 Ref #3888319 Liquidity policy developed for locally incorporated banks 23 One a pproach t aken i n pr escribing l iquidity r equirements i s that o f the liquidity pol icy d eveloped f or l ocally i ncorporated ba nks. B riefly s tated, t he bank liquidity policy has three main elements: • Quantitative; • Qualitative; and, • Disclosure and reporting requirements. 24 The quantitative requirements focus on mismatch positions on one-week, one￾month hor izons, a nd o n a m inimum c ore f unding pos ition a t a one -year horizon. The qualitative requirements set out, at a high level, some minimum requirements that should be included in banks’ internal structures and toolkits for managing liquidity risk. Quarterly disclosure requirements aim to provide a discipline on ba nks by m aking publ ic i nformation a bout t heir l iquidity positions, pe rformance against r equirements, a nd a pproach t o m anaging liquidity risk. Scope of the consultation paper 25 In t his c onsultation pa per w e pr opose a s eries of opt ions f or r egulating liquidity risk. This includes the potential introduction of new quantitative and qualitative requirements. The risk management requirements already in force and t he non -binding guidance which s upports t hem a lready pr ovide s ome qualitative requirements for deposit takers.

26 Disclosure requirements are outside the scope of this paper and are being dealt with separately i n a r eview of ba nk a nd N BDT di sclosure r equirements. Material matters will, however, need to be disclosed under existing disclosure requirements. Policy Issues 27 While t here a re a rguments i n f avour of i mposing a dditional l iquidity requirements o n N BDTs, t he m ain i ssue w e f ace i n r elation t o p rescribing quantitative liqui dity r equirements f or N BDTs is the di versity in liquidity needs in the sector arising from the different business models. As a result, it is not clear to us that specifying a s ingle set of precise requirements across the sector i s a s ensible approach. If t he l iquidity r equirements t ake t he f orm of minimum requirements across the sector, it c ould be argued that each NBDT may b e l ess i nclined t o f orm i ts ow n vi ew of h ow vul nerable i t may b e to liquidity r isks, a nd t ake ot her ne cessary s teps. H owever, i f liqui dity requirements w ere t ailored t o t he r isks of t he di fferent bus iness m odels, consistency and comparability across the sector decreases. Such an approach risks i ntroducing di stortions i n t he s ector d ue t o di fferent r egulatory requirements. 28 The s econd i ssue w e f ace i s t he qu estion of w hether l iquidity requirements should be imposed on t he deposit taker or the borrowing group which it is a

8 Ref #3888319 part of. Our preliminary view is that since the borrowing group guarantees the deposit taker’s liabilities and is treated as an economic unit b y trustees, that requirements should be imposed on the borrowing group for liquidity purposes too. T his w ould pr event r egulatory arbitrage o ccurring w ithin a bor rowing group in relation to liquidity requirements. 3. POLICY OPTIONS BEING CONSIDERED 29 The policy options on which we are seeking your input can be summarised as follows: Maintaining approximately the status quo • In this option the Reserve Bank would not prescribe further liquidity requirements by regulation, other than requiring liquidity requirements to be included in NBDTs trust deeds. As is currently the case, trustees will be r esponsible f or approving l iquidity m anagement a nd s etting liquidity r equirements f or N BDTs on a case-by-case b asis. There i s also scope und er t his o ption t o pr ovide m ore detailed non -binding advice on liquidity risk management. Prescribing a measurement framework and requiring quantitative liquidity requirements to be included in trust deeds

• Here t he R eserve B ank would only s tandardise de finitions a nd prescribe a m easurement f ramework across t he s ector, while t rustees would de termine t he qua ntitative r equirements t hat i ndividual institutions a re r equired t o m eet. A ll N BDTs would be r equired t o have the quantitative requirements reflected in trust deeds. Prescribing precise requirements • Under this appr oach the R eserve Bank would specify pr ecise quantitative r equirements a gainst a liqui dity r isk management framework. This c ould i nvolve pr escribing qua ntitative r equirements against liquidity and mismatch ratios. Under a sophisticated approach, this c ould be a chieved t hrough r ecalibrating t he l iquidity pol icy for locally incorporated banks to address liquidity risk specific to NBDTs.

• Do you agree with this preliminary assessment of liquidity risk in the NBDT sector? • Do you agree that it is appropriate to impose liquidity requirements on the borrowing group? • Are there any other options that the Reserve Bank should consider?

9 Ref #3888319 3.1 Maintaining approximately the status quo 30 The main argument for maintaining the status quo is that current issues with liquidity management could be addressed to a certain extent by non-regulatory means. For example, more detailed liquidity risk management guidelines could be i ssued. A t t he l east, t his opt ion s hould a lso i nclude r equiring l iquidity requirements to be reflected in trust deeds so as to increase the transparency of requirements and to enable enforcement action.

31 However, t here a re s till a rguments f or m oving away from t he s tatus quo t o ensure conservative l iquidity m anagement across t he s ector and to achieve consistency a cross t he NBDT s ector a nd be tween N BDTs and ba nks. T hese benefits include de creasing r elative competitive disadvantages f rom liquidity management and encouraging investor discipline. Given the reliance on retail funding (rather t han wholesale f unding) by t he N BDT s ector, ar guably investor di scipline doe s not pl ay as bi g a role a s i n t he c ase of t he ba nking sector. However the current setup with different frameworks and requirements for liquidity risk likely presents unnecessary complexity for investors. At the micro level, there are benefits to be gained from making small improvements to the current framework from simply defining core liquidity components such as liquid assets. 32 While the DGS is likely to have introduced distortions to the NBDT sector and presents ex it cha llenges, t hese r isks are l ikely t o be t ransitional i n nature. There i s al so the r isk t hat t he p resence of t he D GS pos es a m oral h azard complication, but the re is r eason to believe tha t indus try and trustees will continue to be conservative. 3.2 Prescribing a measurement framework and requiring quantitative liquidity requirements to be included in trust deeds 33 If the Reserve Bank standardises definition and sets measurement frameworks for key liquidity risk components such as liquid assets, maturity matching, or other key components, under this approach trustees and firms would determine quantitative requirements against it. 34 The main benefit is that this approach can ensure effective measurement, and to some extent management, of liquidity risk in the sector while at the same time allowing liquidity requirements to be set to specific entities by allowing trustees to determine the quantitative requirements against the framework. The other benefit is that this approach will achieve consistency across the NBDT sector b y pr escribing a standard measurement f ramework across t he s ector, and c ould i ncrease c onsistency w ith t he ba nking s ector. S ome of t he e xit challenges from the DGS could also be addressed. • Are there any other relevant factors that the Reserve Bank should consider in relation to maintaining or moving away from the status quo?

10 Ref #3888319 3.3 Prescribing precise requirements 35 When pr escribing l iquidity r equirements, a na tural s tarting poi nt i s l iquidity and mismatch ratios to be a pplied (at pot entially different le vels) a cross the sector. A s imilar approach was recently i ntroduced f or l ocally i ncorporated banks where t hree quantitative ratio requirements were de fined (see box 1) . The one -week a nd one -month mismatch ratios s et of f t he va lue of ex pected cash i nflows ( including from t he s ale of l iquid a ssets), a gainst t he va lue of expected outflows, over the respective period. The ratios are defined as the net cash i nflow or out flow as a pe rcentage of t otal funding. T he one -year cor e funding ratio measures the extent to which loans and advances are funded by funding tha t is s table, either be cause it ha s a t least a year to maturity or because it is from sources that are less likely to withdraw their money at any sign of problems. 36 Banks must calculate these ratios on the basis of closing balances at the end of each business day. The one-week and one-month mismatch ratios are required to exceed the standard minimum of zero per cent at the end of each business day. The one-year core funding ratio is required to exceed at the end of each business day a standard minimum of 65 per cent initially, increasing to 75 per cent in stages over time. 37 Our preliminary analysis suggests that many of the larger NBDTs would easily exceed the r atio requirements calibrated for locally incorporated banks. This result is unsurprising given NBDTs’ reliance on retail funding compared with banks. O ther obvi ous di fferences be tween NBDTs and b anks w hich w ould require di fferent c alibrations i n t he pol icy a re t he a ssumptions a round reinvestment r ates of r etail te rm f unding and the a ccessibility of c ommitted lines. 38 To calibrate the bank liquidity policy for NBDTs the main issue, as outlined previously, i s t hat of di versity of business m odels w ithin t he s ector. H ere NBDTs differ from the banking sector where diversity is mostly in terms of size. Theoretically, the bank l iquidity pol icy c ould be r ecalibrated t o t he particular requirements of the different business models of finance companies and ba nk-like s avings ins titutions. T he c omplexity t hat a rises he re i s t he distortionary e ffects f rom va rying requirements w ithin a s ector, a nd consequently the basis on which different calibrations should apply. Another option is for the bank p olicy to be calibrated at a minimum level across t he sector. H owever, t his c ould pos e m oral ha zard w here N BDTs c ould be l ess inclined to form their o wn view o f how vulnerable they may be to liquidity risks, a nd t ake ot her n ecessary s teps. T he pr esence of t rustees s omewhat mitigates this risk. • Do you agree that consistency of measurement frameworks for key liquidity constructs across the NBDT sector is advantageous? • Are there any other matters the Reserve Bank should take into consideration when considering prescribing a liquidity risk measurement or management framework?

11 Ref #3888319 39 At t his s tage w e do n ot pr opose ot her f rameworks t hat pr ecise l iquidity requirements can be set against, but are open to options. BOX 1 THE RESERVE BANK’S QUANTITATIVE LIQUIDITY REQUIREMENTS FOR LOCALLY INCORPORATED BANKS One-week mismatch dollar amount = discounted value of primary liquid assets listed in Appendix A plus cash inflows contractually due within one week plus 75% of undrawn committed lines granted to the registered bank available within one week (subject to limits) minus 100% of “market funding” that can be withdrawn at sight or has residual contractual term within one week minus “non-market funding” that can be withdrawn at sight or with residual contractual term within one week, where the percentage assumed to be withdrawn varies by size band (see Table 1 in Appendix B) minus other outflows contractually due within one week minus 15 % of the undrawn balance of committed lines granted by the bank, other than revolving retail facilities, that can be drawn within one week One-week mismatch ratio = 100 x (One-week mismatch dollar amount / total funding) One-month mismatch dollar amount = discounted value of primary liquid assets listed in Appendix A plus discounted value of secondary liquid assets listed in Appendix A plus cash inflows contractually due within one month plus 75% of undrawn committed lines granted to the registered bank available within one month (subject to limits) minus 100% of “market funding” that can be withdrawn at sight or has residual contractual term within one month minus “non-market funding” that can be withdrawn at sight or has residual contractual term within one month, where the percentage assumed to be withdrawn varies by size band (see Table 1in Appendix B) minus other outflows contractually due within one month minus 15 % of the undrawn balance of committed lines granted by the bank, other than revolving retail facilities, that can be drawn within one month One-month mismatch ratio = 100 x (One-month mismatch dollar amount / total funding) One-year core funding dollar amount = all funding with residual maturity longer than one year, including subordinated debt and related party funding plus 50% of any tradable debt securities issued by the bank with original maturity of at least two years, and residual maturity (at the reporting date) between six months and one year plus “non-market funding” that can be withdrawn at sight or with residual maturity up to one year, where the percentage to be included decreases with size band (see Table 2 in Appendix B) plus Tier 1 capital One-year core funding ratio = 100 x (One year core funding dollar amount / total loans and advances)

12 Ref #3888319 • Do you agree that precise liquidity requirements for the NBDT sector could be set against liquidity and mismatch ratios? • Do you agree that a simplified bank liquidity policy, with the appropriate calibrations, could be an appropriate framework for liquidity requirements in the sector? • Do you agree that liquidity requirements should be calibrated at a minimum level across the NBDT sector? • Do you agree that liquidity requirements should be calibrated separately to suit the different business models of finance companies, and bank-like savings institutions? On what basis would you consider this distinction should be made? • Do you consider there to be other appropriate liquidity risk management frameworks suitable to the NBDT sector? • Are there any other relevant factors that the Reserve Bank should consider in relation to this approach?

13 Ref #3888319 APPENDIX A Liquid assets

1. The liquidity policy for locally incorporated banks specifies which type of marketable security (in addition to cash itself) can be treated as liquid assets in the one-week and one-month mismatch calculations. The following is a broad summary of the two classes of liquid asset defined in the policy, primary and secondary:2 Primary Liquid Assets Securities issued by the following – • New Zealand government • Reserve Bank of New Zealand • New Zealand local authorities • New Zealand state owned enterprises • NZD securities issued by overseas sovereign, supranational, and quasi￾sovereign entities • Residential mortgage backed securities Secondary Liquid Assets • Securities guaranteed by the New Zealand government (NZD and foreign currency) • Securities guaranteed by AAA-rated sovereign entities (NZD and foreign currency) • Foreign currency denominated securities issued by AAA-rated sovereign entities • Lower-rated and un-rated local authority securities • New Zealand corporate securities • Asset-backed securities • Registered bank securities
2. The discount values which adjust for various types of risk are available from the Reserve Bank website at: http://www.rbnz.govt.nz/finstab/banking/

2 The securities listed must all be denominated in New Zealand dollars except where otherwise noted.

14 Ref #3888319 APPENDIX B Table 1: percentages of non-market funding in each size band to be included as outflows (negative sign) in the mismatch ratio calculations (for registered banks, and for illustrative purposes) Size band Up to $5mn $5mn to $10mn $10mn to $20mn $20mn to $50mn Over $50mn Percentage to be included 5% 20% 40% 60% 80% Table 2: percentages of non-market funding up to one year in each size band to be included in core funding Size band Up to $5mn $5mn to $10mn $10mn to $20mn $20mn to $50mn Over $50mn Percentage to be included in core funding 90% 80% 60% 40% 20%