Consultation paper on Disclosure Review July 2010

Ref #4126312 v2.1 CONSULTATION DOCUMENT: REVIEW OF DISCLOSURE REQUIREMENTS FOR REGISTERED BANKS Consultation paper The Reserve Bank invites submission on this consultation paper by 24 September 2010. Submission and enquiries about this consultation should be addressed, in the first instance, to: Jeremy Richardson Senior Adviser, Financial System Policy Prudential Supervision Department Reserve Bank of New Zealand PO BOX 2498 Wellington 6140 Email: jeremy.richardson@rbnz.govt.nz Or Phoebe Chan Senior Analyst, Financial System Policy Prudential Supervision Department Reserve Bank of New Zealand PO BOX 2498 Wellington 6140 Email: phoebe.chan@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. August 2010

2 Ref #4126312 v2.1 Table of Contents Executive Summary .................................................................................................................4 Section 1: Introduction ............................................................................................................6 Section 2: Background ............................................................................................................7 2.1 Current regulatory reporting requirements in New Zealand .......................................7 2.2 Comparison with Australia and the United Kingdom ................................................7 Section 3: The Disclosure Review............................................................................................9 3.1 Objective .................. ..................................................................................................9 3.2 Engagement with key stakeholders ............................................................................9 3.3 The givens and norms ...............................................................................................10 3.4 Analysis overview ....................................................................................................11 3.5 High level options .....................................................................................................12 3.6 Page count estimates..................................................................................................17 3.7 Disclosure statement delivery mechanism ................................................................17 3.8 Private reporting to the RBNZ ..................................................................................18 3.9 Next steps ..................................................................................................................18 Section 4: Detailed Analysis ..................................................................................................19 4.1 Further design features .............................................................................................19 4.1.1 NZ IAS 34 compliance in off quarters ..........................................................19 4.1.2 NZ IFRS 7 Appendix E .................................................................................20 4.1.3 Scope of financial reporting ...........................................................................21 4.1.4 Options for the Supplemental Disclosure Statement .....................................22 4.1.5 Disclosure by branches ..................................................................................23 4.1.6 Improved comparability in certain key areas .................................................26 4.1.7 Nature of audit review ...................................................................................29 4.2 Proposed changes in disclosure of specific subject areas .......................................30

3 Ref #4126312 v2.1 4.2.1 Disclosure of accounting policies .........................................................................30 4.2.2 Disclosure of risk management approaches..........................................................31 4.2.3 Disclosure of credit risk concentration to individual counterparties ....................31 4.2.4 Disclosure of credit risk impairment information ................................................32 4.2.5 Disclosure of Basel Pillar 3 information ..............................................................35 4.2.6 Disclosure relating to liquidity risk ......................................................................37 4.2.7 Other proposals for revised disclosure in specific subject areas ..........................38 Appendices .............................................................................................................................41 Appendix 1: List of overlaps and duplications between on quarter OiCs and NZ IFRSs and recommendation .................................................................................................42 Appendix 2: List of items in on quarter OiC that should be kept or removed.................43 Appendix 3: Full list of information currently required by OiCs that will be removed, streamlined or restructured for half-year GDSs ................................................................45 Appendix 4: Recommendation to shorten the off-quarter GDSs ......................................46 Appendix 5: KIS – assessment of current contents and possible additions ......................47 Appendix 6: Assessment of disclosure requirements of NZ IFRS 7 Appendix E ............48 Appendix 7: Consolidated questions ....................................................................................51

4 Ref #4126312 v2.1 Consultation document: Review of Disclosure requirements for registered banks Executive Summary This consultation document seeks submissions on the Reserve Bank’s proposals to change the current disclosure regime for registered banks, which was first put in place in 1996. This is a fundamental review that has as a primary aim the reduction of compliance costs associated with the current disclosure requirements – while at the same time better matching the needs of the key stakeholders. This is likely to result in a significant reduction, and modification, in the Reserve Bank’s disclosure requirements, and the introduction of other methods of collecting information for prudential purposes. The review is against the background of financial reporting and international prudential standards:  The Financial Reporting Act 1993 requires banks to publish at least annual audited financial statements that comply with the New Zealand financial reporting standards.  The capital adequacy framework issued by the Basel Committee on Banking Supervision also requires both qualitative and quantitative disclosure annually, and quantitative disclosure half-yearly.  In addition, banks are also subject to the Securities Act 1978, which generally requires a registered prospectus for any issue of debt securities. Currently, banks have an exemption from the prospectus requirement on the basis that they are subject to the RBNZ disclosure regime. Over the last few years, extensive changes to international and New Zealand financial reporting standards have materially increased the compliance burden on banks as more detailed disclosures have been required. The new capital adequacy framework from the Basel Committee also resulted in additional reporting requirements for banks across the world, including New Zealand. The general experience is that there have been a few substantial step-jumps in disclosure requirements. With the objective of the Review being “to better match the needs of the key stakeholders” as well as “reducing compliance costs”, we have developed the following “acid test” as an aid to our detailed analysis of the disclosure regime: “What is the value-added or marginal benefit of an item (mandated by the disclosure Orders In Council) on top of what is already disclosed, in terms of how much it says about risk of a bank’s failure to stakeholders who may exert market discipline, relative to the cost to banks of producing it?” This review reflects those objectives. The two preferred options have the following features:  The removal of duplication or slightly different definitions between the RBNZ disclosure regime and the New Zealand International Financial Reporting Standards, to reduce the length of disclosure and to improve the consistency between the two;

5 Ref #4126312 v2.1  a change in the requirement for the financial statements that are included in the half￾year disclosure, from being prepared on the annual financial reporting standards basis, to an interim financial reporting basis. This should have two effects: it will align New Zealand with international practice; and it is likely to lead to a significant reduction in compliance costs for banks without compromising the quality of information that the public have access to; and  the removal of the Supplemental Disclosure Statements. The two options are:  Option A: the Key Information Summary will no longer be required. Banks will make disclosures in the off quarters that are significantly reduced from the current off￾quarter short-form disclosure statements, and on a more summarised basis than the proposed six-monthly disclosure. It is expected that this will improve comparability across banks and again significantly lower the compliance costs.  Option B: there will be a quarterly Key Information Summary, which will be revised to be more readable for retail depositors. It will include the key corporate information, summarised income statement and balance sheet, key ratios, a set of useful notes and a glossary. This will be the only required disclosure in the off quarters. We also discuss other options that were considered but that are, for one reason or another, not currently preferred. While we are consulting on two preferred options, we do however welcome submissions on alternative approaches. Appendix 7 of this paper contains a list of the questions on particular points. The first 8 of these questions are more about issues of principle and high-level design (discussed in Section 3 of the paper); the remaining 33 questions are more about the detail of the disclosure regime (discussed in Section 4 of the paper).

6 Ref #4126312 v2.1 SECTION ONE: INTRODUCTION In 1996, the Reserve Bank put in place comprehensive disclosure requirements for New Zealand banks. The Reserve Bank sees market discipline as an important complement to regulatory discipline, and the disclosure regime aims to ensure that the market has the information it needs to exercise that discipline. Under the existing regime, banks are required to publish quarterly a Key Information Summary (KIS) providing a high-level overview of the bank’s financial condition; a General Disclosure Statement (GDS) containing detailed financial information on all aspects of the bank’s business, including its conditions of registration and compliance with prudential requirements; and a Supplemental Disclosure Statement (SDS) containing background documents such as guarantee contracts, and, for branches, the financial statements of their overseas banking group. The requirements for banks to publish quarterly disclosure statements are contained in the Registered Bank Disclosure Statement Orders in Councils1 (OiCs). These are issued under section 81of the Reserve Bank of New Zealand Act, which deals with the public disclosure of information or data by registered banks. The regime was designed to:  Improve market discipline;  Increase the public’s financial awareness; and  Strengthen directors’ responsibilities. Since the regime was introduced, and particularly more recently, there have been some major developments in accounting standards, with the cumulative effect of requiring significantly more disclosure. The current New Zealand equivalents to International Financial Reporting Standards (NZ IFRSs) include several areas of required disclosure that either overlap with, or duplicate what is required by the OiCs. A few recent changes to NZ IFRSs have also resulted in some inconsistencies between the OiC and NZ IFRS requirements. The Reserve Bank has also added to the information required by the OiCs over time, most notably the expanded disclosure of capital adequacy for locally-incorporated banks, which was added in March 2008 to implement “Pillar 3” 2 . These have put a rising compliance burden on banks in producing their quarterly disclosure statements. Anecdotal evidence and feedback from users also suggested that some of the disclosure statements were not useful, especially the KIS and SDS. The above factors have prompted us to undertake a fundamental review of the disclosure regime for registered banks in New Zealand, which commenced in October 2009. The bulk of the work of the review to date has been on the disclosure requirements for locally￾incorporated banks. Much of this work is also applicable to branches, but we raise some specific issues and consultation questions for branches in a section 4.1.5. Throughout the paper we have posed specific questions on particular points on which we would like to hear views. (For ease of reference, these questions are also collected together in Appendix 7.) However, we will be interested to hear views on any aspect of the proposals, or on any alternative suggestions.

1 There are four Orders in Councils for disclosure statements: Full and Half year New Zealand Incorporated Registered Banks; Off quarter New Zealand Incorporated Registered Banks; Full and Half Year Overseas Incorporated Registered Banks; and Off quarter Overseas Incorporated Registered Banks. Most of the references to OiCs in the consultation document are to the first two OiCs. 2 The revised capital adequacy framework issued by the Basel Committee on Banking Supervision – “Basel II” – consists of three “pillars”. Pillar 3 deals with market discipline.

7 Ref #4126312 v2.1 Section 3 of this paper (and questions 1-8 in Appendix 7) discusses issues of principle and high-level design. This section contains, for example, a discussion of whether it is appropriate to abandon the disclosure regime altogether, and how far – at a high level – we might go in consolidating and reducing the disclosure requirements in on- and off-quarters. Inevitably, though, much of the “devil is in the detail” and Section 4 (questions 9-41) covers the detailed requirements that might follow from the preferred high-level options. SECTION 2: BACKGROUND 2.1 Current Regulatory Reporting Requirements in New Zealand Banks, as issuers, are required by the Financial Reporting Act 1993 to publish audited financial statements at least annually that comply with New Zealand financial reporting standards approved under that Act. The bulk of these standards comprise New Zealand equivalents to International Financial Reporting Standards and International Accounting Standards. For convenience in this paper, we refer to these as a whole as NZ IFRSs3 . In addition, banks are also subject to the Securities Act 1978, which in general requires a registered prospectus and investment statement for any issue of debt securities. However, banks are currently exempt from the prospectus requirement in respect of their debt securities. This exemption was granted around the time that the RBNZ disclosure regime was set up, on the basis that the latter would serve as a substitute for the prospectus requirement. The RBNZ disclosure regime provides a “one-stop shop” for the reporting obligations that banks are faced with, covering the requirements of the accounting standards, Basel Pillar 3 disclosure, and the Securities Act. Currently, it requires banks to publish a disclosure statement every three months. The disclosure statements contain a wide range of financial, corporate and risk-related information. This includes information meeting the requirements of NZ IFRSs and prudential information on matters such as capital adequacy that is driven by Pillar 3. Other prudential information required includes individual credit exposure concentrations, and other matters of interest to depositors such as deposit guarantees and the ranking of creditor claims. The requirements for “on quarters” (i.e. the annual and half-year periods) are the same, and for “off quarters” (i.e. the 3-month and 9-month periods) a separate set of “slimmer” requirements apply, which focus more on summarised data with less requirement for details. It is particularly at the half-year and off-quarter reporting periods that the RBNZ regime imposes more disclosure requirements than NZ IFRSs and the Pillar 3 framework. At the half year, the RBNZ regime requires banks to produce financial reports on the basis of NZ IFRSs applicable for full-year reporting. Normally, any entity reporting interim financial results (commonly at the half year) does so on the basis of NZ IAS 34 Interim Financial Reporting4 , which requires significantly less information than the full-year reporting standards. The off￾quarter reporting is largely a requirement that the Reserve Bank imposes in addition to what is required by NZ IFRSs (although Pillar 3 does require a brief summary of capital adequacy).

3 Unless stated, NZ IFRSs includes any New Zealand specific material such as Appendix E of NZ IFRS 7 Financial Instruments: Disclosure. 4 This standard sets the minimum content of an interim report, including condensed financial statements and selected notes. It is to provide an update on the latest complete set of annual statements, and focuses on new activities and events, and does not duplicate information previously reported.

8 Ref #4126312 v2.1 Were a bank to be subject to the Securities Act requirements, it would be required to make “continuous disclosure”, i.e. any prospectus issued by the bank would have to be updated whenever it had become incorrect or misleading due to material events taking place. There is no quarterly reporting requirement per se under the Securities Act. 2.2 Comparison with Australia and the United Kingdom Table 1 below compares the current New Zealand bank disclosure regime to public reporting requirements in Australia and the United Kingdom. Public reporting obligations NZ banks Australian banks UK banks Off-quarter financial reporting √ × × Off-quarter pillar 3 reporting √ √ × Half-year financial reporting √ √ √ Half-year pillar 3 reporting √ √ × Full-year financial reporting √ √ √ Full-year pillar 3 reporting √ √ √ There are a few things to note:  New Zealand banks’ half-year reporting is based on the full-year NZ IFRSs (resulting in much more detailed and voluminous disclosure) while Australian and UK banks’ half-year accounts are usually based on IAS 34 Interim Financial Reporting;  For banks, full-year NZ IFRSs also include the additional disclosure required by the New Zealand-only Appendix E of NZ IFRS 7 (see section 4.1.2 below).  New Zealand banks are required to disclose full quantitative Pillar 3 information in the off quarters, whereas Australian banks are only required to disclose a summary of capital adequacy;  Both Australian and UK banks publish financial statements separately from their prudential (mainly Basel II) disclosure;  Some Australian and UK banks are listed companies which means they are subject to the stock exchange’ disclosure requirements as well. No New Zealand banks are listed on NZX5 . So the general impression when compared at least to these two countries is that the New Zealand disclosure regime requires more quarterly and half-yearly public disclosure.

5 Note that if a bank becomes listed here, it will be subject to the continuous disclosure requirement.

9 Ref #4126312 v2.1 SECTION 3: THE DISCLOSURE REVIEW 3.1 Objective The objective of the Review is to assess banks’ prudential disclosure requirements with a view to better matching the needs of the key stakeholders and reducing compliance burdens where possible; both to modify RBNZ’s disclosure requirements and introducing other methods of collecting information for prudential purposes. 3.2 Engagement with key stakeholders We identified a number of external stakeholders in banks’ disclosure documents and have had discussions with them during the Review. The feedback we have received from the following groups has been most useful, and offered us insights into how the regime could be improved for various parties.  Banks Banks have dual roles in the regime, as users of other banks’ disclosures in their interbank lending decisions and for strategic purposes, and as preparers of information themselves. An industry user group was set up with representatives initially from six locally-incorporated banks. Discussions have been focusing on areas of concern, how to improve usefulness of the documents, and exploring options.  Banks’ auditors Banks’ auditors sign off banks’ full and half-year disclosure statements, and are thus well-placed to offer thoughts on how the regime could be improved. Discussion with the auditors provided a somewhat different perspective from the banks on the usefulness of the current regime, where the compliance costs lie, and comments on specific issues relating to the auditor sign-off of disclosure statements.  Staff of the Financial Reporting Standards Board (FRSB) of the New Zealand Institute of Chartered Accountants Financial reporting standards in New Zealand are driven to a large extent by International Financial Reporting Standards (IFRSs) promulgated by the International Accounting Standards Board (IASB). The FRSB develops NZ IFRSs, which in some cases includes New Zealand-specific adaptations. We continue to have discussions with FRSB staff on particular areas of overlap between their work and ours, specifically Appendix E of NZ IFRS 7 Financial Instruments: Disclosures (see section 4.1.2).  Consumer groups Retail depositors are considered to have very distinct needs from other key stakeholders, in requiring short, simple and more understandable data, and the KIS was designed for this purpose. Rather than talk directly to groups of depositors we held meetings with three bodies that represent retail depositors’ interests in one way or another – the Banking Ombudsman, the Retirement Commission, and Consumer Magazine. (Of course, we

10 Ref #4126312 v2.1 welcome submissions on this consultation paper from members of the public.) The main focus of these discussions with these three bodies was on the KIS.  Securities Commission and Ministry of Economic Development (MED) We have had some discussion with the Securities Commission on the interaction between the RBNZ disclosure regime and the Securities Act prospectus requirements for debt issuers. We have also talked to MED about their proposed reform of the Securities Act6 . It is important that we form a co-ordinated view across government on the appropriate form of disclosure by banks, and the vehicle for that disclosure.  Rating agencies Rating agencies are key players for market discipline, as their rating assessments can assist bank counterparties in exerting market discipline on banks. We have spoken to the three main rating agencies to gauge their level of interest in the disclosure regime. Although a bank would generally have an interest in providing a rating agency privately with any additional financial or other information requested by the agency to enable it to form its rating opinion, the rating agencies told us that they do to varying extents make use of the information published in banks’ GDSs. It has also been valuable for us to hear the agencies’ views on which information is most valuable in assessing a bank’s soundness.  Financial commentators and journalists Media commentators and financial advisers are another group that provide public assessments, similarly to rating agencies, but using mainly publicly available data. The general public relies on their comments to a certain extent. We have talked to a few financial commentators to get their views on the usefulness of the data, areas for improvement etc. 3.3 The givens and norms Before undertaking the detailed analysis of the Review, we assumed a few “givens”, as the basic principles or starting points. They are:

1. NZ IFRSs: We have taken NZ IFRSs for the most part as a given: they represent New Zealand equivalents to IFRSs promulgated by the IASB, and as such our scope to influence them is very limited7 . The Financial Reporting Act 1993 requires issuers (i.e. including banks) to publish audited financial statements based on generally accepted accounting practices (i.e. NZ IFRSs) at least annually. Usually banks overseas publish a full set of IFRS-compliant financial statements annually and a smaller set of financial statements based on IAS 34 half-yearly;
2. Pillar 3: Public disclosure of detailed information on a bank’s capital adequacy (“Pillar 3”) is a key component of the recently implemented Basel II capital adequacy framework, and represents a widely-accepted international norm. It would be a complete change of direction for New Zealand to pull back from this just when the

6 MED released a discussion document “Review of Securities Law” on 21 June 2010, available on their website: http://www.med.govt.nz/templates/MultipageDocumentTOC____43741.aspx 7 One exception is the New Zealand-specific Appendix E of NZ IFRS 7, which the Reserve Bank has a realistic chance of influencing (see section 4.1.2).

11 Ref #4126312 v2.1 rest of the world has taken this step towards greater transparency. We therefore believe that New Zealand banks should continue to comply at least with the broad outlines of Pillar 3. Banks in other countries now usually publish their Pillar 3 disclosure in a document separate from their general financial reporting. 3) Promoting market discipline: We also continue to take as a given that market discipline plays an important role in helping the Reserve Bank achieve its Section 68 objectives8 . The persons who are in a position to exert that discipline need sufficient information to enable them to do so. 3.4 Analysis Overview With the objective of the Review being “to better match the needs of the key stakeholders” as well as “reducing compliance costs”, we have developed the following “acid test” as an aid to our detailed analysis of the disclosure regime: “What is the value-added or marginal benefit of an item (mandated by the disclosure Orders In Council) on top of what is already disclosed, in terms of how much it says about risk of a bank’s failure to stakeholders who may exert market discipline, relative to the cost to banks of producing it?” We have therefore taken NZ IFRSs as setting “the floor” or minimum for what must be disclosed publicly at least annually. From there we have analysed any additional requirements imposed by the OiCs, including alternative breakdowns of information, higher reporting frequencies, and other required information that is not accounting-related (for this exercise we have treated the requirements of Appendix E of NZ IFRS 7 as information additional to the minimum required). Table 2 below illustrates the kinds of additional OiCs requirements that we have analysed. Requirements Annual Half year Off quarter Minimum requirement NZ IFRSs NZ IAS 34 Interim Financial Reporting

OiC additional

• accounting Not much NZ IFRSs full-year compliance Spelt out in OiCs, not directly linked to NZ IFRSs OiC additional – Basel Pillar 3 such as capital adequacy Pillar 3 such as capital adequacy Pillar 3, in more summarised form OiC additional – other prudential Conditions of Registration, connected exposures etc Conditions of Registration, connected exposures etc Conditions of Registration, connected exposures etc We have adopted a bottom-up, line-by-line analysis to assess all additional disclosure imposed through the OiCs (and through NZ IFRS 7 Appendix E) – to consider whether each piece of information is useful for the key stakeholders, and if so, how frequently it should be reported. We have then balanced that against the compliance burden on banks to produce the

8 Section 68 of the Reserve Bank Act 1989 states that the powers conferred on the Governor-General, the Minister, and the Bank by Part 5 of the Act [the part dealing with registration and supervision of banks] shall be exercised for the purposes of— (a) promoting the maintenance of a sound and efficient financial system; or (b) avoiding significant damage to the financial system that could result from the failure of a registered bank.

12 Ref #4126312 v2.1 information at that frequency, to come to a preliminary view on how the costs and benefits compare. This informs our view on whether a particular requirement should remain, either at the current or a lower frequency, or should be removed from public disclosure, and if so, whether it still needs to be collected privately by the Reserve Bank for prudential supervision purposes. A summary of the findings of this analysis is set out below: Periodic Reports Findings Annual General Disclosure Statements (GDSs) There are inconsistencies and overlaps between the OiCs and NZ IFRSs, which should be removed 9 . A material portion of the additional OiC requirements is driven by Basel II Pillar 3 capital adequacy disclosures. But among other requirements, some are of doubtful value, or are in fact inconsistent with NZ IFRSs (see Appendix 1). Half-year GDSs – based on full-year NZ IFRSs We have identified quite a few areas where the RBNZ’s imposition of full-year NZ IFRSs requirements on half-year disclosure is not warranted – such as full disclosure of accounting policies, risk management policies, detailed notes on tax expense, deferred tax, bonds and notes, management remuneration, retirement benefits etc. Some of these notes are lengthy but can be more or less copied from one period to the next, as little usually changes (although these clutter up the disclosure for its users). But some notes are costly to produce even though they are only one table (such as key management remuneration). (See Appendices 2 and 3) Off-quarter GDSs The off-quarter OiC requires slightly more information than NZ IAS 34 Interim Financial Reporting. In our view some of that extra information is of value, but some may not be (see Appendix 4). Key Information Summary (KIS) Our impression is that the current content of the KIS is not useful, and no one uses it. For a short document, it is often filled with legal and technical jargon and hard to comprehend (see Appendix 5). Supplemental Disclosure Statement (SDS) A low-benefit item reserved for legal documents (e.g. guarantees). (See further discussion in section 4.1.4 below) If we succeed in addressing the issues raised in these findings (through one of the options discussed later), it would represent fairly material streamlining of the current OiC requirements that are over and above the NZ IFRSs ones, and as such, a significant reduction of compliance burden on banks – while at the same time better matching disclosure to the needs of the key stakeholders. 3.5 High Level Options 3.5.1 Options that have been considered but are not preferred Before going into more details on the two preferred options, we note three other options that appear not to achieve the objectives of the review or not to be workable. Maintain the status quo. The first one is to maintain the status quo. Our analysis and views from stakeholders so far have confirmed significant issues in the existing disclosure regime that need to be addressed. We have identified:

9 In some cases the RBNZ would achieve this by seeking to have requirements removed from Appendix E of NZ IFRS 7, rather than from the OiCs.

13 Ref #4126312 v2.1  Overlaps and inconsistencies between the OiC and NZ IFRS requirements that can lead to confusion for the banks in preparing the disclosure, and GDSs that are hard for users to understand;  Information that should not have to be published every six months. There is little to be gained, for example, in having a full description of accounting policies every six months (certainly if they have not changed);  There is strong evidence that the KIS is not serving its purpose. Banks hardly ever get requests from retail depositors for a copy. The content is not pitched at the right level to be comprehensible by the average retail depositor; and  There are too many areas where it is hard to compare information from one bank’s disclosure documents against another’s, something essential if we expect market discipline to be exerted by users. Remove the disclosure regime. Another option that was considered would be to remove the RBNZ disclosure regime altogether. This would mean that banks’ public disclosure would be only what is required by the NZ IFRSs and any Securities Act requirements. The Securities Act currently exempts banks from having to publish a registered prospectus for their debt offers to the public. From our preliminary discussions with the Securities Commission, their view is that if banks did not publish prospectuses this would not provide investors in bank debt with sufficiently frequent updates on the financial standing of the bank. To address this, one solution would be to remove banks’ current Securities Act exemption, so that a bank would keep the market informed by updating its prospectus whenever there was a material change in its position. However, there are a number of practical difficulties10 in bringing banks within the prospectus regime (which was one of the original drivers for the RBNZ disclosure regime being put in place instead). This suggests that an alternative solution or a more tailored exemption might have to be found, to provide continuous disclosure by some other means. Our analysis to date does not support going down this route, taking the following points into account:  Pillar 3 disclosure. Financial reporting in accordance with NZ IFRSs would not deliver anywhere near the amount of capital adequacy information required by Pillar 3. Nor would the current prospectus requirements under the Securities Act, if banks were to be subject to those. The focus of disclosure in the prospectus is different, being around the terms and conditions of the offer, the ranking of the securities, the historical financial performance of the issuer and so on. Also, recent changes to prospectus requirements have moved them further away from specified information and more towards reliance on NZ IFRSs.  More frequent risk-based information. More fundamentally, the focus of the disclosure regime needs to be information that will enable the market to help promote the Reserve Bank’s Section 68 objectives. Financial reporting standards on the other hand allow management to discharge its stewardship and accountability functions and are concerned with presenting a true and fair view of a bank’s historical position and performance at a specified point in time. So while there is a considerable amount of

10 Above all, if a prospectus update is required, any deposits, including payments made to customers of the bank, would have to be placed in trust until the revised prospectus is issued.

14 Ref #4126312 v2.1 data that is useful for both purposes, prudential disclosure information needs to include more data relevant to the risk of failure of an individual bank or threats to the soundness of the financial system (for instance, much of the Pillar 3 disclosure meets this need). And although full-year financial statements do require disclosure of measures of the risks arising from financial instruments, to promote market discipline effectively, some of that information is needed at greater than annual frequency. We are liaising with the Securities Commission to come to an agreed view on what frequency and level of detail of disclosure under our (revised) regime would be needed to allow banks to keep their Securities Act exemptions. Separate publication of financial reporting and prudential disclosures. A third option that we have considered but are not pursuing further is still requiring additional prudential disclosure on top of that required by financial reporting standards, but requiring the two to be published separately. Under this option, there would be annual financial reports based on NZ IFRSs (“the given”); plus half-year financial reports based on NZ IAS 34 Interim Financial Reporting (“the norm”); plus Pillar 3 disclosure (half-yearly for the quantitative with brief quarterly update, annually for the qualitative material – another “given” in the light of Basel minimum requirements). This option could possibly include a redesigned KIS quarterly or a new quarterly report, to contain summary financial information and some other prudential information such as individual large credit exposures. This generally represents the ‘norm’ in other countries, where banks publish financial reports required by financial reporting standards on a half-yearly basis, and have recently started having to publish detailed capital adequacy information under Pillar 3 of Basel II – so in some way this would result in an alignment of the NZ framework with international practice. We might propose that in addition, some form of quarterly disclosure be retained – a quarterly KIS (to be significantly revised), or RBNZ publishing summary quarterly tables allowing comparison of key information across banks11 . Initial feedback from banks was that they were not attracted to the option of separating public disclosure into two different documents, because of linkages between the two sets of information: for instance, NZ IFRSs require an analysis of impaired assets, but Pillar 3 requires a breakdown of this analysis into the separate Basel II credit risk exposure categories. We also think that it is more helpful for users to be able to see the essential information together in one place (provided that the overall volume of information can at the same time be reduced to make it easier to navigate). Q1. Do you think any of the above three options should be considered further? If so, which one and why? 3.5.2 Options for consultation The analysis and feedback from key stakeholders to date have been able to effectively inform and complement the development of two high-level options set out in Table 4 below:

11 This is already being done to some extent, but the structure could be redesigned to enable easier comparison across the sector.

15 Ref #4126312 v2.1 TABLE 4 Option A Option B Annual New KIS, Modified GDS Modified GDS Half Year New KIS, Streamlined GDS (NZ IAS 34) Streamlined GDS (NZ IAS 34) Off quarters New KIS Brief GDS (possibly NZ IAS 34) Option A – Redesigning the KIS to be the only off-quarter document Under this option, there will be:

• Annual – New KIS (redesigned to be more useful), Modified GDS (with inconsistency/overlaps removed);
• Half year – New KIS, Streamlined GDS (closer to current off-quarter GDS);
• Off quarter – New KIS only. One main change from the current regime under this option would be to slim down the half￾year GDS from the current on quarter requirements (i.e. applying full-year NZ IFRSs, and comprehensive additional prudential disclosure) to something similar to the current off￾quarter requirements (i.e. applying NZ IFRS interim reporting requirements and more summary versions of some of the prudential information, although with the same quantitative Pillar 3 disclosure as at the full year to satisfy Basel standards). For the full-year GDS, the aim would be to improve consistency with NZ IFRSs and minimise duplication. This would include seeking the removal of Appendix E of NZ IFRS 7. Another emphasis of Option A is on the new KIS. This involves redesigning the content and structure of the KIS to make it more useful for retail depositors. It is also intended that the new KIS will be expanded to include more financial statement items (Profit and Loss and the Balance Sheet) and important ratios, so it could replace the current off-quarter GDSs. Potentially there is a risk of complicating the KIS’s original purpose with complex financial information that would be confusing to retail depositors. Option B: Remove the KIS and retain the quarterly GDS Under this option, there would be:
• Annual –Modified GDS (with inconsistency/overlaps removed);
• Half year –Streamlined GDS (closer to current off-quarter GDS);
• Off quarter – Brief GDS (possibly based on NZ IAS 34, with summary other risk information). Option B is similar to Option A except that it removes the KIS from the disclosure regime altogether but keeps the quarterly GDS. The rationale for this option is that for the fourteen years that the KIS has been in place, we do not believe it has delivered what it was intended to achieve. The requirement that it be displayed in every branch, while understandable a decade ago, has been overtaken by changes in technology. According to the banks, there are virtually never any requests for copies of the KIS from branches. Even website hits are very infrequent, and there is no way of determining whether any of these come from retail depositors. Any market discipline that is exerted by retail depositors is likely to come from depositors reacting to the commentaries of financial journalists, or depositors themselves accessing popular websites (such as interest.co.nz or sorted.org.nz). Financial journalists are usually reasonably sophisticated users of disclosure documents and they have generally commented

16 Ref #4126312 v2.1 that they do not use the KIS at all. It follows that if RBNZ chooses to pursue raising depositors’ awareness, a more realistic approach is to consider either publishing and publicising simplified information on RBNZ’s website or make use of other popular websites that are known to be frequently used by the public. Feedback to date has suggested that having some information updated quarterly has been an important feature of the regime. While Option A does retain the quarterly update through the KIS, it would require a reasonably significant publicity campaign to promote the new KIS for there to be any chance of its being used. Given that it seems that the quarterly GDS has been used while the KIS has not, it seems natural to remove the KIS and retain the quarterly GDS but improve it to make it more useful. Our preliminary thinking is that Option B might be preferred because:  It retains something that is currently considered useful – i.e. the quarterly GDS.  An attempt to devise an off-quarter document that is accessible enough to encourage general readers to look at it, while containing sufficient information to satisfy the needs of expert analysts, seems likely to end up achieving neither.  From what we have heard, it is unclear to what extent retail depositors in a bank will take an interest in their bank’s financial condition regardless of the availability and readability of the KIS. Option B provides financial commentators with better information in the off quarters on which to base analysis and commentary aimed at any interested readers.  Although the compliance burden on banks would be somewhat less in the off quarters under Option A, this would be offset by the need to publish the KIS every quarter. A variant on Option B would be to dispense with off-quarter disclosure requirements as far as possible. The absolute minimum of what is required for quarterly publication is the Pillar 3 information on capital adequacy, which we think would be satisfied with a summary update as proposed in section 4.2.5. Such a reduction in information would raise the question whether the market would be provided with sufficient information on the bank’s overall financial condition frequently enough to justify continued exemption from Securities Act requirements. Some mechanism might therefore need to be found for continuous disclosure of material updates by the banks. We are not attracted to this variant, as we have heard a fair amount of support for publication of off-quarter financial information on a standardised basis, allowing cross-bank comparison. Among other things, without quarterly disclosure it would not be possible to compare banks’ performance over a given quarter, since banks’ financial years run to different end-quarter dates. We think that this would be moving too far away from the basic principle of promoting market discipline. Q2. Do you agree with our assessment that Options A and B are the main options for consideration? Q3. Is there an alternative approach we should consider? Q4. What are your views on the relative merits of Options A and B? Q5. Do you think that replacing off-quarter disclosure with continuous disclosure is a feasible option for consideration?

17 Ref #4126312 v2.1 Under each of these broad options there are numerous detailed decisions to be made on how specific areas of disclosure need to be changed. As well as informing our views on the right options to consult on, our line-by-line analysis of disclosure requirements has also helped us to come to a view on the specific changes that need to be made. Full detail of proposed changes and the rationale for them is set out in Section 4. 3.6 Page count estimates Although the actual compliance burden on banks of producing a disclosure document is clearly not directly proportional to the number of pages it contains, we give here our rough estimates of what the impact of the two options will be on the length of disclosure. This assumes that we make all of the changes discussed in the detailed analysis. Currently a full-year GDS typically ranges from 90 to 120 pages, and the half-year and off￾quarter GDSs range from 80 to 130 pages and 30 to 50 pages respectively. Under both of the options consulted, we expect the volume of the full-year GDS will stay roughly the same, with possibly a reduction of 5 pages. Half-year GDSs, however, will be significantly slimmer, to be about 40 pages. The off-quarter GDSs under Option B will also reduce in volume, to roughly 20 pages. An expanded KIS under Option A will be around 10 pages. Removing the SDS can also cut a hundred pages or more (see 4.1.4). Q6. Can the banks give us hard information on the likely impact of the proposed changes on their compliance costs? 3.7 Disclosure statement delivery mechanism Most of the focus of the disclosure review has been on the content of disclosure statements. We touch here briefly on the processes required for their publication. The deadline for publication of all the components of the required disclosure is currently three months at the full and half year, two months at the off quarter. Banks have indicated that they need most of the time allowed to publish the information. This is partly driven by a few items of disclosure that take the longest to compile (for instance, capital adequacy information, particularly for banks using modelling approaches under Basel II). It is also partly driven by the requirements for director sign-off of the disclosure statements, and audit requirements at the full and half year. We are not proposing to change the audit requirements, and banks have indicated that they would be unwilling to publish disclosure statements without director sign-off. However, the proposals do amount to a considerable reduction in the volume of information required other than at the full year; and the market discipline objective would undoubtedly be better served by shorter deadlines. We therefore propose to shorten the half-year delivery time by one month, to two months. Q7. Do you agree that the delivery time at the half year should be shortened? How much do you think publication deadlines could be reduced in the light of the detailed proposals for change? Another aspect of the delivery mechanism is accessibility of disclosure information. Online, it can prove hard for users to find where on a bank’s website disclosure statements are kept: we propose to make easy accessibility a requirement, and take steps to ensure that it happens in practice. Also, not all banks keep previous periods’ disclosure statements available on their website: we propose to make that a requirement.

18 Ref #4126312 v2.1 In terms of paper versions, if the KIS is dropped (Option B) we think there is no remaining case for requiring that hard copies of disclosure statements are made available in every bank branch. Even if the KIS is retained, experience suggests that putting copies in every branch is not effective in encouraging depositors to take an interest in the state of their banks, and we think better ways would need to be found to publicise the KIS. As a backstop we think that hard copies of all disclosure material should be available on request from the registered bank’s head office, within a reasonable time frame. The bank would not need to keep a stock of printed disclosure statements available to meet this requirement, but could print off copies as needed from its website. Bank branches should also be able to print out a copy of the disclosure statements upon request by customers. Q8. What are your views on the appropriate publication mechanism for bank disclosure statements? 3.8 Private reporting to the RBNZ Both options proposed in this document involve removal of various pieces of information from public disclosure, whether because it is not considered necessary for market discipline, it is not useful in the current prescribed format, or the compliance costs far outweigh the benefits. The information not considered useful from a market discipline perspective may nevertheless remain important for the Reserve Bank to carry out its prudential oversight function. Further work is being progressed to review the nature and scope of private reporting from banks to the Reserve Bank in light of this Review. 3.9 Next steps The closing date for submissions is Friday 24 September 2010. Subject to the submissions received, we plan to publish the outcome of the Review early in November 2010, to be followed by draft revised Orders in Council for consultation, for comments by the end of the year. We plan that the changes will take effect for the disclosure period ended 31 March 2011. Banks have indicated that on the basis of the likely changes in the disclosure regime discussed with them so far, it should take them at most three months to make the necessary systems changes to be ready to begin disclosing under the revised regime. If that proves not to be the case in the light of the details of the review now being published, or in the light of changes to the proposals in response to submissions, we might need to extend the timetable, and consider including a transition period.

19 Ref #4126312 v2.1 SECTION 4: DETAILED ANALYSIS Following the discussion of the background and the high level options for change, the rest of this consultation paper covers the detail of the analysis we have carried out and deals with the detailed implications of the proposals. 4.1 FURTHER DESIGN FEATURES 4.1.1 NZ IAS 34 compliance in off quarters A separate question on which we welcome feedback is whether banks’ off-quarter disclosure statements or the expanded KIS should have to meet the minimum content requirements of NZ IAS 34 Interim Financial Reporting. NZ IAS 34 prescribes the minimum content of an interim financial report and also prescribes the principles for recognition and measurement in financial statements for an interim period. At present, the OiC for the off quarters (Schedule 3 12 , paragraph 4) refers to the content requirements of NZ IAS 34, in that it specifies a list of financial items to be disclosed “to the extent that it is additional to the information that NZ IAS 34 requires the banking group to disclose when publishing interim financial statements”. This by no means amounts to a clear instruction that the short form GDS has to comply with the content requirements of NZ IAS 34, and makes no reference to its recognition and measurement requirements. However, as a matter of practice banks’ off-quarter disclosure statements do currently comply with NZ IAS 34 and state that they do. Banks’ KISs provide an example of summary financial and other information published by banks that do not satisfy the presentation requirements of NZ IAS 34. However, the nature of the content specified for the KIS is such that it would generally be considered to be outside the mandate of NZ IAS 34. The rationale for not requiring off-quarter disclosure statements to include all of the content specified by NZ IAS 34 would be to allow them to exclude a certain amount of material that arguably goes beyond the Reserve Bank’s objective of providing a brief update on key risk factors during off quarters. With a view to paring back off-quarter disclosure as much as possible, this would remove information that readers of the disclosure statements possibly pay little attention to, including the following:  statement of cash flows, along with additional required information usually presented in a note. This can add three pages to the GDS. Feedback from various users has shown little interest in seeing this information every quarter.  a separate statement of recognised income and expense. Without this requirement, we think it would be sufficient to show a single line for total changes in items recognised directly in equity, that could be added at the end of the income statement.  segmental analysis, which typically adds a further full page of detail.  different banks also include a range of additional information which we cannot trace back to any requirements in the RBNZ disclosure regime, and which therefore seem likely to derive from a cautious interpretation of NZ IAS 34 requirements. Examples of quite voluminous disclosure which adds little at an off quarter include a detailed

12 Schedule 3 is “Short form financial statements and asset quality”.

20 Ref #4126312 v2.1 cross-tabulation of assets and liabilities by instrument type and accounting classification, and full detail of the terms of all loan capital issues.  under the option of retaining the KIS, it would be additionally problematic to produce a consumer-focussed document that nevertheless contained all the information required by NZ IAS 34. Although we would expect banks to be able to produce these classes of information relatively easily since they are prepared for NZ IAS 34 compliance at the half year, removing them from the public disclosure would still represent some compliance savings. Possible drawbacks of not requiring NZ IAS 34 compliance include the following:  NZ IAS 34 includes guidance on the preparation and the presentation of the financial numbers to be included in an interim report. With no reference to NZ IAS 34, it would not be clear what the required reporting standards would be, and there would be no assurance that banks were preparing the numbers on a consistent basis.  To get round that problem, the disclosure regime could specify that the off-quarter disclosure is to be prepared as if NZ IAS 34 applied, but with the exception of specified items in NZ IAS 34’s presentation requirements. In that case banks would not be able to state that the statement was prepared in accordance with NZ IAS 34.  Another possible concern is that NZ IAS 34, as it derives from an internationally￾agreed minimum standard, provides a convenient basis for demonstrating sufficiently frequent updates of relevant information. Without this, it would raise the question whether the Securities Act exemptions could continue to be justified. Q9. Do users of disclosure statements agree with our assessment that the items noted above are of little interest at the off quarters? Q10. How concerned are you about the additional length of off-quarter disclosure if NZ IAS 34 applies? Q11. Does not requiring NZ IAS 34 compliance for off-quarter disclosure raise any concerns? 4.1.2 NZ IFRS 7 Appendix E NZ IFRS 7, the New Zealand implementation of IFRS 7 Financial Instruments Disclosure, includes Appendix E New Zealand-Specific Additional Disclosure Requirements Applicable to Financial Institutions that applies to banks (among other financial institutions). The disclosure in Appendix E was primarily based on the New Zealand-specific disclosure requirements previously located in NZ IAS 30 Disclosures in Financial Statements of Banks and Similar Financial Institutions, and prior to that FRS 33 Disclosure of Information by Financial Institutions, to retain regulatory disclosure requirements. The Basis for Conclusions that accompanies Appendix E notes the FRSB’s concerns regarding Appendix E, and the FRSB’s acknowledgement that its constituents supported the need for Appendix E. Our view is that in light of the changes that have taken place in the regulatory space over time and the fact that practice has evolved, it is an appropriate time to reconsider the previous rationale for requiring Appendix E.

21 Ref #4126312 v2.1 The case for revisiting the previous rationale for requiring Appendix E is supported by our analysis of what banks disclose. Our analysis has identified significant overlaps between NZ IFRS 7 Appendix E and our on quarter OiC requirements. We think the most helpful approach is to get reactions to the combined effect of changes to our disclosure regime and to Appendix E. So although it is the role of the FRSB, not the Reserve Bank, to recommend changes to Appendix E, we are putting forward here an overall set of proposals. The feedback we receive on those can then be taken account of by the FRSB. Possible options include removing Appendix E altogether, or retaining some of its requirements, in which case these might be combined into a separate additional NZ disclosure standard, along with any other NZ-specific material to be retained. Our detailed assessment of each of the areas of disclosure required by Appendix E is set out in Appendix 6 attached. Our overall view is that only a fairly small proportion of the paragraphs in Appendix E specify disclosure that is both separate from what is already required in our disclosure regime, and also adds sufficient marginal value to what is required by the body of NZ IFRS 7 to justify keeping. Given this, our preference is for Appendix E to be dropped entirely. In our assessment of what material should be cut and what kept in our disclosure requirements, we have therefore worked on the assumption that the Appendix E disclosure will no longer be there, and in a few cases this means we are proposing additional disclosure requirements to replace material currently required by Appendix E. As a general caveat to this approach, we should note that the IASB is engaged in a project to rewrite IAS 39 Financial Instruments: Recognition and Measurement. This may have future implications for NZ IFRS 7, but at present there is no way to determine how that might affect current practice. In practice we have to proceed on the basis that NZ IFRSs (apart from Appendix E) are givens. We should also note that among financial institutions currently subject to Appendix E, the key ones apart from banks in which there is a general public interest in adequate disclosure are non-bank deposit-takers (NBDTs). The Reserve Bank is in the process of developing a regulatory regime for NBDTs. In tandem with this, work is being done on any additional disclosure needed for NBDTs in addition to Securities Act and financial reporting requirements. If Appendix E is cut, that work can consider which of the proposed replacement disclosure requirements for banks should also be put in place for NBDTs. Q12. Do you agree with our analysis of the overlaps between Appendix E and other disclosure requirements? Q13. Do you have a view on whether Appendix E is required or not? 4.1.3 Scope of financial reporting NZ IFRSs require full-year financial statements to include comparative information for the previous accounting period, and to include information on both a group and parent bank basis. Interim accounts are required to include figures for three periods, namely the current period, the comparable interim period within the previous accounting period, and the previous accounting period. Combined with the OiC requirements, this means that there are currently four versions of many of the sets of figures in a full-year GDS and six versions at the half year, which contributes considerably to the bulk of the disclosure statements and makes it harder to focus on the information that matters most.

22 Ref #4126312 v2.1 Under our proposals, NZ IAS 34 will apply to half-year GDSs and may or may not apply to off-quarter disclosure (as discussed above). NZ IAS 34 requires previous period comparisons in interim reporting as noted above, but it does not mandate parent as well as group reporting. Also, the requirements for comparison figures only apply to the financial information that NZ IAS 34 requires to be disclosed. Thus additional information that the Reserve Bank specifies can be for the current period only and also for the banking group only. In implementing Pillar 3 for the IRB banks13 , we took the view that the volume of additional information required was such that it would not be helpful to require previous period comparisons. We also focused mainly on group rather than solo capital adequacy. We think this is a useful precedent for other areas of disclosure added on by the OiCs. We have not heard any concerns from expert users of GDSs, who can generally carry out their own comparisons with previous GDSs if they need to. We therefore propose that most of the additional information that we require for the half year and off quarters will be at the current balance date or covering the most recent period only. In some cases this may not be feasible, for instance if we want to specify particular items to be included in the income statement, then NZ IAS 34’s requirements on the periods that the income statement should cover will apply. We also propose that the additional information required by the OiCs will generally be on a consolidated-only basis at the half year and the off quarters, but remaining on the same basis as now at the full year. While publication of the solo information exerts market discipline to prevent any perverse group structures, we think that an annual update for most of the information is sufficient. One exception is solo capital adequacy (see section 4.2.5 below), where summary solo ratios are currently required every quarter: we plan to reduce the frequency of this from quarterly to six-monthly. This will not make much difference for the full-year disclosure, but can give significant further reductions in the volume of material at the other periods. Q14. Do you agree that reduced amounts of previous period comparative information will on balance be beneficial for users of disclosure statements? Q15. Do you agree that once a year is sufficiently frequent for an update on the solo bank’s financial position? 4.1.4 Options for the Supplemental Disclosure Statement (SDS) The SDS for locally-incorporated banks is required to include the following documents:  if the bank has a material guarantee of its obligations, a copy of the guarantee contract and a copy of the guarantor’s financial statements (except for government guarantors);  if a person has entered into any material cross-guaranteeing arrangements with the bank, a copy of the contract (if a single contract is available); and  if the bank calculates its aggregate credit exposure to connected persons on a net basis, a copy of the bilateral netting agreement and, if applicable, a copy of an external opinion confirming the robustness of the agreement.

13 Banks accredited to use their own IRB (internal ratings based) models for determining their capital requirements for credit risk.

23 Ref #4126312 v2.1 The GDS has to refer to the existence of any such guarantees or netting arrangements, so the thought was that any concerned reader of a GDS should be able to get hold of the background documentation. The idea of having a separate SDS was to keep this material, which will tend to be rather lengthy and static, out of the GDS (they can be over 200 pages). Banks usually publish their SDSs only on their websites, undated. However, directors are required to sign off the SDS each quarter as part of a bank’s overall disclosure, and any person can request a copy of the most recent SDS immediately from the head office, or within 5 working days if at a branch. This does impose some compliance costs on the banks. Our view is that the likely benefit of requiring these documents to be published is so low that it does not justify any compliance burden. The document that is currently most likely to be of interest, namely the contract containing details of the New Zealand government retail guarantee for each bank, is available on the Treasury website in any case. Some additional material on banks’ risk modelling approaches was added to the SDS requirements as part of the Basel II Pillar 3 disclosure in 2008. However banks have generally opted to keep this material (1-2 pages at most) alongside other Pillar 3 disclosure in the GDS. We propose to group that material with other risk management disclosures in the GDS (see discussion in 4.2.2). Accordingly, we propose to cut the current requirement to publish the SDS. As an alternative to losing from the public domain altogether some of the documents that are in the SDS, there could be a requirement that a bank must provide a copy of any of these documents, in response to a request made in writing to the bank’s registered address in New Zealand, within a specified period (say 10 days). Q16. Is there any benefit in the documents currently in the SDS continuing to be made publicly available? Q17. If so, does the alternative delivery mechanism proposed achieve that at acceptably low compliance cost? Branches of overseas banks have to include their parent group’s latest annual report in their SDS. We regard that as a much more important document which should be readily available in New Zealand, but that can be achieved outside the SDS framework (see discussion of branches below). 4.1.5 Disclosure by branches Disclosure requirements for branches are in many areas the same as for locally-incorporated banks. Most of the discussions we have held in the disclosure review have been with locally￾incorporated banks on the basis that broadly the same issues arise for branches in terms of reducing compliance burden and making disclosure statements more useful. We are therefore proposing that the changes discussed elsewhere in this paper will apply equally to branches, except where obviously not applicable. There are however some branch-specific issues which we discuss in this section. These divide into two cases: (i) where the registered bank branch is part of the same global banking group as one of the registered locally-incorporated banks (“dual registration”); and (ii) where this is not the case (“stand-alone branch”).

24 Ref #4126312 v2.1 Dual-registered branches In this case, the global banking group’s New Zealand operations are currently required to be disclosed at four different levels of consolidation: Branch disclosure NZ subsidiary disclosure Full and half year (1) Business of the branch on a stand-alone basis (2) “NZ banking group”, that is, the branch, the NZ subsidiary on a consolidated basis, and any other NZ subsidiaries of the overseas banking group (3) Business of the locally￾incorporated subsidiary on a stand￾alone basis (4) Consolidated figures for the subsidiary, including all of its subsidiaries. Off quarters As for (2) above As for (4) above In addition, the SDS for the branch must contain the following:  the most recent publicly available financial statements of the overseas bank and overseas banking group.  if the overseas bank carries on insurance or non-financial business in New Zealand outside the New Zealand banking group, the most recent publicly available financial statements for each of those businesses (as applicable). The general view we have formed from talking to users of GDSs is that their main interest is either in the New Zealand subsidiary’s figures on a consolidated basis, or on the banking group’s New Zealand banking activities as a whole. They pay less attention to the accounts of either the branch or the subsidiary on a stand-alone basis. While it is the locally￾incorporated entity that stands or falls as a legal entity, its risk cannot be considered without taking its subsidiaries into account. And the activities of a related New Zealand branch also need to be taken in to account to a greater or lesser degree, to form a view on the group’s activities in New Zealand as a whole: this depends on how intertwined the branch and subsidiary’s businesses are, which varies according to business model. On the other hand we think it is important that there is at least some disclosure on the branch as a separate entity, since it is a registered bank subject to prudential supervision by the Reserve Bank. We therefore propose to reduce the scope of branch disclosure in line with that for locally￾incorporated banks: that is, financial statements and other disclosure for the stand-alone branch would only be required in the full-year disclosure, and for the other periods only the New Zealand banking group disclosure would be required. We plan to remove the separate SDS for branches just as for locally-incorporated banks. For the financial statements currently required in the SDS, we propose the following:  the most recent published financial statements of the overseas bank and overseas banking group should be easily accessible in New Zealand (for example, from the local website, or on request from head office). We think the condition of the global bank is the main question for anyone placing money with the branch.

25 Ref #4126312 v2.1  the requirements relating to financial statements of insurance and non-financial business outside the New Zealand banking group should be dropped from our disclosure regime. These will still be publicly available, but we think they are of such specialised interest that anyone who needs to refer to them can do the necessary research. Summary information on any such activities is required quarterly in the general disclosure, and that would be kept but reduced in frequency to half-yearly. Branches are currently required to disclose risk-weighted credit risk exposures using the methodology of the Basel I capital adequacy regime. We propose to drop this for several reasons:  a capital adequacy methodology does not make sense when there is no corresponding measure of capital.  the credit risks in question are adequately analysed in various required accounting disclosures, including those on credit risk management, off-balance sheet financial commitments, and the breakdown of lending by sector.  our capital adequacy approach is now based on Basel II and we are aiming to remove other references to Basel I as well (see section 4.2.5).  we do not think this disclosure helps someone who is analysing the risks in the New Zealand subsidiary and wants to supplement that analysis with a view of the New Zealand financial reporting group as a whole, since the subsidiary’s capital adequacy is disclosed on a Basel II basis. However, the current summary capital adequacy disclosure for the overseas bank and banking group as a whole should be retained. This provides meaningful information on the risk of the parent bank and group as a whole, which is what mostly matters for the survival of the branch. In related areas, we are also proposing to keep the breakdown of mortgage lending by loan￾to-valuation ratio, as that is a key area of commentator interest (see section 4.1.6) and it can be the total amount of New Zealand business which is of interest. We also propose to retain the disclosure of market risk based on the Basel II Standardised approach, as this has the advantage of being comparable across all banks. NZ IFRS 7 paragraph E13 requires a branch of an overseas incorporated bank to relate its credit exposure to the latest published global equity position of the incorporated bank. The main value of this would seem to be to give a sense of the importance of the branch to the operations of the bank as a whole. We think the informed reader can adequately assess this from other disclosed information, and paragraph E13 can therefore be cut from NZ IFRS 7 and not replaced in the OiCs. Stand-alone branches We propose that the above changes would also apply to stand-alone branches. However, disclosure by the stand-alone branches does not have any role to play in supplementing the information on a locally-incorporated bank, so there may be a case for further streamlining of disclosure in this case.

26 Ref #4126312 v2.1 The RBNZ imposes a limit of $200 million on the total amount of retail deposits a branch may take, unless there is both adequate disclosure in the home country, and the home country’s insolvency regime does not give preferential treatment to depositors in that country. Timeliness of information on the branch is much less important than that on the banking group as a whole. In some cases, banking group information is published in the home country on a quarterly basis, and in many cases the group will also be subject to the continuous disclosure requirements of an overseas stock exchange. We think there are good arguments for removing the off-quarter disclosure requirement for stand-alone branches, either altogether, or subject to certain criteria. Q18. Do you agree with our assessment of user needs for the various types of branch disclosure? Q19. What are your views on the proposed changes in branch disclosure? Q20. If the requirement for off-quarter disclosure by stand-alone branches is made subject to certain criteria, what do you think those criteria should be? 4.1.6 Improved comparability in certain key areas Retail mortgages. Figures on mortgage lending are of particular interest to external commentators. However, the figures presented in bank’s disclosures are on a number of different bases, varying both across banks and within a given bank’s GDS. This greatly complicates assessment of matters such as the analysis of growth in individual bank’s mortgage lending and their respective market shares, and has resulted on occasion in basic, but completely understandable, errors in published analysis. Examples of the reasons for the differences and the problems arising are:  Residential mortgage lending can include just lending for owner-occupied house purchase, or it can include lending secured on residential property for investment purposes, or it can also include small business lending secured on residential property.

 Totals can include off-balance sheet lending commitments as well as loans on the balance sheet (although this at least is normally clear from the context).  A number of different terms are used, including “housing lending”, “residential mortgages”, “exposures secured by residential mortgages”, “retail mortgages”, “term loans–housing”, “real estate lending (mortgage)”, “fixed rate mortgages” (along with floating rate). In some cases explanatory text is provided, but this is not really sufficient to understand all the differences. It appears that “retail mortgages” generally excludes business lending but “residential mortgages” goes wider, but the distinction is not adequately clear.  The numbers disclosed are to meet a number of different requirements. These include figures within the breakdowns of maximum exposure to risk, and lending by industry sector (both within the analysis of credit risk management required by NZ IFRS 7), figures for components of the bank’s capital adequacy calculation, and amounts which are required to be broken down by loan-to-valuation ratio (LVR).

27 Ref #4126312 v2.1  The basis of the capital adequacy numbers varies between figures under the Basel II IRB approach (where banks are allowed more flexibility in their categorisation of exposures), the Basel II standardised approach, and the Basel I approach which applies to overseas bank branches, and also to New Zealand financial reporting group figures for dual-registered banks.  Sectoral credit risk concentration figures sometimes include a line for some form of housing lending, but sometimes only include a total personal lending figure.  Finally, it is in many cases not possible to reconcile any of the figures in the disclosure statement with the figure for “NZ$ lending to households – housing” that is privately reported to the RBNZ on the Standard Statistical Return (SSR). This is a complex area, and we have not yet succeeded in developing a fully worked-out proposal. Our thinking on this so far is the following:  The capital adequacy disclosure on mortgage lending should be considered separately from disclosure for other purposes. This includes the LVR analysis, which we think should be tied across more closely to the capital adequacy numbers, as discussed in more detail below. The focus of these numbers is more on the bank’s risk profile rather than the housing market.  We could require that the sector lending concentration table always include a row for mortgage lending, but to be useful that would have to be tightly defined. If we generally require the breakdown to be based on ANZSIC 14 codes as proposed, then lending to a small business that is secured by a residential mortgage would normally be included in the industry sector to which that business belongs.  As a complement to this approach, we could require disclosure of the figure for the widest possible definition for residential mortgage lending, namely the total for lending fully secured by mortgage on residential property, and require a reconciliation of that total with other mortgage lending figures given in the disclosure statement. We understand that arising out of their long experience of applying Basel I capital adequacy ratios, an overall total for lending secured on residential mortgages is a figure which banks would all have readily available. It is a figure for which banks have a consistent long run database and is also one which is least open to different interpretation across banks. The objective would be to anchor all the various numbers down to at least one fixed point, and to provide commentators with the raw material they need to analyse the mortgage lending market. Better explanation of what all the different numbers mean would go a long way towards preventing the sort of misunderstandings that we have seen, even without any convergence in the bases of measurement. Q21. Do you agree with our assessment of the problems with the various types of mortgage lending disclosure? Q22. What are your views on the suggested ways of dealing with these problems, and do you have any alternative suggestions?

14 The Australian and New Zealand Standard Industrial Classification (ANZSIC) has been produced by the Australian Bureau of Statistics and the New Zealand Department of Statistics for use in the collection and publication of statistics in the two countries.

28 Ref #4126312 v2.1 Mortgage LVR disclosure. Banks subject to the IRB approach under Basel II are required to disclose a breakdown of their mortgage lending categorised by LVR. The total this applies to is defined as “total exposures secured by residential mortgages as used to calculate the Registered Bank’s pillar one capital requirement for credit risk”. Standardised banks are subject to similar requirements, with the only difference being that is that, in place of the 0%- 60%, 60%-70%, and 70%-80% buckets for the IRB banks, they disclose a single LVR bucket of 0%-80%. In addition to the problems noted above of comparability with other mortgage lending figures, there are also inconsistencies across banks in the way the LVR breakdown is produced. These mainly arise with the IRB banks, given the greater flexibility that the IRB approach allows in determining exposure classes. The problems include:  Lack of clarity about precisely which exposures should be included in the disclosure. In particular the requirement does not specify how to treat off-balance sheet exposures, and whether the disclosures should be limited to exposures classified within the ‘retail’ asset class for capital adequacy purposes.  Lack of clarity about how to treat exposures for which LVR information is missing. In addressing these problems, as discussed above, our preference is to aim for consistency between the LVR disclosures and other Pillar 3 capital-related disclosures, rather than with other housing-related disclosures. We therefore propose the following amendments to give readers greater clarity on what the LVR numbers represent, and to allow more meaningful comparisons across banks:  Missing values. Accounts that are missing LVR information should be included in the highest LVR bucket. This would mean that the riskiness of the mortgage book could be overstated but would never be understated. It would give banks an incentive to capture LVR information, and is consistent with the approach we expect banks to take in their capital calculations.  Off balance sheet exposures. The LVR disclosure should include off balance sheet exposures that are included in the regulatory capital calculation (adjusted to an on￾balance sheet equivalent where this is consistent with the capital calculation). In our view this would best represent the risks, and would of course be consistent with the capital calculation. In some cases LVR information is not available for pre-approved loans, and in this instance the argument for categorising such loans in the highest LVR bucket would not make sense. In these cases we propose that banks assign an average LVR to such exposures (eg the average LVR of loans originated in the asset class in the last 12 months).  Asset class. The LVR buckets used for disclosure purposes are consistent with those used to calculate regulatory capital requirements for mortgage retail credit risk. Restricting the LVR disclosures to retail exposures only would therefore increase the transparency of the capital calculation. However this approach would not provide a full picture of housing risk for those banks that classify some housing exposures within their corporate rather than retail exposure class for capital adequacy purposes. One solution would be to require disclosure of LVR information for both retail and corporate housing exposures, with retail exposures identified separately. Q23. Have we accurately identified the problems with the LVR disclosure requirements?

29 Ref #4126312 v2.1 Q24. Do you think our proposed approaches are the best way of dealing with accounts that have no LVR information and with off balance sheet exposures? Q25. Do you think LVR information on mortgages classified as corporate (as well as retail) is important? Q26. Do you think LVR disclosures should be used to provide greater transparency about the regulatory capital calculation? Q27. Do you think requiring LVR disclosures about both retail and corporate housing exposures would be costly or excessive? 4.1.7 Nature of audit review General disclosure statements for the full and half year are required to include an auditor’s opinion. At the full year this includes a positive assurance opinion based on a full scope review, at the half year is a negative assurance opinion. However, the audit opinions are quite complex because GDSs contain both financial statements prepared in accordance with generally accepted accounting practice, and other information specified in the OiCs. The latter is further sub-divided into capital adequacy information, which for IRB banks is based partly on management assumptions and more subjective information, and other information. The result is a three-part opinion on the disclosed information, along the following lines: Auditor’s opinion on At full year At half year Financial statements Give a true and fair view of the matters to which they relate Whether anything has come to the auditor’s attention to cause the auditor to believe that they do not give a true and fair view of the matters to which they relate Supplementary information required by Schedules A-Z of the OiCs (non-capital) Fairly states the matters to which it relates in accordance with Schedules A-Z Whether anything has come to the auditor’s attention to cause the auditor to believe that it does not fairly state the matters to which it relates in accordance with Schedules A-Z. Capital adequacy information Same as at half year (see at right). Whether anything has come to the auditor’s attention to cause the auditor to believe that [the information] is not in all material respects prepared in accordance with the bank’s conditions of registration and with the bank’s internal models for credit risk and operational risk as accredited by the [RBNZ] in accordance with Schedule 5B15 . Banks’ auditors have expressed some concerns about the complexity of the resulting opinions. However, banks themselves seem to see this as a manageable problem, and readers of disclosure statements have not raised this as a major concern. Banks typically put a heading such as “unqualified audit opinion” on the multi-stage opinion in their disclosure statements, which is likely to be all that most readers are interested in seeing. One of the options discussed above that we are not putting forward for consultation would be to separate

15 Schedule 5B is “Capital adequacy under the internal models based approach”.

30 Ref #4126312 v2.1 out additional prudential disclosure from financial statements: that would remove this complexity, but we do not think that that on its own provides enough reason for going down that route. We have not heard any arguments in favour of changing the depth and frequency of audit review of the disclosures (in either direction), apart from some concern that it is not possible to obtain a more robust assurance opinion on the capital adequacy information. We therefore propose to keep broadly the same audit requirements as at present, based on full scope audit at the full year and review at the half year. We will however consider putting in place a rolling programme of audits of the capital adequacy information disclosed by banks, with the scope to be discussed with banks and their auditors outside the disclosure regime. Q28. Do you agree with our assessment of the current audit requirements? Q29. Do you have any preferred alternative approach for the revised disclosure regime? 4.2 PROPOSED CHANGES IN DISCLOSURE OF SPECIFIC SUBJECT AREAS 4.2.1 Disclosure of accounting policies Requirements to explain accounting policies used in preparing the financial statements are set out in NZ IAS 1 Presentation of Financial Statements paragraphs 117-124 and in NZ IFRS 7 paragraphs 21 and B5. The NZ-specific paragraph E8 of NZ IFRS 7 and on quarter OiC Schedule 4:416 require disclosure of accounting policies in relation to a number of specific instruments. In our view, none of these additional requirements is likely to add to what readers of GDSs can learn about a bank’s accounting policies. Where a particular class of instrument is material to a bank’s business, the general NZ IFRS requirements should result in its accounting treatment being described. For instance, NZ IAS1 paragraph 119 states: “In deciding whether a particular accounting policy should be disclosed, management considers whether disclosure would assist users in understanding how transactions, other events and conditions are reflected in reported financial performance and financial position. Disclosure of particular accounting policies is especially useful to users when those policies are selected from alternatives allowed in NZ IFRSs.” This might lead to disclosure being dropped in some cases, but that would only be where it is not currently informative. For instance, the descriptions of policies on classifying loans as over 90 days past due tend to be tautologous. Overall this may not reduce much the total volume of disclosure in full-year disclosure statements, but we think there is benefit in removing superfluous compliance requirements that banks need to check. For disclosure other than at the full year, banks would only need to disclose material updates in accounting policies. Q30. Do you agree with our assessment that the additional requirements in the OiCs and in NZ IFRS 7 Appendix E are unnecessary to ensure that users of disclosure

16 Schedule 4 is “Supplementary financial disclosures and asset quality” and section 4 deals with additional accounting policies.

31 Ref #4126312 v2.1 statements have sufficient information on accounting policies to be able to understand the financial statements? 4.2.2 Disclosure of risk management approaches Schedules 9 and 1017 of the on quarter OiC specify disclosure of various aspects of a bank’s risk management, including, where relevant, its modelling of credit and operational risk under the Basel II capital adequacy framework. A certain amount was added to these requirements in 2008 to implement Basel’s Pillar 3 disclosure requirements. Apart from Schedule 9 paragraphs 4 and 5, the required disclosure either follows what is required by Pillar 3, or overlaps with NZ IFRS requirements, or in a number of cases both. These are designed to be a coherent set of requirements rather than additional fragments. For instance, Schedule 9 paragraph 1 lists all the risks on which we wish to see disclosure, rather than just those that are required for Pillar 3 implementation but are not specified in NZ IFRS 7. Since there is no scope to reduce the amount of what is disclosed here (which we regard as useful in any case), we prefer not to change the way the requirements are expressed. Also, Schedule 10 disclosures can currently be published within the SDS, but with the proposed dropping of the SDS (see section 4.1.4) they would be merged with the Schedule 9 requirements for publication in the GDS. The only purely OiC add-ons are Schedule 9 paragraph 4, which requires a description of how a bank reviews its risk management systems, and Schedule 9 paragraph 5, which requires information on the bank’s internal audit function. We believe this is sufficiently important information that it should continue to be disclosed. Both the NZ IFRSs and Pillar 3 only require annual disclosure in these areas. We think this is sufficient unless there are significant changes. We therefore propose to require only material updates in the half-year and off-quarter disclosures. Q31. Do you agree with keeping broadly the current lay-out of the risk management disclosure requirements? Q32. Do you agree that the additional disclosure on reviews of risk management systems and on internal audit should be retained? 4.2.3 Disclosure of credit risk concentration to individual counterparties Current disclosure is required by Schedule 6 18 in the on quarter OIC for locally-incorporated banks, with largely duplicated requirements in NZ IFRS 7 paragraph E14. We regard the core information in this disclosure as vitally important, since the RBNZ does not impose any prudential limits on individual large exposures, unlike many banking supervisors overseas. However, we think that the current disclosure includes a lot of extraneous material that obscures the key information:  the information on exposures to other banks typically adds little to an understanding of the bank’s risk, but takes up a lot of space. Currently, exposures to central governments rated A- or better are excluded (this is the rating that corresponds to a maximum risk weight of 20% in the Basel II Standardised approach). We propose

17 Schedule 9 is “Risk management policies” and Schedule 10 is “Supplementary risk management disclosure”. 18 Schedule 6 is “Concentration of credit exposures to individual counterparties”.

32 Ref #4126312 v2.1 that this exclusion be extended to banks, so that only large exposures to banks rated below A- would be covered.  the breakdown of the reported large credit exposures into those of investment grade, those below investment grade, and those that are unrated can also be simplified. In most cases, a statement of the aggregate end-period balance and a statement that all counterparties are rated investment grade will suffice (rather than a full table showing nil amounts in the other rows as at present).  the option between using end-period equity and the equity amount on the date of the peak exposure should also dropped, as banks do not use the second option (as far as we have been able to tell).  we also think that the most recent position is the key information for assessing risk, and disclosure of previous period amounts can be dropped. Analysts can always put together a run of data from previous disclosure statements. We do however think that this slimmed-down information should be published every quarter. It should include figures for peak intra-period exposures over the quarter, as well as end￾period figures. Q33. Do you think that the proposed reduced disclosure on credit exposure concentration still presents the essential information? 4.2.4 Disclosure of credit risk impairment information Loans that are impaired or in other problem categories, and impairment allowances are another area of crucial interest for readers of GDSs, and we do not think that the financial reporting standards (without NZ IFRS 7 Appendix E) would necessarily result in adequate disclosure in this area. However, the current requirements in the full and half-year OiC Schedule 4 and in NZ IFRS 7 Appendix E overlap significantly with one another and also include information that is of limited value. We propose more focused disclosure, taking into account the following considerations:  The categories “restructured asset”, “financial asset acquired through the enforcement of security” and “other individually impaired asset” (defined in NZ IFRS 7 Appendix E) are not useful, as discussed further in Appendix 6 below.  An ageing analysis of past due assets is required by NZ IFRS 7 paragraph 37(a). We think it is useful to specify specific time bucket to improve comparability across banks, but we do not think it is necessary to show movements into and out of any given bucket over the period.  Pillar 3 requires the analysis of impaired assets to be broken down by major risk￾weighting category (retail mortgages, other retail, corporate), and we have also had feedback from users that this break-down is useful.  References in the OiCs to “allowances for impairment loss created in respect of non￾financial assets” should be dropped, since this is not a focus of interest for bank disclosure, and this will be appropriately covered by a range of other NZ IFRSs.

33 Ref #4126312 v2.1  “Other assets under administration” and undrawn balances on facilities provided to problem borrowers are useful information, but both can be reported as end-period balances only, and off-balance sheet problem exposures should relate to individually impaired assets only (rather than to each type of problem asset as at present).  For loans which are designated at fair value (which cannot be “impaired” on a strict definition), there should be separate disclosures analogous to those, in the case of loans at amortised cost, for collective and individual impairment allowances and individually impaired assets. (At the full year, this is consistent with the requirements of NZ IFRS 7 paragraph 9.)  We propose to drop the disclosure of interest foregone on various categories of problem lending. We do not think this adds materially to an understanding of the bank’s risk or performance.  Disclosure at the half year should be the same as at the full year, except that consolidated figures are sufficient. Disclosure at the off quarter can be in more summary form. On the basis of these considerations, we suggest that the relevant paragraphs of NZ IFRS 7 Appendix E are no longer needed, and that the OiC requirements should be as follows. For every quarter’s disclosure statement, the information shown would also be broken down into the major Pillar 3 risk-weighting categories: Full-year disclosure Individual impairment allowance Collective impairment allowance Individually impaired assets Opening balance Opening balance Pre-allowance opening balance Charge (credit) to income statement for increase (decrease) in individual credit impairment allowance Charge (credit) to income statement for increase (decrease) in collective credit impairment allowance Additions Amounts written off – Amounts written off Recoveries of amounts previously written off – – Provision releases / reversals of previously recognised impairment losses – Deletions Other movements (if any) and the nature of those movements Other movements (if any) and the nature of those movements – Closing balance (A) Closing balance Pre-allowance closing balance End-period allowance for individual credit impairment ( = A)

34 Ref #4126312 v2.1 Loans and advances at fair value For loans and advances designated as at fair value through profit and loss which are credit impaired, we think there should be separate disclosure, analogous to the above:  changes in the fair value of loans that is attributable to changes in their credit risk, as required by NZ IFRS 7.9, should be broken down as above for individual and collective credit impairment allowances.  loans at fair value on which there have been credit-risk related changes in fair value should be disclosed along the lines of individually impaired assets above (Banks have in practice found informative ways to disclose this information, for instance describing such loans as “deemed to be impaired”). Nil returns would not be required from banks that do not have any credit-impaired fair-valued loans (as at present). Past Due Assets We propose that the required ageing analysis of past due assets should have to include (but not be limited to) end-period balances in the following time buckets:  at least 30 days but less than 60 days past due  at least 60 days but less than 90 days past due  at least 90 days past due. Other categories We think the following items should still be disclosed, but only the end-period balances:  Other assets under administration  Undrawn balances on lending commitments to counterparties for which drawn balances are individually impaired Six-monthly disclosure Six-monthly disclosure should be at the same level of detail as full-year disclosure. However, in line with the rest of the disclosure requirements, only consolidated figures would be required. Banks would also disclose the amount of renegotiated loans, as if NZ IFRS 7 paragraph 36(d) applied at the half year. Off-quarter disclosure For the off quarters, the only disclosure required would be: the summary figures in the following table; separate, analogous disclosure for loans and advances at fair value; and the end-period balance of 90 day past due assets. (As at the full and half year, the information shown would also be broken down into the major Pillar 3 risk-weighting categories.)

35 Ref #4126312 v2.1 Individual impairment allowance Collective impairment allowance Individually impaired assets Charge (credit) to income statement for increase (decrease) in individual credit impairment allowance Charge (credit) to income statement for increase (decrease) in collective credit impairment allowance Closing balance Closing balance Pre-allowance closing balance Q34. Do you think that the proposed revised disclosure on credit impairment has a better focus on the essential information? Q35. Is there a good case for keeping disclosure of any of the items we are proposing to drop? 4.2.5 Disclosure of Basel Pillar 3 information The Pillar 3 requirements published by the Basel Committee are for disclosure of detailed quantitative capital adequacy information every six months, and of detailed qualitative information annually. “Significant” banks are expected to disclose their Tier 1 and total capital ratios, and their components, quarterly. We propose to reduce the frequency of detailed disclosure to bring it into line with these Basel requirements. The discussion of risk management disclosure above deals with the Pillar 3 qualitative disclosure. For the quantitative disclosure, we propose only the following minor changes at the full and half year. In the disclosure of market risk:  previous period comparisons and figures as a percentage of the bank’s equity will be dropped, in line with all the other detailed figures on capital requirement  the intra-period peak exposures will cover the most recent six months rather than three months (since this will not be disclosed in the off-quarters) For banks accredited to use internal ratings-based modelling approaches under Basel II (“IRB banks”), we propose to cut the requirement to disclose capital adequacy ratios on a Basel I basis. They would however need to disclose summary capital ratios for the solo registered bank at the full and half year, using the Basel II calculation. This is subject to reaching agreement on a satisfactory method for carving out the solo capital requirements from the modelled group requirements. IRB banks are required to multiply all risk-weighted asset (RWA) figures for credit risk within the IRB approach by a scalar set in their conditions of registration. Banks are required to disclose each RWA figure after applying the scalar. This can lead to confusion: for instance, some banks show exposure-weighted risk weights including the scalar, others do not. We suggest that the impact of the scalar should only be shown at the final stage of aggregating capital requirements.

36 Ref #4126312 v2.1 For the off-quarter quantitative disclosure of capital adequacy, we propose to substantially reduce the current full detail required at the full and half year, to the following summary information: All banks Tier 1 capital ratio Total capital ratio Tier 1 capital before deductions Tier 1 capital net of deductions and any other adjustments Total Tier 2 capital Deductions from total capital Capital Standardised banks IRB banks Capital requirements for on-balance sheet credit risk, broken down into –  Residential mortgages (including 90 days past due)  Corporate  Claims on banks  Other Credit risk capital requirements subject to IRB approach, broken down into total for each exposure class. Typically –  Corporate  Sovereign  Bank  Retail mortgages  Other retail Total capital requirement for off-balance sheet credit risk. Total non-IRB capital requirement for credit risk All banks Total capital requirement for operational risk Total capital requirement for market risk Supervisory adjustment (IRB banks only) Total capital requirement Pillar 2 internal capital allocation Breakdown of retail mortgage lending by LVR (as at present) We note that some banks currently provide full details of the terms and features of equity and loan capital instruments, and a detailed analysis of reserves, in their off-quarter disclosure even though this is not required by the OiCs. We do not think this is essential information for this level of frequency, and do not plan to start requiring it now.

37 Ref #4126312 v2.1 Q36. Do you think that the proposed revised disclosure on capital adequacy includes sufficient information at the off quarter? Q37. Do you see any need for banks to disclose detailed analysis of capital instruments and reserves in the off quarter? 4.2.6 Disclosure relating to liquidity risk The Reserve Bank’s new liquidity policy BS1319 includes minimum ratio requirements, which came into force for most locally-incorporated banks on 1 April 2010. During development of the policy we stated that we would also introduce related new disclosure requirements. We are not proposing detailed disclosure of the components of banks’ liquidity ratios at this stage, for two main reasons –  The policy is new for the banks and is still being bedded down, with some minor definition issues still arising. Detailed private reporting to the Reserve Bank is being developed, but is not expected to be in place until late this year, and at present banks are reporting only high-level summary figures.  The Basel Committee’s proposals for international standards for liquidity risk include disclosure requirements, but as issued in December 2009, the proposals were lacking in detail. We expect to have a better idea of the final shape of those requirements later this year, following Basel’s consultation process. It seems sensible to wait until then. However, users have expressed strong interest in having information relevant to banks’ liquidity risk, and have also told us that the current required disclosure is less useful than it could be:  One area of interest is the maturity ladder, particularly for funding, and the issues here are that banks use varying time buckets, making comparison difficult, and also do not tend to include sufficiently short-dated time bands. Although the GDS publication deadline of 3 months means that any maturities shorter than that will already be in the past by the time the information is disclosed, we think it is still useful for banks to regularly disclose a “snapshot” of their liquidity profile at a particular date.  The other key area of interest is a bank’s holdings of cash and marketable securities, ie those that can be readily converted into cash. Currently it is not clear which balance sheet categories, and how much within each category, would fall within such holdings, and again there is inconsistency across banks. At least one bank allocates “trading securities” to a short time band in its asset maturity ladder in recognition of their availability to raise cash, rather than to the contractual maturities of the individual securities, but most others do not. NZ IFRS 7 excluding Appendix E already requires significant amounts of disclosure on liquidity risk. Of the additional requirements currently in Appendix E, paragraph E20 has not in practice delivered useful disclosure. Paragraph E21 suggests that an “on demand” time band is appropriate in banks’ funding maturity profile, on top of those given as an example in paragraph B11 of NZ IFRS 7. We propose to mandate the following as the minimum level of granularity for banks’ funding maturity profile:

19 See RBNZ Banking Supervision Handbook at http://www.rbnz.govt.nz/finstab/banking/regulation/0094291.html.

38 Ref #4126312 v2.1 On demand Next day to 1 month Over 1 month to 3 months Over 3 months to 6 months Over 6 months to 1 year Over 1 year to 5 years This starts from the time bands suggested in NZ IFRS 7 paragraphs B11 and E21, and adds an additional split at 6 months. We think this is the minimum needed to address the concerns about the lack of comparability and insufficiently short time bands. NZ IFRS 7 paragraph B11E states: “An entity shall disclose a maturity analysis of financial assets it holds for managing liquidity risk (eg financial assets that are readily saleable or expected to generate cash inflows to meet cash outflows on financial liabilities), if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk.” In our view, the conditional in this statement for such information to be necessary will invariably be met by New Zealand registered banks. Broadly, the information we think is of interest is the value of marketable assets that the bank holds for liquidity risk management purposes, broken down by broad asset categories, and including any assumptions about the amount of time needed to realise those assets for cash. The liquidity policy BS13 prescribes precise definitions of liquid assets. Although there may be some differences between this list and the securities a bank holds for its internal liquidity risk management, it has the advantage of being comparable across banks. We will give further consideration to what sort of disclosure we might require of banks’ holdings of liquid assets as defined in BS13. NZ IFRS 7 paragraph E19(a) requires a maturity analysis of all financial assets (not just marketable assets) on the same basis as for financial liabilities. This is asking for something different than what is required by paragraph B11E. We think disclosing a separate picture of the overall contractual maturity mismatch of the balance sheet is helpful, and if asset maturities are included they clearly need to be in the same time buckets as liability maturities. Assuming that Appendix E is cut, we would need to include this requirement in our disclosure regime. Although this ties in to NZ IFRS 7 requirements that will only apply at the full year, we propose that this disclosure be required every quarter. At the half year and off quarter, only consolidated figures would be required, and not the previous period comparisons. Q38. Do you agree with our assessment of the information that is important for assessing a bank’s liquidity risk profile? Q39. Do you think that the proposed revised disclosure on liquidity risk gives a more useful overview of a bank’s liquidity position at the reporting date? 4.2.7 Other proposals for revised disclosure in specific subject areas Exposure concentrations. NZ IFRS 7 requires disclosure of concentration of risk exposure in relation to a bank’s key risks (typically credit risk, liquidity risk and market risk). NZ IFRS 7 paragraphs E11 and E12 add precision to this, by specifying that this should include concentrations by customer, industry or economic sector, and by geographic sector, and refer as an example to ANZSIC codes. We think that the use of ANZSIC code breakdowns should be mandated, and therefore propose that these requirements from Appendix E, suitably

39 Ref #4126312 v2.1 adapted, should be captured in the disclosure OiCs, consistent with our preference to remove NZ IFRS 7 Appendix E as a whole. Users have indicated that this information on credit and funding exposure concentrations is important. They have noted that banks use different groupings in their ANZSIC code breakdown of credit exposures, making cross-bank comparison harder. However, we think there is a limit to how far we can go in spelling out the breakdown, as a given sector may represent a material credit exposure concentration for one bank but not another. Nevertheless, we propose that lending to the agricultural sector should be separately identified. We also discuss in Section 4.1.6 ways in which retail mortgage lending could be more helpfully identified. We propose that data on funding and lending concentrations be required both at the half year and in the off-quarters, but only on a consolidated basis and without previous period comparisons. Interest rate re-pricing schedule. This is another area in which users have specifically expressed interest, although again with concerns about comparability. We suggest that the requirement currently in NZ IFRS 7 Appendix E (paragraph E22) is replaced by a more specific requirement in the OiCs with the following maturity buckets specified, and that this should be disclosed every quarter (current period and consolidated only, except at the full year). A bank could provide a further breakdown within any of these maturity buckets if it chose to: Up to 3 months 3 to 6 months 6 to 12 months 1 to 2 years Over 2 years Balance sheet specified items. Currently, full and half-year balance sheet items are governed by NZ IFRSs, including the specific additional rows required by NZ IFRS 7 paragraph E3. Off-quarter disclosure is specified in the OiCs, and includes the items listed in E3. Our preference (as noted) is for Appendix E of NZ IFRS 7 to be removed entirely. We expect banks to present the same items on the face of their balance sheet at the half year and off quarters as they do at the full year. We may continue to specify certain items that must always be included in the disclosure (which could be in the notes or on the face of the balance sheet). The main focus of the items in E3 appears to be on readily marketable assets, but the disclosure does not currently succeed in being informative about a bank’s liquidity risk – a separate discussion of that is in section 4.2.6 above. Income statement items. NZ IFRSs for full-year reporting delivers ample detail in the income statement and associated notes. Currently the OiCs specify a limited number of items for the off quarters. Most banks in practice go beyond this minimum requirement. However, in some cases it is not possible to separate out fair value adjustments from other income, and this has been raised as a concern. We think it is important for readers to be able to separate out the numbers in every quarter’s disclosure. We propose that for the six-month and off￾quarter disclosure, the requirements on the income statement should be broadly the same as for the current off quarters, but should enable the reader to identify the following: net trading gains/losses; separately, if applicable, credit risk adjustments on financial assets at fair value (in line with the impaired asset disclosure, see section 4.2.4); other fair value adjustments; other operating income. Connected exposure limits. Detailed disclosure on credit risk exposures to connected persons and non-bank connected persons is currently required every quarter. This disclosure relates to

40 Ref #4126312 v2.1 prudential limits normally imposed on locally-incorporated banks in their conditions of registration, as prescribed in Handbook document BS8 Connected Exposures Policy. This disclosure is in addition to the quite extensive disclosure required by NZ IAS 24 Related Party Disclosures in full-year financial statements, and tends not to be closely related to it (it relies on a definition of exposure specified in BS8, which generally produces larger, ie more conservative gross numbers). If a bank was to breach its connected exposure limit, it would have to disclose that breach in its next disclosure statement. It seems to us that that provides the main market discipline on the bank, rather than the need to disclose the numbers every quarter demonstrating compliance. We have not heard from any user who finds this information useful, so we propose to drop it. If anyone does find value in it, we could reduce the frequency of its disclosure to half-yearly, with the peak exposure information covering the previous six months rather than three, and cut the requirement for previous period comparisons. Q40. Do you find the information on connected exposures valuable? If so, is reducing the frequency and comparators an acceptable alternative to dropping it altogether? Related party transactions. Our proposals mean that the detail required by NZ IAS 24 will only be included in the full-year disclosure. Total amounts due to related parties are currently required by the off-quarter OiCs, but not amounts due from related parties. We suggest that at least some information on related party balances is important for readers on a regular basis. We propose that disclosure other than at the full year should show at least the total amounts due from and to related entities at the balance date, on the same basis as the full-year disclosure under NZ IAS 24. It should also include any material transactions or material changes in arrangements with related parties over the period. Historical summary of financial statements. A five year summary of key profit and loss and balance sheet items is currently required at the full and half year. While in our view this can provide useful context for the bank’s latest figures, readers of disclosure statements have generally told us they have little interest in this. We propose to drop this requirement unless we hear strong support for it in feedback on the consultation. Q41. Do you agree that the historical summary of financial statements is of little use? Securitisation, funds management, other fiduciary duties, and marketing and distribution of insurance products. A detailed description of the banking group’s involvement in these activities and some quantitative information is required at the full and half year, and only slightly less at the off quarters. This appears excessive to us. An annual summary, with brief updates in between as necessary, should be sufficient for readers to keep track of the risks. We propose the following streamlining:  the description of the bank’s involvement in these activities, and of arrangements to avoid adverse impacts, should be required annually, with disclosure in any other period only if there has been a material change.  likewise, the statements about transactions being at arm’s length will only be required annually, unless any transaction has not been at arm’s length in the reporting period.  the disclosure of amounts represented by the various activities, and of funding provided to entities conducting those activities, will be required half-yearly. Intra￾period peak amounts will cover the latest half-year rather than latest quarter. Previous period comparative numbers will no longer be needed.

41 Ref #4126312 v2.1 This will provide more than is required by NZ IFRS 7 paragraph E9, and thus supports the removal of that. Insurance business. The total amount of insurance business conducted by the banking group (if any), and a description of how it is managed, is required at the full and half year, with shorter updates in the off-quarters. We propose to reduce this disclosure along the same lines as the disclosure on securitisation etc just discussed, and also to require it to be disclosed alongside that disclosure. APPENDICES Appendix 1 summarises areas where disclosure requirements in the OiCs for the full and half year overlap with, or duplicate, full-year reporting requirements in NZ IFRSs. The aim of this is to identify some OiC disclosure requirements that can be cut for the full year because the required information is already adequately covered by NZ IFRSs. It also proposes areas that should be kept. This delivers the full-year disclosure, which would be the same under either option. Appendix 2 summarises areas where disclosure requirements in the OiCs for the full and half year are purely additional to full-year reporting requirements in NZ IFRSs. This appendix proposes which of these should be kept for full-year disclosure, and which for half year. Appendix 3 summarises the information currently required by the full and half-year OiC that will be removed, streamlined or restructured, for the half-year GDSs. The changes here that will have by far the biggest impact on the volume of disclosure are the last three listed, namely the switch from full-year to interim financial reporting, and the removal (in many cases) of the need to disclose solo bank information and previous period comparison figures. Appendix 4 summarises the information currently required by the off-quarter OiC that would be removed or streamlined for the off-quarter disclosure, under the option where that disclosure is only made in the off quarters and the KIS is discontinued. We are also proposing some additional information to be added to the off quarters. Appendix 5 summarises the information currently required for the KIS and the assessment of each requirement. It also includes some suggested additions to the KIS proposed under Option A. Appendix 6 summarises our analysis of the individual disclosure items required by NZ IFRS 7 Appendix E. Appendix 7 lists all the questions we are seeking feedback on throughout the consultation document.

42 Ref #4126312 v2.1 Appendix One: List of overlaps and duplications between on quarter OICs and NZ IFRSs and recommendation Disclosure Requirements On quarter OICs NZ IFRSs Recommendation for OiC General disclosure – name, address Schedule 3: 1 NZ IAS 1: 138 (a), 51(a) Remove General disclosure – parents’ name, address Schedule 3:2(a)(b) NZ IAS 1: 138 (c) Keep (OiC specifies parent bank) General disclosure – pending procedure Schedule 3: 13 NZ IAS 37 Keep (OiC more specific) Presentation currency/rounding Part 2,22(3) NZ IAS 1,51(d)(e), NZIAS21 Keep (OiC specifically requires NZD) Providing comparatives In many schedules NZ IAS 1, 38 Merged into one general requirement, except for Capital Adequacy Accounting policies for trading securities Schedule 4: 4(c) NZ IAS 39,38; NZ IFRS 7,B5(c) Remove (see discussion of accounting policies disclosure at 4.2.1) Financial risk management – risk categories Schedule 9: 1 NZ IFRS 7, 32 Keep (OiC specifies more, eg operational risk) Risk management policies – objectives, policies, strategies, and process; nature of risks, measurement and monitoring Schedule 9: 2(1),2(a) NZ IFRS 7, 33(a)(b) Keep (hard to disentangle – see discussion at 4.2.2) Risk management policies – process for identify, measure and monitor exposures, incl. frequency of monitor/report Schedule 9: 2(2)(c) NZ IFRS 7, 33(b) Keep (hard to disentangle – see discussion at 4.2.2) Provision for credit impairment and reconciliation of impaired assets Schedule 4:5-11 NZ IFRS 7: 16, 37, E5, E6, E16-E18 Rationalise OiC requirements on the basis that the NZ IFRS 7 App E requirements will be cut (see 4.2.4) Reserves and retained earnings – description of nature and purpose of each reserve within equity Schedule 5:A￾5B,2(4) NZ IAS 1, 79(b) Cut (NZ IAS 1 level of detail is sufficient) Listing name, nature of business, country of incorporation, percentage ownership of Controlled entities, associates and interests in joint entities/member of banking group Schedule 3: 16 NZ IAS 24, 12, 14 NZ IAS 27, 43(b) Remove Funds under management and other fiduciary activities – nature and amounts, arrangements for ensuring such activities are separated from other activities Schedule 8: 2(a), 3, 4 NZ IFRS 7, App. E:E9 Keep OiC annual requirements as long as the NZ IFRS 7 requirement is cut (see discussion at 4.2.7)

43 Ref #4126312 v2.1 Appendix Two: List of items in On-quarter OiC (i.e. additional ones to NZ IFRSs) that should be kept or removed – on the basis that On￾quarter OiC will apply to full-year GDS only. Recommendations for the half-year GDS are also provided. Item Disclosure Requirements On quarter OiC Recommendation For annual Recommendation for half year 1 General disclosure – restriction on parent to support, other material matters Schedule 3: 2(c), 18 Keep Keep 2 General disclosure – guarantors, detail of guarantee Schedule 3: 4, 6A, 6B, 7 Keep State if present, more detail only if material update 3 Summary of five year accounts Schedule 3: 15 Keep Remove (see Q41) 4 Related party: management contracts, agency relationships, taxation grouping arrangements, debts or other amounts forgiven, transactions at nil or nominal value. Schedule 4: 2(2)(a)-(e) Cut (add little to already extensive requirement by NZIAS 24) Cut 5 Accounting policies for the basis of classifying, and for recognising and measuring assets under administration Schedule 4: 4(a)(ii) Cut (see discussion of accounting policies disclosure at 4.2.1) Covered by material update in accounting policies generally 6 Accounting policies for repurchase agreements, financial instruments used for hedging, accounting for leases, foreign exchange contracts, acceptances and endorsements of bills of exchange, loan transfers Schedule 4: 4(b)(d)(e)(f) (g) (h) Cut (see 4.2.1) Covered by material update in accounting policies generally 7 Risk management policies – structure/organisation of risk management functions, systems and procedures for controlling risk Schedule 9: 2(2)(b), (d) Keep (Pillar 3) Material update only 8 Risk management policies – reviews of risk management systems, internal audit function Schedule 9: 4 & 5 Propose to keep (see 4.2.2 and Q32) Material update only (if kept for full year) 9 Risk management policies – credit risk mitigation Schedule 9: 7 Keep (Pillar 3) Material update only 10 Operational risk, Market risk, liquidity risk – description, explanation of the nature, how the risk is being monitored and controlled etc Schedule 9: 1(b)-(f), 2 Keep Material update only 11 Additional information on Basel II modelling approaches for credit risk and operational risk Schedule 10 Keep (and move to GDS from SDS – Pillar 3) Material update only 12 Income statement – net gain or loss attributable to derivatives used for hedging purposes that do not qualify as designated and effective hedging Schedule 4: 3 Remove Remove

44 Ref #4126312 v2.1 instruments in terms of the provisions of NZ IAS 39 13 Balance Sheet – total interest earning and discount bearing assets and liabilities Schedule 4: 1(1)(a) & (b) Keep – useful for interest margin calculation Keep 14 Balance Sheet – assets that have been used to secure any obligations, the nature and amounts of those assets Schedule 4: 1(1)(c) Keep Keep, same as at full year 15 Balance Sheet – the nature and amount of any assets not legally owned but presented in the Balance Sheet Schedule 4: 1(1)(d) Remove Remove 16 Balance Sheet – where risk attaches to financial assets or liabilities set off in accordance with NZ IAS 32, information on those assets and liabilities. Schedule 4: 1(3) to (5) Remove – has not proved to be of any value Remove 17 Capital adequacy (quantitative) Schedule 5, 5A, 5B Keep (with minor amendments – see 4.2.5) Keep (as for full year) 18 Concentration of credit risk to individual counterparties Schedule 6:4,7 Streamlined, assuming NZ IFRS 7 E14 are cut (see 4.2.3) Streamlined (same as at full year) 19 Credit exposures to connected persons (BS8 compliance) Schedule 7 Either cut altogether , or keep at full and half-year only, current period figures only. (See 4.2.7) As for full year 20 Securitisation, funds management, fiduciary activities and marketing and distribution of insurance products Schedule 8 Keep Key figures only, and material updates (see 4.2.7) 21 If the banking group conducts insurance business, the aggregate amount of such business and info on how it is managed. Schedule 3:17 Keep Aggregate amount only material updates 22 Directors and auditors Schedule 3: 10-11 Keep Material update only 23 Conditions of registrations Schedule 3: 12 Keep Material update and breaches only 24 Credit ratings Schedule 3: 14 Keep Brief summary and material updates only. 25 Director statements Schedule 3: 19 Keep Keep 26 Auditor’s report Schedule 3: 20 Keep Keep

45 Ref #4126312 v2.1 Appendix Three: Full list of information currently required by OiCs that will be removed, streamlined or restructured, for half-year GDSs Disclosure Requirements On quarter OiC Recommendation Guarantors and details of guarantees Schedule 3: 4, 6, 7 State if present, more detail only if material update Accounting policies required by OiCs and NZ IFRSs Schedule 4: 4 Material update only Risk management policies Schedule 9 Material update only Supplementary information on income statement Schedule 4: 3 Remove Supplementary information on balance sheet on the nature and amount of any assets not legally owned but presented in the balance sheet Schedule 4: 1(1)(d) Remove Related party – specific additional information Schedule 4: 2(2)(a)-(e) Remove Financial assets and liabilities set off in accordance with NZ IAS 32 Schedule 4: 1(3)-(5) Remove Provision for credit impairment and reconciliation for impaired assets Schedule 4:5-11 Streamlined Amount of interest revenue foregone Schedule 4:7 Remove Capital adequacy (quantitative) Schedule 5, 5A, 5B Mainly keep, some streamlining Concentration of credit risk to individual counterparties Schedule 6:4,7 Streamlined Connected exposure limits Schedule 7 Possibly cut altogether Securitisation, funds management, marketing/distribution of insurance products Schedule 8 Summary figures, more information only if material update Insurance business: aggregate amount of such business conducted by the bank (if any) and info on how it is managed. Schedule 3:17 Aggregate amount only, unless material updates Additional information on Basel II modelling approaches (can be in SDS, but in practice published in the GDS) Schedule 10 Material update only Credit rating information Schedule 3: 14 Brief summary, more only if material updates Conditions of registration Schedule 3: 12 Material update/breaches only Directors and auditors Schedule 3: 10-11 Material update only Requirement to disclose quantitative information on the registered bank Part 2: 23(1)(a) Remove (banking group sufficient for the half year) Financial statements for interim period to be as if it were an accounting period Part 2: 23(2)(a) Remove (interims sufficient for the half year) Figures for previous corresponding period and previous accounting period to be included Throughout Remove except where driven by financial reporting standards

46 Ref #4126312 v2.1 Appendix Four: Recommendations to shorten the off-quarter GDSs (with reference to current off-quarter OiC) Disclosure Requirements Off-quarter OiC Recommendation General disclosure – name, address Schedule 2: 1 Keep General disclosure – parent and ultimate holding company info Schedule 2: 2 Remove General disclosure – interest in 5% or more of voting securities Schedule 2: 3 Remove General disclosure – directors (changes only) Schedule 2: 4 Keep Guarantees, guarantors, guaranteed obligations Schedule 2: 5-9 State if present, more detail only if material update Absence of supplemental disclosure statement Schedule 2: 10 Remove – no longer applicable Conditions of registration Schedule 2: 11 Material update/breaches only Credit rating information Schedule 2: 12 Current ratings summary only Director’s statements Schedule 2: 14 Keep Auditor’s report Schedule 2: 15 Keep Extra line items in Income Statement: net trading gains/losses, other gains less losses on financial instruments at fair value, profit/loss attributable to minority interest, and profit/loss attributable to equity holders of the parent Schedule 3: 4 Sufficient detail to separate out fair value gains and losses and total changes in equity Extra line items in Balance Sheet Schedule 3: 4, B/S items 1-18 Broadly, to be consistent with face of balance sheet at full year. A few key items specified. Extra balance sheet items: assets used to secure obligations, and assets not legally owned but presented in Balance sheet Schedule 3:4, B/S items 22 & 23 Cut Asset quality – generally Schedule 3: 5-10 Streamlined and shortened Asset quality – real estate assets, other assets acquired through enforcement of security, movement in allowances for impairment loss for non-financial assets Schedule 3: 5, 7 Remove Asset quality – credit risk on loans and receivables at fair value Schedule 3: 9 Keep, within the above Asset quality – breakdown by major type of credit exposure Schedule 3: 10 Keep, within the above Capital adequacy (quantitative) Schedules 4, 4A-B Short summary only Concentration of credit exposures to individual counterparties Schedule 5 Streamlined Credit exposures to connected persons Schedule 6 Cut Securitisation, fund mgmt, insurance etc Schedule 7 Cut Insurance business Schedule 2: 13 Cut Risk management policies, only if any material changes Schedule 8 Keep

47 Ref #4126312 v2.1 Appendix Five: KIS – Assessment of Current contents and possible additions Current Requirements Required Content Recommendation Introductory statement for customers ...to provide customers and potential customers with information about financial condition of their bank... Keep the format but paraphrase Corporate info Name, ultimate parent bank, country of domicile Keep Credit rating Rating agency’s name, type of rating, current rating and qualifications and any changes in the last 2 years Keep Government guarantee Whether covered, and how to obtain more info Keep, paraphrase Profitability Net profit/loss after tax, and as percentage of the 12 months total assets Remove, to be replaced with P/L info Size Total assets, % change over the 12 months Keep, but further breakdown into key balance sheet items Capital adequacy Tier one capital ratio, total capital ratio Keep largely, remove Basel I ratios Asset quality Total individually impaired assets, % of total assets, total individual credit impairment allowance, impaired assets %; total collective credit impairment allowance, non-financial assets acquired through enforcement of security Keep, but revised – a summary version of the general disclosure proposed (see 4.2.4) Peak credit exposure concentrations # of individual non bank and bank counterparties, in successive 10% of the banking group’s equity Simplified (see 4.2.3) Credit exposure to connected persons Peak end-of-day aggregate credit exposure (to connected persons and non￾bank connected persons) as an % of tier one capital; any breaches Either cut or streamlined (see 4.2.7) Statement on availability of GDS/SDS Keep (in respect of GDS) Auditor’s report Keep Recommended Additions Contents Glossary Explain technical terms such as what is capital, impairment, credit exposure in simple terms Director statements/signoff Key ratios e.g return on equity, reinvestment rate. There are arguments for and against providing underlying data How to interpret A page at the end to explain why particular ratios are important and how to interpret capital ratios etc Net loans and advances Income statement and Balance sheet Current statements Asset quality & provision Break down into 90 days past due etc, provide ratios as well.

48 Ref #4126312 v2.1 Appendix Six: Assessment of disclosure requirements of NZ IFRS 7 Appendix E Para Subject Analysis and recommendation E1, E2 Purpose, scope Not needed if Appendix E as a whole is dropped. E3 Balance sheet breakdown This provides additional breakdown beyond that required by NZ IFRS 7.8. The latter focuses on the financial reporting categories specified in NZ IAS 39/ NZ IFRS 9 (fair value, available for sale, etc), whereas this breakdown is by instrument and counterparty type, particularly within wholesale-type assets and liabilities. For bank disclosure it therefore adds some value, although some items are not essential. For non-banks it is less relevant. We propose that this should be cut from Appendix E, and in a slightly amended form be included in the OiCs, to apply every quarter. (See section 4.2.7, “Balance Sheet Specific Items”.) E4 Priority of creditors’ claims for each category of liability disclosed under E3 This is potentially important information, however the focus on those particular liability categories does not seem helpful. We suggest that more general information on the ranking of creditors’ claims is disclosed annually alongside information on assets used to secure obligations (see Appendix 2). Cut from Appendix E. E5, E17 Details of impaired assets and reconciliation of changes in the allowance account for credit impairment losses These paragraphs specify the detail of the disclosure required by NZ IFRS7 paragraphs 16 and 37(b), but there are largely overlapping requirements in the OiCs. The preferred outcome is for simplified and reduced details to be specified in the OiCs (as described in section B.4) E6, E18 Details of restructured assets, financial assets acquired through the enforcement of security, and other individually impaired assets. These three categories are NZ-specific defined terms and seem to us to say very little additional about asset quality. Our preference is for them to be removed both from financial reporting and from the OIC requirements. The definition of a restructured asset requires that the asset is still classed as impaired after the restructuring. Disclosure of renegotiated loans required by NZ IFRS 7 paragraph 36(d) seems much more relevant, as that covers non-impaired assets that would not be otherwise be included in any class of “problem” asset. NZ IFRS7.38 requires disclosure of the nature and carrying amount of assets (financial and non-financial) obtained by taking possession of collateral that the firm holds as security.

49 Ref #4126312 v2.1 Separate disclosure of financial assets acquired through the enforcement of security seems to us unnecessary on top of this, and in practice amounts disclosed by banks have been negligible. “Other individually impaired assets” is intended as the residual item, ie individually impaired assets that are neither impaired nor acquired through enforcement of security. It would no longer be needed if those two are cut. E7 Breakdown of interest income This includes interest income on the three categories of asset covered in E6 and E18. If those are dropped as we propose, since interest income on impaired financial assets is disclosed in accordance with NZ IFRS 7.20(d), the only remaining additional breakdown required by E7 is between interest on “securities held for trading” and “other securities”. We think this paragraph can be cut. E8 Accounting policies Our overall view is that the general requirements in IFRSs on disclosure of accounting policies will result in disclosure in any material areas, and that the additional specific areas covered in E8 and in the OiCs can be cut (see discussion at section 4.2.1). E9 Trust and fiduciary activities Cut. This is a subset of disclosure that is also required by the OiCs. The proposal is to keep that disclosure for the full-year GDS (see section 4.2.7, “Securitisation, funds management...”). E10 Breakdown of off-balance sheet items Cut. The categories specified here are out-of-date ones from the Basel I capital adequacy framework. Disclosure of the risk arising from such items is amply covered by Basel II Pillar 3 disclosure. Banks will also disclose the nominal amounts to an adequate level of detail in complying with NZ IAS 1 and NZ IAS 37. E11, E12 Concentration of funding, credit and market exposure (more detail) This provides useful disclosure, imposing greater precision on the very general requirements of NZ IFRS 7.34(c) and B8. The use of ANZSIC codes for industry classification is appreciated by users. However, that is only suggested, not mandated, here and also different banks use different ANZSIC groupings. We suggest that this requirement is replaced by more specific requirement in the OiCs (as suggested at 4.2.6). E13 Branch credit exposure relative to global equity Cut from here. Section 4.1.5 discusses a single co-ordinated approach to the most appropriate way to present the risks being run by branches.

50 Ref #4126312 v2.1 E14 Individual large credit exposures. These requirements duplicate what is required by the OiCs, which we suggest is not very helpful in any case. Suggested improved disclosure, to be required by the OiCs, is set out in Section 4.2.3. E15 Statement by branches on their disclosure of large exposures. In relation to E14, this requires branches to state that the individual large credit exposures disclosed do not include exposures to those counterparties if they are booked outside New Zealand. Assuming this approach is retained for branches (as we propose), it is reasonable that this must be stated, since only locally-booked credit exposure is being compared to equity of the banking group globally. However, it should go alongside the rest of the large exposure disclosure requirements in the OiCs, and be cut from Appendix E. E16 90-day past due assets This can be cut from Appendix E as it is already covered in the OiCs, and we are proposing that it will continue to be disclosed quarterly (see Section 4.2.4). E19 – E21 Liquidity risk The requirement for an “on demand” maturity bucket for funding and for an asset maturity ladder are helpful, but the other requirements here have not delivered useful disclosure. We would prefer additional liquidity risk-related disclosure to be addressed within the Reserve Bank’s prudential liquidity policy for banks, as discussed further at Section 4.2.6. E22 Interest rate re-pricing schedule From our discussions with users, it seems that there is some demand for this information, although to be really useful the maturity buckets need to be standardised.

51 Ref #4126312 v2.1 Appendix 7: Consolidated Questions Number Questions Section Page 1 Do you think any of the above three options should be considered further? If so, which one and why? 3.5.1 14 2 Do you agree with our assessment that Options A and B are the main options for consideration? 3.5.2 16 3 Is there an alternative approach we should consider? 4 What are your views on the relative merits of Options A and B? 5 Do you think that replacing off-quarter disclosure with continuous disclosure is a feasible option for consideration? 6 Can the banks give us hard information on the likely impact of the proposed changes on their compliance costs? 3.6 17 7 Do you agree that the delivery time at the half year should be shortened? How much do you think publication deadlines could be reduced in the light of the detailed proposals for change? 3.7 17 8 What are your views on the appropriate publication mechanism for bank disclosure statements? 18 9 Do users of disclosure statements agree with our assessment that the items noted above are of little interest at the off quarters? 4.1.1 20 10 How concerned are you about the additional length of off-quarter disclosure if NZ IAS 34 applies? 11 Does not requiring NZ IAS 34 compliance for off-quarter disclosure raise any concerns? 12 Do you agree with our analysis of the overlaps between Appendix E and other disclosure requirements? 4.1.2 21 13 Do you have a view on whether Appendix E is required or not? 14 Do you agree that reduced amounts of previous period comparative information will on balance be beneficial for users of disclosure statements? 4.1.3 22 15 Do you agree that once a year is sufficiently frequent for an update on the solo bank’s financial position? 16 Is there any benefit in the documents currently in the SDS continuing to be made publicly available? 4.1.4 23 17 If so, does the alternative delivery mechanism proposed achieve that at acceptably low compliance cost? 18 Do you agree with our assessment of user needs for the various types of branch disclosure? 4.1.5 26 19 What are your views on the proposed changes in branch disclosure? 20 If the requirement for off-quarter disclosure by stand-alone branches is made subject to certain criteria, what do you think those criteria should be? 21 Do you agree with our assessment of the problems with the various types of mortgage lending disclosure? 4.1.6 27 22 What are your views on the suggested ways of dealing with these problems, and do you have any alternative suggestions?

52 Ref #4126312 v2.1 23 Have we accurately identified the problems with the LVR disclosure requirements? 28 24 Do you think our proposed approaches are the best way of dealing with accounts that have no LVR information and with off balance sheet exposures? 29 25 Do you think LVR information on mortgages classified as corporate (as well as retail) is important? 26 Do you think LVR disclosures should be used to provide greater transparency about the regulatory capital calculation? 27 Do you think requiring LVR disclosures about both retail and corporate housing exposures would be costly or excessive? 28 Do you agree with our assessment of the current audit requirements? 4.1.7 30 29 Do you have any preferred alternative approach for the revised disclosure regime? 30 Do you agree with our assessment that the additional requirements in the OiCs and in NZ IFRS 7 Appendix E are unnecessary to ensure that users of disclosure statements have sufficient information on accounting policies to be able to understand the financial statements? 4.2.1 30 31 Do you agree with keeping broadly the current lay-out of the risk management disclosure requirements? 4.2.2 31 32 Do you agree that the additional disclosure on reviews of risk management systems and on internal audit should be retained? 33 Do you think that the proposed reduced disclosure on credit exposure concentration still presents the essential information? 4.2.3 32 34 Do you think that the proposed revised disclosure on credit impairment has a better focus on the essential information? 4.2.4 35 35 Is there a good case for keeping disclosure of any of the items we are proposing to drop? 36 Do you think that the proposed revised disclosure on capital adequacy includes sufficient information at the off quarter? 4.2.5 36 37 Do you see any need for banks to disclose detailed analysis of capital instrument and reserves in the off quarter? 38 Do you agree with our assessment of the information that is important for assessing a bank’s liquidity risk profile? 4.2.6 38 39 Do you think that the proposed revised disclosure on liquidity risk gives a more useful overview of a bank’s liquidity position at the reporting date? 40 Do you find the information on connected exposures valuable? If so, is reducing the frequency and comparators an acceptable alternative to dropping it altogether? 4.2.7 40 41 Do you agree that the historical summary of financial statements is of little use?