Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010

DRAFT FOR CONSULTATION Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Governor-General Order in Council At Wellington this day of 2010 Present: in Council Pursuant to sections 157B, 157K, 157S, 157V, and 157ZY of the Reserve Bank of New Zealand Act 1989, His Excellency the Gov￾ernor-General, acting on the advice and with the consent of the Ex￾ecutive Council, and on the advice of the Minister of Finance given in accordance with a recommendation of the Reserve Bank of New Zealand made after consultation in accordance with section 157E and taking into account the principles in section 157F of that Act, makes the following regulations. Contents Page 1 Title 3 2 Commencement 3 Consultation draft 1

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 1 Preliminary provisions 3 Interpretation 3 4 Definition of related party 6 5 All calculations to be on consolidated basis if deposit taker is member of borrowing group 8 Part 2 Requirements relating to credit ratings 6 Requirements for credit ratings 9 Part 3 Requirements relating to maintenance of minimum capital ratio 7 Overview 9 8 Trust deed must include minimum capital ratio deposit taker must maintain 10 9 How to calculate capital ratio 10 Calculation of capital 10 How to calculate capital 10 Calculation of risk-weighted amount for credit risk 11 Calculation of risk-weighted amount for credit risk 12 12 Calculation of risk-weighted amount for on-balance sheet exposures 13 13 Classification of on-balance sheet exposures for purpose of determining applicable risk weight 14 14 When assets may be classified as rated short-term or long-term claim 14 15 How to determine applicable rating grade for purpose of classifying rated claims 14 16 How to determine loan-to-valuation ratio for purpose of classifying residential mortgage loans and certain other loans 15 17 How to determine loan-to-valuation ratio for purpose of classifying property development loans 16 18 Requirements for transferred loans to be excluded from calculation of risk-weighted amount for on-balance sheet exposures 17 19 Requirements for loans subject to sub-participations to be excluded from calculation of risk-weighted amount for on-balance sheet exposures 18 2 Consultation draft

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 1 r 3 Calculation of amount for market risk and operational risk 20 How to calculate amount for market risk and operational risk 19 Part 4 Restrictions on related party exposures 21 Overview 19 22 Trust deed must include maximum limit on aggregate related party exposures of no more than 15% of capital 20 23 How to calculate maximum limit ratio 20 24 Identifying related party exposures 21 25 Measuring related party exposures 21 26 Measuring related party exposures that are market-related contracts 22 Part 5 Revocation 27 Revocation 23 Schedule 23 Regulations 1 Title These regulations are the Deposit Takers (Credit Ratings, Cap￾ital Ratios, and Related Party Exposures) Regulations 2010. 2 Commencement (1) Regulations 6 and 27 come into force on [to come]. (2) The rest of these regulations come into force on [to come]. Part 1 Preliminary provisions 3 Interpretation (1) In these regulations, unless the context otherwise requires,— Act means the Reserve Bank of New Zealand Act 1989 allowance for credit impairment loss means an amount that has been created in respect of identified credit losses or in re￾Consultation draft 3

Part 1 r 3 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 spect of an identified deterioration in value attributable to an increase in credit risk asset sale with recourse, in relation to a deposit taker or mem￾ber of the borrowing group, means an asset sale where, under the terms of the sale, the deposit taker or member of the bor￾rowing group has an obligation to assume or retain a risk in relation to the asset sold bank, in table 1 of the Schedule, means— (a) a registered bank: (b) an overseas bank that is licensed or authorised by the relevant authority of its home jurisdiction to carry on banking business within that jurisdiction book value, in relation to an item, means— (a) the amount shown for that item in the statement of fi￾nancial position of a deposit taker; or (b) in a calculation required to be made on a consolidated basis, the amount shown for that item in the consoli￾dated statement of financial position for the borrowing group in accordance with regulation 5 consolidated basis means the basis set out in regulation 5 credit rating means a rating of a deposit taker’s creditworthi￾ness that complies with section 157I of the Act direct credit substitute, in relation to a deposit taker or mem￾ber of the borrowing group, means— (a) an off-balance sheet exposure that carries the same credit risk to the deposit taker or member of the bor￾rowing group as a direct extension of credit by the deposit taker or member of the borrowing group; and (b) includes (without limitation)— (i) a bill of exchange; and (ii) a letter of credit serving as a financial guarantee for a loan; and (iii) a guarantee of a financial obligation given by the deposit taker or member of the borrowing group exchange rate contract has the meaning set out in regulation 26(3) forward asset purchase, in relation to a deposit taker or mem￾ber of the borrowing group, means a commitment by the de￾4 Consultation draft

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 1 r 3 posit taker or member of the borrowing group to purchase on a specified future date a loan, security, or other asset from an￾other party generally accepted accounting practice has the same mean￾ing as in section 3 of the Financial Reporting Act 1993 group member has the meaning set out in regulation 4(1) independent valuer means a person who is not associated (whether directly or indirectly) with a person who has an in￾terest in the property for which a valuation is made and who is— (a) a registered valuer (as defined in section 2 of the Valuers Act 1948); or (b) another person approved to provide valuation services by rules made under the Rating Valuations Act 1998 interest rate contract has the meaning set out in regulation 26(3) market-related contract has the meaning set out in regulation 26(3) ordinary shares means shares that— (a) have full voting rights; and (b) have no preferential or predetermined rights to distribu￾tions of capital or income; and (c) are not redeemable within the meaning of section 68 of the Companies Act 1993 original maturity has the meaning set out in regulation 26(3) personal loan means a loan to an individual not exceeding $40,000 property development loan means a loan made for the pur￾pose of financing the development of real property property valuation policy means a policy governing how a property value is determined for a residential mortgage loan, property development loan, or other loan secured over land, buildings (including buildings that are not yet complete), or both that— (a) is approved by the deposit taker’s governing body; and (b) includes guidance on the use of— (i) a valuation produced by an independent valuer; and Consultation draft 5

Part 1 r 4 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 (ii) the purchase price of the property public sector entity means a local authority (as defined in section 5 of the Local Government (Rating) Act 2002) qualifying insured residential mortgage loan means a resi￾dential mortgage loan that is fully covered by lenders’ mort￾gage insurance provided by the Housing New Zealand Cor￾poration qualifying movable machinery means a machine that is self￾propelled (for example, a bulldozer) or is towed as part of its normal function (for example, a roller) qualifying mutual means an entity whose members have 1 vote each, regardless of the size of their investment, and that does not have the capacity to raise capital by the issue of or￾dinary shares related party has the meaning set out in regulation 4 residential mortgage loan means a loan secured by a mort￾gage over a residential property used primarily for residential purposes either by the mortgagor or a tenant of the mortgagor sub-participation has the meaning set out in regulation 19(2) substantial interest has the meaning set out in regulation 4(3). (2) In these regulations, unless the context otherwise requires, a reference to a financial statement means a financial statement prepared in accordance with generally accepted accounting practice. (3) Any term or expression that is defined in the Act and used, but not defined, in these regulations has the same meaning as in the Act. (4) Any term or expression that is used in these regulations, but not defined in the Act or these regulations, and that has a meaning according to generally accepted accounting practice has the same meaning in these regulations. 4 Definition of related party (1) The purpose of subclauses (2) and (3) is to restate the statutory definition of related party of a deposit taker in section 157B of the Act, and to declare some additional classes of persons to be related parties for the purposes of Part 5D of the Act so that,— 6 Consultation draft

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 1 r 4 (a) if the deposit taker is part of a borrowing group, persons who are related to any member of the borrowing group (a group member) are also treated as related parties of the deposit taker; and (b) the following classes of persons are also related parties: (i) persons in which the deposit taker or a group member has a substantial interest: (ii) sister entities of the deposit taker or of a group member: (iii) persons with which the deposit taker or a group member (or a person with a substantial interest in the deposit taker or group member) have inter￾locking boards. (2) For the purposes of Part 5D, a person (A) is a related party of a deposit taker if— Directors and senior office holders and their relatives (a) A is a director of the deposit taker or of a group member: (b) A is a senior office holder of the deposit taker or of a group member: (c) A is a relative of a director or senior office holder of the deposit taker or of a group member: Subsidiaries (d) A is a subsidiary of the deposit taker or of a group mem￾ber: Persons having substantial interest in deposit taker or group member (e) A has a substantial interest in the deposit taker or a group member: Entities in which deposit taker or group member has substantial interest and sister entities (f) the deposit taker or a group member has a substantial interest in A: (g) another person with a substantial interest in the deposit taker or a group member has a substantial interest in A: Example If a company (X co) that owns 20% of the shares in a deposit taker also owns 20% of the shares in another entity (Y co), then X co is a related party of the deposit taker Consultation draft 7

Part 1 r 5 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Example—continued under paragraph (e) and Y co is a related party of the deposit taker under paragraph (g). Entities with interlocking boards (h) 40% or more of A’s governing body are the same per￾sons as 40% or more of the governing body of the de￾posit taker or of a group member (or of another person that has a substantial interest in the deposit taker or of a group member). (3) In this regulation, a person (X) has a substantial interest in another person (an entity) if— (a) the entity is a company and X— (i) owns, or in any way has the power to control (whether directly or indirectly), or has the right to acquire, 10% or more of the ordinary shares of the entity; or (ii) owns, or in any way has the power to control (whether directly or indirectly), or has the right to acquire, 10% or more of the voting rights of the entity; or (iii) has, by any other means, 10% or more of the control of the entity: (b) the entity is not a company and X— (i) is in a position to control (whether directly or indirectly) 10% or more of the voting rights in relation to the entity; or (ii) has, by any other means, 10% or more of the control of the entity: (c) X has control (whether directly or indirectly) or signifi￾cant influence over 25% or more of the composition of the governing body of the entity. 5 All calculations to be on consolidated basis if deposit taker is member of borrowing group (1) If a deposit taker is a member of a borrowing group, every calculation that these regulations require the deposit taker to make must be made on a consolidated basis for the deposit taker’s borrowing group. 8 Consultation draft

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 3 r 7 (2) If a calculation is made on a consolidated basis for a borrow￾ing group, then no member of that borrowing group is a related party of the relevant deposit taker for the purposes of the cal￾culation (despite regulations 4(2)(d), (e), or (f)). (3) The calculation is only required to be made on the consolidated basis specified in subclause (1) (rather than on a solo basis for the deposit taker as well as on that consolidated basis). Part 2 Requirements relating to credit ratings 6 Requirements for credit ratings For the purposes of section 157I(a) of the Act, the current rat￾ing of a deposit taker’s creditworthiness given by an approved rating agency must be a local currency (New Zealand dollar), long-term, issuer rating. Part 3 Requirements relating to maintenance of minimum capital ratio 7 Overview (1) The capital ratio of a deposit taker is the ratio of the deposit taker’s capital to an amount representing the degree of the fol￾lowing types of risk to which the deposit taker is exposed: (a) credit risk: (b) market risk: (c) operational risk. (2) This Part sets out what a trust deed must include about the capital ratio (see clause 8) and how the capital ratio must be calculated. (3) Calculation of the capital ratio requires determination of— (a) the deposit taker’s capital (see regulation 10); and (b) the deposit taker’s risk-weighted amount for credit risk (see regulation 11); and (c) the deposit taker’s aggregate amount for market risk and operational risk (see regulation 20). (4) This regulation is intended only as a guide to the general scheme and effect of this Part. Consultation draft 9

Part 3 r 8 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 8 Trust deed must include minimum capital ratio deposit taker must maintain (1) Every deposit taker and trustee must ensure that the trust deed includes the minimum capital ratio that the deposit taker must maintain. (2) The deposit taker and the trustee must ensure that the min￾imum capital ratio that is included in the trust deed is— (a) not less than 8%, if the deposit taker has a credit rating; and (b) not less than 10%, if the deposit taker does not have a credit rating. 9 How to calculate capital ratio (1) The capital ratio must be calculated as the ratio, expressed as a percentage, of the deposit taker’s capital to the sum of— (a) the deposit taker’s risk-weighted amount for credit risk, calculated in accordance with regulation 11; and (b) the deposit taker’s aggregate amount for market risk and operational risk, calculated in accordance with regula￾tion 20. (2) The deposit taker’s capital, referred to in subclause (1), must be calculated in accordance with regulation 10 using book values as at the date of calculation. (3) If the deposit taker is part of a borrowing group, the capital ratio must be calculated on a consolidated basis (see regulation 5). (4) If accounting standards require a securitisation special purpose vehicle to be consolidated for the purposes of group financial statements, the special purpose vehicle must be consolidated with the deposit taker or the borrowing group for the purposes of the calculations under this Part. Calculation of capital 10 How to calculate capital (1) Capital must be calculated in accordance with the following formula: gross capital – deductions 10 Consultation draft

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 3 r 10 (2) In the formula in subclause (1), gross capital is— (a) issued and fully paid-up ordinary shares: (b) retained earnings: (c) fully paid-up perpetual non-cumulative preference shares that meet the requirements in subclause (4), up to the limits set out in subclause (5): (d) revenue and other reserves, including the following, but not including reserves that are earmarked on account of any assessed likelihood of loss: (i) capital redemption reserves: (ii) other reserves that are created or increased by appropriations of retained earnings net of tax and dividends payable: (iii) share premium reserves arising from the issue of ordinary shares: (iv) each of the following types of reserves that are reflected in the statement of financial position: (A) reserves arising from a revaluation of tan￾gible fixed assets, including owner-occu￾pied property and cumulative fair value gains on investment property: (B) foreign currency translation reserves: (C) reserves arising from the revaluation of investments: (e) minority interests. (3) In the formula in subclause (1), deductions are— (a) goodwill and other intangible assets: (b) future tax benefits or deferred tax assets: (c) share capital in, and subordinated loans to, related par￾ties: (d) share capital in, and subordinated loans to, other finan￾cial institutions or holding companies of other financial institutions (whether held directly or indirectly): (e) unrealised gains and losses on liabilities designated at fair value through profit and loss that arise from changes in the deposit taker’s own credit risk or in the credit risk of the borrowing group of which the deposit taker is part: Consultation draft 11

Part 3 r 11 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 (f) any fair value gain that relates to a financial instrument for which a fair value cannot reliably be calculated: (g) any surplus, net of any associated deferred tax liabil￾ities, in any defined benefit superannuation fund spon￾sored by the deposit taker, or another member of the borrowing group of which the deposit taker is a part, as employer. (4) Perpetual non-cumulative preference shares may be included in capital if they meet the following requirements: (a) dividends on the shares are able to be waived if the financial condition of the deposit taker or the member of the borrowing group would not support payment of those dividends (for example, if no dividends are being paid on ordinary shares); and (b) dividends that are waived in accordance with paragraph (a) do not cumulate; and (c) the dividend rate for the shares must be set— (i) as a fixed percentage rate; or (ii) as a fixed margin above a benchmark floating rate (for example, a bank bill rate); and (d) the shares are not— (i) subject to any arrangement for resetting the divi￾dend rate; or (ii) redeemable within the meaning of section 68 of the Companies Act 1993; or (iii) repayable or redeemable at the option of the holder. (5) Perpetual non-cumulative preference shares without full vot￾ing rights may not constitute more than— (a) 25% of capital, if a deposit taker is not a qualifying mutual; and (b) 50% of capital, if a deposit taker is a qualifying mutual. Calculation of risk-weighted amount for credit risk 11 Calculation of risk-weighted amount for credit risk A deposit taker must calculate its risk-weighted amount for credit risk by aggregating— 12 Consultation draft

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 3 r 12 (a) its risk-weighted amount for on-balance sheet expos￾ures, calculated in accordance with regulation 12; and (b) the following off-balance sheet exposures, measured as the principal or notional principal amount of the expos￾ure as at the date of calculation, risk-weighted at 100%: (i) direct credit substitutes: (ii) asset sales with recourse: (iii) forward asset purchases. 12 Calculation of risk-weighted amount for on-balance sheet exposures (1) To calculate its risk-weighted amount for on-balance sheet ex￾posures a deposit taker must— (a) classify each on-balance sheet asset into its appropriate class in table 1 of the Schedule in accordance with regu￾lations 13 to 19— (i) including any transferred loan, unless that loan meets the requirements for exclusion set out in regulation 18; and (ii) including any loan or part of a loan in respect of which there is a sub-participation, unless that sub-participation meets the requirements for ex￾clusion set out in regulation 19; but (iii) excluding any asset that must be deducted from the deposit taker’s capital under regulation 10; and (b) multiply the book value of each asset as at the date of calculation (measured net of any allowances for credit impairment loss) by the risk weight that applies to that class of asset set out in table 1 of the Schedule; and (c) aggregate the resulting amounts. (2) However, if the asset is a loan for which the deposit taker holds a deposit as security, the deposit taker may deduct the deposit from the book value of the loan before carrying out the multi￾plication under subclause (1)(b) if (and only if) there is a writ￾ten contractual agreement between the deposit taker and the depositor that provides that the deposit taker has direct, un￾conditional, and irrevocable recourse to the deposit security. Consultation draft 13

Part 3 r 13 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 13 Classification of on-balance sheet exposures for purpose of determining applicable risk weight The deposit taker must classify each on-balance sheet asset according to the first numbered class into which it falls in the first column of table 1 of the Schedule. 14 When assets may be classified as rated short-term or long-term claim (1) An asset may only be classified as a rated claim if,— (a) in the case of a short-term claim, there is a short-term credit assessment of that claim; and (b) in the case of a long-term claim, there is a long-term credit assessment of that claim or a credit assessment of the issuer or the counterparty; and (c) the credit assessment is— (i) solicited from, and issued by, an approved rating agency; and (ii) paid for by the issuer or rated counterparty or a commercial associate of the issuer or rated coun￾terparty. (2) For the purposes of subclause (1)(c)(ii), a person is a commer￾cial associate in relation to the issuer or rated counterparty if— (a) the person and the issuer or rated counterparty are in the same group of companies; or (b) the person and the issuer or rated counterparty are di￾rectly or indirectly under the control of the same per￾sons. (3) In subclause (2)(a), group of companies means a holding company and its subsidiaries within the meaning of section 5 of the Companies Act 1993. 15 How to determine applicable rating grade for purpose of classifying rated claims (1) For the purpose of classifying a rated short-term claim, the rat￾ing grade that applies to the claim is the rating grade that cor￾responds to the rating agency’s assessment according to table 2 of the Schedule. 14 Consultation draft

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 3 r 16 (2) For the purpose of classifying a rated long-term claim, the rat￾ing grade that applies to the claim is the rating grade that cor￾responds to the rating agency’s credit assessment according to table 3 of the Schedule. (3) If there are different credit assessments for a particular claim, the credit assessment that must be used is the credit assessment that results in the higher (less favourable) rating grade accord￾ing to table 2 or 3 (as applicable). 16 How to determine loan-to-valuation ratio for purpose of classifying residential mortgage loans and certain other loans (1) For the purpose of classifying a residential mortgage loan or other loan secured by first mortgage over land, buildings, or both (to avoid doubt, not including a property development loan, see regulation 17), the loan-to-valuation ratio must be calculated using the formula— loan value property value ×100 (2) In the formula in subclause (1), loan value,— (a) in relation to a residential mortgage loan, is the total amount of— (i) all claims secured by way of first mortgage over the residential property; and (ii) subsequent claims of the deposit taker or mem￾bers of the borrowing group (if the deposit taker is part of a borrowing group) that are secured over the residential property: (b) in relation to other loans secured by first mortgage over land, buildings, or both, is the total amount of— (i) all claims secured by way of first mortgage over the land, buildings, or both; and (ii) subsequent claims of the deposit taker or mem￾bers of the borrowing group (if the deposit taker is part of a borrowing group) that are secured over the same land, buildings, or both. (3) In the formula in subclause (1), property value,— Consultation draft 15

Part 3 r 17 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 (a) in relation to a residential mortgage loan, is the value of the residential property determined under a deposit taker’s property valuation policy: (b) in relation to other loans secured by first mortgage over land, buildings, or both, is the value of the land, build￾ings, or both determined under a deposit taker’s prop￾erty valuation policy. 17 How to determine loan-to-valuation ratio for purpose of classifying property development loans (1) For the purpose of classifying a property development loan, the loan-to-valuation ratio must be calculated using the for￾mula— loan value present value of the property ×100 (2) In the formula in subclause (1),— (a) loan value is the total amount of— (i) all claims secured by way of first mortgage over the land, buildings, or both; and (ii) subsequent claims of the deposit taker or mem￾bers of the borrowing group (if the deposit taker is part of a borrowing group) that are secured over the same land, buildings, or both (b) present value of the property is calculated using the formula— value × (1 − time to maturity × 0.12) (3) In the formula in subclause (2)(b),— (a) value is the value of the land and buildings at comple￾tion as determined by an independent valuer in accord￾ance with the deposit taker’s property valuation policy (b) time to maturity is the expected time to maturity of the credit exposure, in years, as at the date of calculation. 16 Consultation draft

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 3 r 18 18 Requirements for transferred loans to be excluded from calculation of risk-weighted amount for on-balance sheet exposures (1) A deposit taker may only exclude a transferred loan from the calculation of its amount for risk-weighted on-balance sheet exposures under regulation 12 if the transfer meets the follow￾ing requirements: (a) the loan is transferred by novation or assignment; and (b) the transfer does not contravene the terms and condi￾tions of the underlying loan agreement and all necessary consents have been obtained; and (c) the seller has no residual beneficial interest in the prin￾cipal amount of the loan (or that part which has been transferred), and the buyer has no formal recourse to the seller for losses; and (d) the seller has no obligation to repurchase the loan, or any part of it, at any time; and (e) the seller has given notice to the buyer that it is under no obligation to repurchase the loan or support any losses suffered by the buyer, and the buyer has provided writ￾ten acknowledgement of the absence of those obliga￾tions; and (f) the documented terms of the transfer are such that if the loan is rescheduled or renegotiated, the buyer, and not the seller, will be subject to the rescheduled or renego￾tiated terms; and (g) if payments are routed through the seller, the seller is under no obligation to remit funds to the buyer unless and until they are received from the borrower; and (h) if the buyer is subject to a trust arrangement, the trustees of that trust are independent of the seller or companies related to the seller both during and after the sale nego￾tiations; and (i) a clean transfer within the meaning of subclause (2) is achieved. (2) A clean transfer is achieved if, as a result of the transfer, the deposit taker or member of the borrowing group (as applic￾able)— Consultation draft 17

Part 3 r 19 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 (a) would incur no loss (of interest or principal) in the event of non-performance by the borrower; and (b) reasonably believes that it is not, in any circumstances, required to support the loan. 19 Requirements for loans subject to sub-participations to be excluded from calculation of risk-weighted amount for on-balance sheet exposures (1) A deposit taker may only exclude a loan, or any part of a loan, in respect of which the deposit taker (or member of the borrow￾ing group, as applicable) has entered into a sub-participation from the calculation of its risk-weighted amount for on-bal￾ance sheet exposures under regulation 12 if the following re￾quirements are met: (a) there are no terms or conditions in the underlying loan agreement that would prevent the deposit taker or mem￾ber of the borrowing group from entering into the sub￾participation and all necessary consents have been ob￾tained; and (b) the deposit taker or member of the borrowing group, whether under the terms of the sub-participation agree￾ment or any other agreement or arrangement,— (i) is not under an obligation to assume all or any part of the risk of the sub-participant under the sub-participation in any circumstances; and (ii) has no liability for any losses suffered by the sub￾participant under the sub-participation as a result of default by the borrower under the underlying loan agreement; and (c) the sub-participant must have given written notice to the deposit taker or member of the borrowing group, confirming the matters in paragraph (b); and (d) the deposit taker or member of the borrowing group is not under an obligation to repay any amount to the sub-participant unless and until an equivalent amount is received by the deposit taker or member of the borrow￾ing group under the underlying loan agreement, includ￾ing if payments under the underlying loan agreement are rescheduled; and 18 Consultation draft

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 4 r 21 (e) if the sub-participation does not apply to the whole of the underlying loan, the parts of the loan that are subject to the sub-participation must rank equally with the parts of the loan that are not subject to the sub-participation in the event of default by the borrower. (2) In this regulation, sub-participation means a transaction in which a person (the sub-participant) places a deposit with the deposit taker in the amount of its participation in respect of a loan (the underlying loan) by the deposit taker to a third party (the borrower) on terms under which the deposit taker’s obli￾gation to repay the sub-participant depends on the borrower repaying the deposit taker under the underlying loan agree￾ment; and sub-participation agreement has a corresponding meaning. Calculation of amount for market risk and operational risk 20 How to calculate amount for market risk and operational risk A deposit taker must calculate its aggregate amount for market risk and operational risk by applying the book value for its total assets as at the date of calculation and its risk-weighted amount for credit risk, calculated in accordance with regulation 11, in the following formula: total assets + deposit taker’s risk-weighted amount for credit risk 2 × 0.175 Part 4 Restrictions on related party exposures 21 Overview (1) The limit on related party exposures is a limit, expressed as a ratio, on the exposures that a deposit taker may have with related parties, relative to the deposit taker’s capital base. (2) The limit applies to all exposures to related parties, in aggre￾gate (and is not a limit on exposures to individual related par￾ties), and, if the deposit taker is part of a borrowing group,— Consultation draft 19

Part 4 r 22 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 (a) applies to exposures to related parties of all members of the borrowing group (by virtue of the definition of related party); and (b) is relative to the capital of that borrowing group. (3) This Part sets out what a trust deed must include about the maximum limit on related party exposures (see regulation 22) and how the maximum limit must be calculated. (4) This regulation is intended only as a guide to the general scheme and effect of this Part. 22 Trust deed must include maximum limit on aggregate related party exposures of no more than 15% of capital (1) Every deposit taker and trustee must ensure that the trust deed includes a maximum limit on aggregate exposures to related parties that the deposit taker must not exceed. (2) The maximum limit must be fixed by agreement between the deposit taker and the trustee (but see section 157ZD of the Act for provisions that apply if there is no agreement). (3) The maximum limit must be expressed as a ratio that— (a) must be calculated in accordance with regulation 23; and (b) must not exceed 15%. 23 How to calculate maximum limit ratio (1) A deposit taker must calculate the maximum limit (and meas￾ure whether or not it is exceeding that maximum limit) by— (a) determining the amount of the aggregate exposures as follows: (i) identifying the exposures as set out in regulation 24; and (ii) measuring those exposures as set out in regula￾tions 25 and 26; and (iii) adding together all of those exposures; and (b) determining the amount of capital under regulation 10, using the book values most recently reported to the trustee; and (c) applying those amounts in the following formula: 20 Consultation draft

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Part 4 r 25 aggregate exposures capital × 100 (2) If the deposit taker is part of a borrowing group, both the ag￾gregate exposures and the capital must be calculated on a con￾solidated basis (see regulation 5) and in accordance with regu￾lation 9(4). 24 Identifying related party exposures (1) The deposit taker must identify, for the purposes of regula￾tion 23(1)(a)(i), all actual, potential, or contingent exposures to loss for the deposit taker (or a member of its borrowing group) under a contract or arrangement if a related party fails to discharge its obligations (whether or not it is a counterparty to the contract or arrangement). (2) In identifying those exposures, the deposit taker must— (a) include those not recorded in the statement of finan￾cial position (for example, commitments, contingen￾cies, stand-by lines, letters of credit); and (b) exclude those that are share capital or subordinated loans. 25 Measuring related party exposures An exposure identified under regulation 24 (other than a mar￾ket-related contract) must then be measured on the following basis: (a) if it is included in the statement of financial position, the exposure is the book value most recently reported to the trustee: (b) if it is not included in the statement of financial position, the exposure is the maximum loss that the deposit taker (or member of the borrowing group) would incur, at the time of the calculation, as a result of the related party failing to discharge its obligations (measured net of allowances for impairment loss and without taking into account any credit risk mitigation arrangements). Consultation draft 21

Part 4 r 26 Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 26 Measuring related party exposures that are market-related contracts (1) If an exposure identified under regulation 24 is a market-re￾lated contract, the exposure must be measured as the notional principal amount of the contract, at the time of calculation, multiplied by the credit conversion factor set out in subclause (2). (2) The credit conversion factor must be determined under the fol￾lowing table according to the type of contract and its original maturity: Type of contract Original maturity Credit conversion factor Interest rate contract less than 1 year 0.5% 1 year or more aggregate of 1% for each year (or part of a year) of maturity Exchange rate contract less than 1 year 2% 1 year or more aggregate of 2% for 1st year and 4% for each additional year (or part of year) of maturity Other market-related contracts less than 1 year 5% 1 year or more, but less than 2 years 7% 2 years or more 10% (3) In this regulation and regulation 25,— exchange rate contract means a market-related contract the value of which is determined by reference to an exchange rate, changes in an exchange rate, or an index of exchange rates interest rate contract means a market-related contract the value of which is determined by reference to an interest rate, changes in an interest rate, or an index of interest rates market-related contract means a contract that is settled to a future date and the value of which is determined by reference to the value of an underlying equity, commodity, interest rate, exchange rate, or changes in any of those rates or prices, or to an index of any of those markets 22 Consultation draft

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Schedule original maturity means the maturity of the contract under its terms as at the date it takes effect (rather than the residual maturity at the time of the calculation). Part 5 Revocation 27 Revocation The Deposit Takers (Credit Ratings) Regulations 2009 (SR 2009/420) are revoked. Schedule rr 12,13 Table 1—Risk-weighted exposures for on-balance sheet assets Item Class Risk weight 1 Cash (notes, coin, and gold bullion held by deposit taker or bor￾rowing group member (as applicable) on site) 0% 2 Claims on Crown and Reserve Bank 0% 3 Claims on public sec￾tor entities 20% 4 Claims on banks 20% Rated short-term claims(see regulations 14 and 15) 5 – with a rating grade of 1 20% 6 – with a rating grade of 2 50% 7 – with a rating grade of 3 100% 8 – with a rating grade of 4 150% Rated long-term claims(see regulations 14 and 15) 9 – with a rating grade of 1 20% 10 – with a rating grade of 2 50% 11 – with a rating grade of 3 100% Consultation draft 23

Schedule Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Item Class Risk weight 12 – with a rating grade of 4 100% 13 – with a rating grade of 5 150% 14 – with a rating grade of 6 150% 15 Qualifying insured residential mortgage loans 20% Residential mortgage loans (see regulation 16) 16 – first ranking with a loan-to￾valuation ratio not exceeding 70% 35% 17 – first ranking with a loan-to￾valuation ratio exceeding 70% but not exceeding 80% 50% 18 – first ranking with a loan-to￾valuation ratio exceeding 80%; but not exceeding 90% 100% 19 – first ranking with a loan-to￾valuation ratio exceeding 90%; but not exceeding 100% 125% 20 – first ranking with a loan￾to-valuation ratio exceeding 100% 150% 21 – second or subsequent ranking 150% Property develop￾ment loans (see regu￾lation 17) 22 – first ranking security with a loan-to-valuation ratio not ex￾ceeding 60% 150% 23 – first ranking security with a loan-to-valuation ratio exceed￾ing 60% but not exceeding 100% 200% 24 – any other property develop￾ment loans, including those with second or subsequent ranking security, no security, and first ranking security with a loan-to-valuation ratio ex￾ceeding 100% 300% 24 Consultation draft

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Schedule Item Class Risk weight Other loans with qualifying security over land and/or buildings (see regula￾tion 16) 25 – first mortgage over land and/or buildings with a loan-to-valu￾ation ratio not exceeding 70%, excluding property develop￾ment loans and residential mortgage loans 100% 26 – first mortgage over land and/or buildings with a loan-to-valu￾ation ratio exceeding 70% but not exceeding 100%, ex￾cluding property development loans and residential mortgage loans 150% 27 Loans against qualify￾ing movable machin￾ery – in respect of which a finan￾cing statement has been regis￾tered and perfected under the Personal Property Securities Act 1999 and when an iden￾tification number is used to describe the collateral with a loan-to-current value not ex￾ceeding 70% 100% Personal loans 28 – in respect of which a financing statement has been registered and perfected under the Per￾sonal Property Securities Act 1999 100% 29 – in respect of which a financing statement has not been regis￾tered under the Personal Prop￾erty Securities Act 1999 150% Other loans (not within classes 15 to 29) 30 – where a financing statement has been registered and per￾fected under the Personal Prop￾erty Securities Act 1999 150% Consultation draft 25

Schedule Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Item Class Risk weight 31 – where a financing statement has not been registered and perfected under the Personal Property Securities Act 1999 200% 32 Assets in respect of which deposit taker or other borrowing group member (as applic￾able) is lessor under an operating lease (excluding operating leases over assets that are land and buildings) 175% 33 Equity holdings (not deducted from capital) 600% 34 Other assets 350% 26 Consultation draft

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Schedule Table 2—Rating grades for short-term credit assessments Rating grade Rating agency credit assessments Standard & Poor’s Ratings Services Moody’s Investors Service Fitch Ratings 1A-1 P-1 F1 2A-2 P-2 F2 3A-3 P-3 F3 4 Other Table 3—Rating grades for long-term or issuer credit assessments Rating grade Rating agency credit assessments Standard & Poor’s Ratings Services Moody’s Investors Service Fitch Ratings 1 AAA Aaa AAA AA+ Aa1 AA+ AA Aa2 AA AA− Aa3 AA− 2A+ A1 A+ AA2 A A− A3 A− 3 BBB+ Baa1 BBB+ BBB Baa2 BBB BBB− Baa3 BBB− 4 BB+ Ba1 BB+ BB Ba2 BB BB− Ba3 BB− 5B+ B1 B+ B B2 B B− B3 B− 6 CCC+ Caa1 CCC+ CCC Caa2 CCC CCC− Caa3 CCC− Consultation draft 27

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Rating grade Rating agency credit assessments Standard & Poor’s Ratings Services Moody’s Investors Service Fitch Ratings CC Ca CC CCC DD Clerk of the Executive Council. Explanatory note This note is not part of the regulations, but is intended to indicate their general effect. These regulations, which come into force on [to come], prescribe various matters for the purposes of Part 5D of the Reserve Bank of New Zealand Act 1989 (the Act), which relates to the prudential regulation of deposit takers. The regulations— • specify the type of credit rating that a deposit taker is required to have: • require every deposit taker and trustee to ensure that the de￾posit taker’s trust deed includes the minimum capital ratio that the deposit taker must maintain: • specify that the minimum capital ratio that must be included in the trust deed is not less than 8% if the deposit taker has a credit rating under the Act and not less than 10% if it does not have such a credit rating: • set out how the minimum capital ratio must be calculated: • declare additional classes of persons to be related parties of deposit takers for the purposes of Part 5D: • require every deposit taker and trustee to ensure that the de￾posit taker’s trust deed includes a maximum limit on aggregate exposures to related parties relative to capital, fixed by agree￾ment between the deposit taker and trustee: 28 Consultation draft

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Explanatory note • provide that the maximum limit included in the trust deed must not exceed 15%: • set out how the maximum limit must be calculated. The regulations are organised into 5 parts as follows: Part 1—Preliminary provisions Regulations 1 and 2 relate to the title and commencement of the regu￾lations. Regulation 3 defines terms used in the regulations. The Act also defines a number of terms used in the regulations. The effect of section 3(4) is that if a term is used in the regulations but is not defined and that term has a meaning according to generally accepted accounting practice then the term must be given the mean￾ing according to generally accepted accounting practice. Regulation 4 restates the statutory definition of related party and ex￾tends that definition so that any related party of a member of the borrowing group is treated as also being a related party of the de￾posit taker for the purposes of Part 5D. The following classes are also added: • sister entities of the deposit taker or any member of the bor￾rowing group: • persons in which the deposit taker or any member of the bor￾rowing group has a substantial interest (which, in essence, is 10% control over the entity or control or significant influence over 25% of the board composition): • persons with which the deposit taker or a group member (or a person with a substantial interest in the deposit taker or group member) have inter-locking boards (in essence, 40% common membership). This definition is also used in section 157L of the Act (which relates to governance requirements for deposit takers, but is not yet in force) and sections 157V to 157Y of the Act and Part 4 of these regulations (which impose limits on aggregate related party exposures). Regulation 5 provides that where the regulations require a calculation to made on a consolidated basis that calculation must be done on a consolidated basis for the borrowing group. Part 2—Requirements relating to credit ratings Consultation draft 29

Explanatory note Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Regulation 6 requires the rating of creditworthiness that a deposit taker must have from an approved rating agency under section 157I of the Act to be a local currency (New Zealand dollar), long-term, is￾suer rating. These are the same requirements as prescribed by the De￾posit Takers (Credit Ratings) Regulations 2009 (which are revoked by these regulations). A long-term issuer rating expresses an opinion about the overall capacity of a deposit taker to meet its financial obli￾gations (in contrast to an issue rating, which relates only to a specific financial obligation). Part 3—Requirements relating to maintenance of capital ratio This Part sets out the regulations needed under sections 157S to 157U of the Act. Regulation 8 requires every deposit taker and trustee to ensure that the deposit taker’s trust deed includes the minimum capital ratio that the deposit taker has to maintain. This must be not less than 8% if the deposit taker has a credit rating under section 157I of the Act and 10% if the deposit taker does not have such a credit rating. Regulation 9 provides that the capital ratio must be calculated as the ratio (expressed as a percentage) of the deposit taker’s capital (cal￾culated as set out in regulation 10) to the sum of 2 amounts: its risk-weighted amount for credit risk (calculated as set out in regu￾lation 11) and its aggregate amount for market risk and operational risk (calculated as set out in regulation 20). If the deposit taker has a borrowing group, the calculation must be done on a consolidated basis. To calculate its risk-weighted amount for credit risk, the deposit taker must classify each of its on-balance sheet exposures into the first class that applies to the asset in table 1 of the Schedule and then multiply the value of each asset by the risk-weight that applies to that class set out in the second column of the table. The resulting total amount for risk-weighted on-balance sheet exposures must then be added to the deposit taker’s following off-balance sheet exposures: direct credit substitutes, asset sales with recourse, and forward asset purchases. Regulations 12 to 19contain more detailed provisions about when certain assets must be included in the calculation of risk-weighted on-balance sheet exposures and requirements that must be satisfied before certain on-balance sheet assets are able to be classified into various of the classes listed in table 1. 30 Consultation draft

Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010 Explanatory note Regulation 20sets out a formula for calculation of the deposit taker’s aggregate amount of market risk and operational risk. Two values need to be determined to apply the formula: the deposit taker’s total assets (taken from the book value) and the deposit taker’s risk-weighted amount for credit risk (taken from the calculation made under regulation 11). Part 4—Restrictions on related party exposures This Part sets out the regulations needed to implement sections 157V to 157Y of the Act. The combined effect of the Act and these regu￾lations is to require deposit takers and trustees to include an agreed maximum limit on aggregate exposures to related parties in the trust deed of no more than 15% of capital (expressed as a ratio). It is a limit on aggregate related party exposures, not a limit on exposures to individual related parties. If the deposit taker is part of a borrow￾ing group, the ratio must be calculated on a consolidated basis so that it captures exposures of every member of the borrowing group to a related party of any member of the borrowing group and applies rela￾tive to the consolidated capital of the borrowing group. Regulation 23 sets out the ratio calculation. For the purposes of that calculation, the related party exposures must be identified in accord￾ance with regulation 24 and measured in accordance with regulations 25 and 26. Regulation 24 requires not just the standard forms of lend￾ing, but all on- and off-balance sheet exposures, to be included. In essence, the limit applies to credit exposures and so exposures of a capital nature are excluded. Regulation 25 requires the full potential exposure to be measured. However, market-related contracts must be measured under regulation 26 by applying a credit conversion factor that is intended to approximate their replacement cost over the life￾time of the contract. Part 5—Revocation Regulation 27 revokes the Deposit Takers (Credit Ratings) Regula￾tions 2009. Issued under the authority of the Acts and Regulations Publication Act 1989. Date of notification in Gazette: These regulations are administered by the Reserve Bank of New Zealand. Consultation draft 31