An Analysis of the Reserve Bank of New Zealand's Policy on the Incorporation of Foreign Banks

Abstract

In this study we analyse the objectives underlying the Reserve Bank's policy ofmandatory local incorporation and provide an assessment of the effectiveness of the policy in meeting these objectives. We review both the legal and regulatory framework within which branches of foreign banks now operate in New Zealand and we review the international literature on the costs benefits and efficiency tradeoffs associated with a policy of mandatory local incorporation. We consider the consistency of mandatory local incorporation with the Reserve Bank's current approach to the regulation of financial institutions and we show that the governance structure that is imposed on New Zealand banks by mandatory local incorporation is likely to reduce the efficiency of their operations. Finally we examine a number of approaches that may meet the current concerns of the RBNZ at lower cost than a policy of mandatory local incorporation.