I spent a large part of my summer break (or maybe I should rather call it winter break?) in Australia and New Zealand. In addition to enjoying the beautiful landscape and great food (and even some skiing), I had interesting conversations
in both countries on financial sector issues. One striking issue that came up again and again was the closely interconnected banking systems in both countries. More specifically, the large four Australian banks have subsidiaries in New Zealand, which
in turn make up more than 80% of the Kiwi banking system. This has very obvious repercussions for regulatory dialogue and cooperation between the two countries. The situation is similar but also different to that of other home-host country pairs across the
globe in the sense that the Australian banks are not only of material interest to the New Zealand host supervisor, but that the Kiwi operations are of material importance for the Australian parent banks. This puts the relationship between Australian and New
Zealand supervisors on a somewhat more level playing field than often observed across the globe between home and host country supervisors. Maybe as a result of this or of the close historic links between both countries, the regulatory cooperation is also based
on a rather unique legal basis. Rather than relying on legally non-binding Memorandums of Understanding as common across the globe, there are specific legal foundations for regulatory cooperation: specifically the Banking Act in both countries includes
language to the effect that the local supervisor is to take into account financial stability interests of the other country.
This close cooperation between both countries is very consistent with the
theoretical work by Wolf Wagner and myself, recently published in the International Journal of Central Banking (Supranational Supervision: How Much and for Whom?). Specifically, our model predicts that
high externalities from cross-border bank failures and limited heterogeneity across two countries makes it more likely that the two countries agree on regulatory cooperation. As described above, these externalities from the large four Australian banks are
relatively symmetric across both countries. And both countries have lots of history, culture and institutional frameworks in common, not to mention the language. And the relatively symmetric nature of the externalities makes the political economy of cross-border
regulatory cooperation somewhat less tricky than in many other country pairs and sub-regions, where only one of countries or some members of the sub-region would benefit from closer cooperation. When looking beyond cross-country comparisons and the
big picture, however, the details look a bit more tricky. The home-host country split between Australia and New Zealand provides for a divergence of interests. While the Reserve Bank of New Zealand is primarily interested in safeguarding financial
stability in their own country and limit any negative contagion effect from the parent bank on the subsidiaries, the Australian authorities cares mostly about the stability of the consolidated bank. There are also differences in the financial safety net structure
across the two countries, most prominently, while Australia introduced a deposit insurance scheme after the Global Financial Crisis, New Zealand continues without such a scheme.
There seems no obvious
solution to overcome this conflict of interest, but the close cooperation in the form of the Trans-Tasman Council on Banking Supervision and the focus on resolution in the cooperation between both countries in the form of a Memorandum of Cooperation
on Trans-Tasman Bank Distress Management certainly help. Ultimately, having a clear understanding of the interests and incentives of the other side and the different tools and possibilities of the other side can go a long way.