Research Handbook on International Banking and Governance
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Research Handbook on International Banking and Governance

Edited by James R. Barth, Chen Lin and Clas Wihlborg

The contributors – top international scholars from finance, law and business – explore the role of governance, both internal and external, in explaining risk-taking and other aspects of the behavior of financial institutions. Additionally, they discuss market and policy features affecting objectives and quality of governance. The chapters provide in-depth analysis of factors such as: ownership, efficiency and stability; market discipline; compensation and performance; social responsibility; and governance in non-bank financial institutions. Only through this kind of rigorous examination can one hope to implement the financial reforms necessary and sufficient to reduce the likelihood and severity of future crises.
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Chapter 30: Bank Governance: The Case of New Zealand

Don Brash


Don Brash 30.1 THE 1980S: LIBERALIZATION AND CRISIS Until the mid-1980s, New Zealand had just four banks: one fully owned by the government, one owned by Lloyds Bank in the UK, and two owned by large Australian banks. In the mid-1980s, as the New Zealand economy experienced a far-reaching liberalization across virtually every area of policy, non-bank financial institutions were allowed to convert to full banking status, and foreign banks were allowed to establish branches or subsidiaries. By the time I became Governor of the Reserve Bank of New Zealand in September 1988, there were a total of 15 registered banks, including the four ‘original’ banks. The Reserve Bank had responsibility for issuing licences to the new banks – the original four were deemed banks by legislation, and so did not need to get a licence – and for supervising all of them. In keeping with the policy environment in New Zealand at that time, supervision was light-handed, and regulation even more so. We did not dream of on-site inspection and were relaxed about whether foreign-owned banks operated as subsidiaries incorporated in New Zealand or as branches of the foreign parent. When I first arrived at the Bank, there was no limit on risk concentration. I was particularly surprised at the absence of any limit on risk concentration, having just come from a commercial banking environment, and soon after my arrival we instituted a limit of 35 per cent of bank equity for any single counterparty. But then in the late 1980s...

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