Westpac seeks new model in NZ

The Reserve Bank of New Zealand and Westpac have agreed to a new operating model for the bank, though implementing that model requires passage of a private member's bill through parliament.

The model mainly aims to correct a breach of conditions of registration that occurred when the liabilities of Westpac branch in New Zealand, net of amounts due to related parties, exceeded the NZ$15 billion mark. Once that limit is reached, a bank is deemed to be "systemically important" and therefore can no longer operate as a branch.

Westpac has a dual operating model in New Zealand where it operates as a locally incorporated subsidiary and as a branch of the overseas bank, and both are subject to conditions of registration.

Until a few years ago Westpac operated its entire business in New Zealand as a branch. The RBNZ compelled the bank to transfer most of the activities, including all the retail banking business, into a locally incorporated subsidiary in 2005.

The Westpac branch exceeded the NZ$15 billion limit in 2008, thus breaching a key condition of registration. While the breach has since been rectified and liabilities net of related parties brought down to NZ$11.7 billion as of December 2009, it is expected that the entity should not continue as a branch to ensure it is able to durably comply with conditions of registration.

Strictly taken, the RBNZ rule says if a bank expects such liabilities to exceed NZ$15 billion in the five years following registration, it becomes a "systemically important" bank and must be incorporated locally and not operate via a branch.

To correct the breach, Westpac branch must now transfer some assets and liabilities to Westpac NZ. And this transfer first requires passage of an Act in Parliament.

The process is expected to be time consuming and Westpac will incur costs, going by the fact that it has set up a project, Linc NZ, to take it through the changes required.

It is not clear when the bill may fit in the legislative timetable, a RBNZ spokesman said. Westpac expects the new model to be in place by the end of 2011.

RBNZ prefers local incorporation to ensure there is a clear delineation between the assets and liabilities of the NZ bank and those of its parent.

Westpac has NZ$1.8 billion of capital allocated to the NZ branch. With accumulated loss of NZ$130 million, capital at December 2009 was NZ$1.67 billion.