Financial Markets (FM) and Financial Institutions (FI) are the core drivers of the overall financial system where economic agents carry out financial transactions. It is a place where individuals borrow and invest while corporations and governments finance and invest.
FIs perform the essential function of channeling funds from those with surplus funds to those with shortages of funds. Examples of FIs are: Commercial banks (depository institutions whose major assets are loans and major liabilities are deposits), Thrifts (depository institutions in the form of savings and loans, credit unions), Investment banks and securities firms (financial institutions that underwrite securities, advise companies, and engage in securities brokerage and trading), Finance companies (financial institutions that make loans to individuals and businesses), Mutual Funds (financial institutions that pool financial resources and invest in diversified portfolios), Pension Funds (financial institutions that offer savings plans for retirement) and Insurance companies (financial institutions that protect individuals and corporations from adverse events). FIs provide vital financial services to all sectors of the economy; therefore, their regulation is in the public interest and done by regulatory agencies.
Government regulates FIs for two main reasons: Increase the efficiency and Ensure the soundness of the financial system thus preventing failures of FIs and of financial markets overall.
Regulator’s role is not to direct investors' capital or remove risk from investing. Regulator can not prevent all loss! The role of regulation is to promote investment markets that are fair, efficient and transparent.Typically regulators set tight restrictions on market entry on FI exposures to risky assets and impose high capital and disclosure requirements on FIs. They should in principle refrain from any regulatory leniency that allows insolvent institutions to continue to operate.
New Zealand has a 'twin peaks' financial markets regulatory structure. The Financial Markets Authority (FMA) (that was established in 2011 under the Financial Markets Authority Act 2011 with a role to enforce securities, financial reporting, and company laws to apply to financial services and securities markets. The FMA also regulate securities exchanges, financial advisers and brokers, trustees and issuers (including issuers of KiwiSaver and superannuation schemes) and The Reserve Bank of New Zealand (RBNZ).
RBNZ has many roles and is very important because it has prudential powers over the banking sector, including finance companies and credit unions. The Reserve Bank registers and supervises banks in New Zealand for the purposes of promoting the maintenance of a sound and efficient financial system, and avoiding significant damage to the financial system that could result from the failure of a registered bank. It regulates Non-Bank Deposit Takers (NBDTs) in New Zealand for the purposes of promoting the maintenance of a sound and efficient financial system, and avoiding significant damage to the financial system that could result from the failure of an NBDT. RBNZ became sole regulator of the New Zealand financial system in Sept 2008.
NBDTs are potentially vulnerable to contagion risk, whereby the distress or failure of some NBDTs could trigger acute distress or failure in others. This suggests the need for enhancements to the standard regulation of debt issuers, such as in respect of public disclosure requirements, ratings and distress management arrangements. Prudential regulation of this sector is aimed at raising standards and improving the sector's overall resilience to adverse market conditions in the future and is not aimed at insulating individual deposit takers from failure.
The Reserve Bank of New Zealand is the prudential regulator and supervisor of all insurers carrying on insurance