(1) In these regulations, unless the context otherwise requires,—

(2) In these regulations, unless the context otherwise requires, a reference to a financial statement means a financial statement prepared in accordance with generally accepted accounting practice.

(3) Any term or expression that is defined in the Act and used, but not defined, in these regulations has the same meaning as in the Act.

(4) Any term or expression that is used in these regulations, but not defined in the Act or these regulations, and that has a meaning according to generally accepted accounting practice has the same meaning in these regulations.

(1) The purpose of subclauses (2) and (3) is to restate the statutory definition of related party of a deposit taker in section 157B of the Act, and to declare some additional classes of persons to be related parties for the purposes of Part 5D of the Act with the following effect:

• (a) if the deposit taker is part of a borrowing group, persons who are related to any member of the borrowing group (a group member) are also treated as related parties of the deposit taker; and

• (b) the following classes of persons are also related parties:

  • (i) persons in which the deposit taker or a group member has a substantial interest (see subclause (2)(f)):

  • (ii) sister entities of the deposit taker or of a group member (see subclause (2)(g)):

  • (iii) persons with which the deposit taker or a group member (or a person with a substantial interest in the deposit taker or group member) have inter-locking boards (see subclause (2)(h)).

(2) For the purposes of Part 5D of the Act, a person (A) is a related party of a deposit taker if—

• Directors and senior office holders and their relatives

• (a) A is a director of the deposit taker or of a group member:

• (b) A is a senior office holder of the deposit taker or of a group member:

• (c) A is a relative of a director or senior office holder of the deposit taker or of a group member:

• Subsidiaries

• (d) A is a subsidiary of the deposit taker or of a group member:

• Persons having substantial interest in deposit taker or group member

• (e) A has a substantial interest in the deposit taker or a group member:

• Entities in which deposit taker or group member has substantial interest and sister entities

• (f) the deposit taker or a group member has a substantial interest in A:

• (g) another person with a substantial interest in the deposit taker or a group member has a substantial interest in A:

  Example

  If a company (X co) that owns 10% of the shares in a deposit taker also owns 10% of the shares in another entity (Y co), then X co is a related party of the deposit taker under paragraph (e) and Y co is a related party of the deposit taker under paragraph (g).

• Entities with interlocking boards

• (h) 40% or more of A’s governing body are the same persons as 40% or more of the governing body of the deposit taker or of a group member (or of another person that has a substantial interest in the deposit taker or of a group member).

(3) In this regulation, a person (X) has a substantial interest in another person (an entity) if—

• (a) the entity is a company and X—

  • (i) owns, or in any way has the power to control (whether directly or indirectly), or has the right to acquire, 10% or more of the ordinary shares of the entity; or

  • (ii) owns, or in any way has the power to control (whether directly or indirectly), or has the right to acquire, 10% or more of the voting rights of the entity; or

  • (iii) has, by any other means, 10% or more of the control of the entity:

• (b) the entity is not a company and X—

  • (i) is in a position to control (whether directly or indirectly) 10% or more of the voting rights in relation to the entity; or

  • (ii) has, by any other means, 10% or more of the control of the entity:

• (c) X has control (whether directly or indirectly) or significant influence over 25% or more of the composition of the governing body of the entity.

(4) Subclause (1) is intended only as a guide to the general scheme and effect of this regulation.

(1) If a deposit taker is a member of a borrowing group, every calculation that these regulations require the deposit taker to make must be made on a consolidated basis for the deposit taker's borrowing group.

(2) If a calculation is made on a consolidated basis for a borrowing group, then—

• (a) no member of that borrowing group is a related party of the relevant deposit taker for the purposes of the calculation (despite regulation 4(2)); and

• (b) the calculation is only required to be made on the consolidated basis specified in subclause (1) (rather than on a solo basis for the deposit taker as well as on that consolidated basis).

For the purposes of section 157I(a) of the Act, the current rating of a deposit taker's creditworthiness given by an approved rating agency must be a local currency (New Zealand dollar), long-term, issuer rating.

(1) This regulation is intended only as a guide to the general scheme and effect of this Part.

(2) The capital ratio of a deposit taker is the ratio of the deposit taker's capital to an amount representing the degree of the following types of risk to which the deposit taker is exposed:

• (a) credit risk:

• (b) market risk:

• (c) operational risk.

(3) This Part sets out what a trust deed must include about the capital ratio (see regulation 8) and how the capital ratio must be calculated.

(4) Calculation of the capital ratio requires determination of—

• (a) the deposit taker's capital (see regulation 10); and

• (b) the deposit taker's risk-weighted amount for credit risk (see regulation 11); and

• (c) the deposit taker's aggregate amount for market risk and operational risk (see regulation 21).

(1) Every deposit taker and trustee must ensure that the trust deed includes the minimum capital ratio that the deposit taker must maintain.

(2) The deposit taker and the trustee must ensure that the minimum capital ratio that is included in the trust deed is—

• (a) not less than 8%, if the deposit taker has a credit rating; and

• (b) not less than 10%, if the deposit taker does not have a credit rating.

(1) The capital ratio must be calculated as the ratio, expressed as a percentage, of the deposit taker's capital to the sum of—

• (a) the deposit taker's risk-weighted amount for credit risk, calculated in accordance with regulation 11; and

• (b) the deposit taker's aggregate amount for market risk and operational risk, calculated in accordance with regulation 21.

(2) The deposit taker's capital, referred to in subclause (1), must be calculated in accordance with regulation 10 using book values as at the date of calculation.

(3) If the deposit taker is part of a borrowing group, the capital ratio must be calculated on a consolidated basis (see regulation 5).

(4) If accounting standards require a securitisation special purpose vehicle to be consolidated for the purposes of group financial statements, the special purpose vehicle must be consolidated with the deposit taker or the borrowing group for the purposes of the calculations under this Part.

(1) Capital must be calculated in accordance with the following formula:

(2) In the formula in subclause (1), gross capital is—

• (a) issued and fully paid-up ordinary shares:

• (b) retained earnings:

• (c) fully paid-up perpetual non-cumulative preference shares that meet the requirements in subclause (4), up to the limits set out in subclause (5):

• (d) revenue and other reserves, including the following, but not including reserves that are earmarked on account of any assessed likelihood of loss:

  • (i) capital redemption reserves:

  • (ii) other reserves that are created or increased by appropriations of retained earnings net of tax and dividends payable:

  • (iii) share premium reserves arising from the issue of ordinary shares:

  • (iv) each of the following types of reserves that are reflected in the statement of financial position:

    • (A) reserves arising from a revaluation of tangible fixed assets, including owner-occupied property:

    • (B) foreign currency translation reserves:

    • (C) reserves arising from the revaluation of investments:

• (e) minority interests.

(3) In the formula in subclause (1), deductions are—

• (a) goodwill and other intangible assets:

• (b) future tax benefits and deferred tax assets:

• (c) share capital in, and subordinated loans to, related parties:

• (d) share capital in, and subordinated loans to, other financial institutions or holding companies of other financial institutions (whether held directly or indirectly):

• (e) unrealised gains and losses on liabilities designated at fair value through profit and loss that arise from changes in the deposit taker's or member of the borrowing group's own credit risk:

• (f) any fair value gain that relates to a financial instrument where—

  • (i) fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable current market transactions in the same instrument; or

  • (ii) fair value is not based on observable market data; or

  • (iii) fair value is based on prices in a market that is not active:

• (g) any surplus, net of any associated deferred tax liabilities, in any defined benefit superannuation fund sponsored by the deposit taker as employer.

(4) Perpetual non-cumulative preference shares may be included in capital if they meet the following requirements:

• (a) the payment of dividends on shares is able to be withheld if the financial condition of the deposit taker or borrowing group would not support payment of those dividends; and

• (b) dividends that are withheld in accordance with paragraph (a) are not cumulative; and

• (c) the dividend rate for the shares must be set—

  • (i) as a fixed percentage rate; or

  • (ii) as a fixed margin above a benchmark floating rate (for example, a bank bill rate); and

• (d) the shares are not—

  • (i) subject to any arrangement for resetting the dividend rate; or

  • (ii) redeemable within the meaning of section 68 of the Companies Act 1993; or

  • (iii) repayable or redeemable at the option of the holder.

(5) Perpetual non-cumulative preference shares without full voting rights may not constitute more than—

• (a) 25% of capital, if a deposit taker is not a qualifying mutual; and

• (b) 50% of capital, if a deposit taker is a qualifying mutual.

A deposit taker must calculate its risk-weighted amount for credit risk by aggregating—

• (a) its risk-weighted amount for on-balance sheet exposures, calculated in accordance with regulation 12; and

• (b) the following off-balance sheet exposures, measured as the principal or notional principal amount of the exposure as at the date of calculation, risk-weighted at 100%:

  • (i) direct credit substitutes:

  • (ii) asset sales with recourse:

  • (iii) forward asset purchases.

(1) To calculate its risk-weighted amount for on-balance sheet exposures, a deposit taker must—

• (a) classify each on-balance sheet asset into its appropriate class in table 1 of the Schedule in accordance with regulations 13 to 20,—

  • (i) including any transferred loan, unless that loan meets the requirements for exclusion set out in regulation 19; and

  • (ii) including any loan or part of a loan in respect of which there is a sub-participation, unless that sub-participation meets the requirements for exclusion set out in regulation 20; but

  • (iii) excluding any asset that must be deducted from the deposit taker's capital under regulation 10; and

• (b) multiply the book value of each asset as at the date of calculation (measured net of any allowances for impairment loss and unearned income) by the risk weight that applies to that class of asset set out in table 1 of the Schedule; and

• (c) aggregate the resulting amounts.

(2) However, if the asset is a loan for which the deposit taker holds a deposit as security, the deposit taker may deduct the deposit from the book value of the loan before carrying out the multiplication under subclause (1)(b) if there is a written contractual agreement between the deposit taker and the depositor that provides that the deposit taker has direct, unconditional, and irrevocable recourse to the deposit security.

(1) The deposit taker must classify each on-balance sheet asset according to the first numbered class into which it falls in the first column of table 1 of the Schedule.

(2) However, if a loan is made against more than 1 form of security, it must be classified into the numbered class that refers to one of those forms of security and that has the highest risk weight.

(1) An asset may only be classified as—

• (a) a rated short-term claim if there is a short-term credit assessment of that claim and the credit assessment meets the requirements in subclause (3); and

• (b) a rated long-term claim if there is a long-term credit assessment of that claim or a credit assessment of the issuer or the counterparty and the credit assessment meets the requirements in subclause (3).

(2) However, in the case of a subordinated claim,—

• (a) subclause (1)(b) does not apply; and

• (b) the asset may only be classified as a rated long-term claim if there is a long-term credit assessment of that claim and the credit assessment meets the requirements in subclause (3).

(3) The credit assessment must—

• (a) be solicited from, and issued by, an approved rating agency; and

• (b) be paid for by the issuer or rated counterparty or a commercial associate of the issuer or rated counterparty.

(4) For the purposes of subclause (3)(b), a person is a commercial associate in relation to the issuer or rated counterparty if—

• (a) the person and the issuer or rated counterparty are in the same group of companies; or

• (b) the person and the issuer or rated counterparty are directly or indirectly under the control of the same persons.

(5) In subclause (4)(a), group of companies means a holding company and its subsidiaries within the meaning of section 5 of the Companies Act 1993.

(1) For the purpose of classifying a rated short-term claim, the rating grade that applies to the claim is the rating grade that corresponds to the rating agency's assessment according to table 2 of the Schedule.

(2) For the purpose of classifying a rated long-term claim, the rating grade that applies to the claim is the rating grade that corresponds to the rating agency's credit assessment according to table 3 of the Schedule.

(3) If there are different credit assessments for a particular claim, the credit assessment that must be used is the credit assessment that results in the higher (less favourable) rating grade according to table 2 or 3 of the Schedule (as applicable).

(1) For the purpose of classifying a residential mortgage loan or other loan secured by first mortgage over land, buildings, or both (to avoid doubt, not including a property development loan, see regulation 17), the loan-to-valuation ratio must be calculated using the formula—

(2) In the formula in subclause (1), loan value,—

• (a) in relation to a residential mortgage loan, is the total amount of—

  • (i) all claims secured by way of first mortgage over the residential property; and

  • (ii) subsequent claims of the deposit taker or members of the borrowing group (if the deposit taker is part of a borrowing group) that are secured over the residential property:

• (b) in relation to other loans secured by first mortgage over land, buildings, or both, is the total amount of—

  • (i) all claims secured by way of first mortgage over the land, buildings, or both; and

  • (ii) subsequent claims of the deposit taker or members of the borrowing group (if the deposit taker is part of a borrowing group) that are secured over the same land, buildings, or both.

(3) In the formula in subclause (1), property value,—

• (a) in relation to a residential mortgage loan, is the value of the residential property determined under a deposit taker’s property valuation policy:

• (b) in relation to other loans secured by first mortgage over land, buildings, or both, is the value of the land, buildings, or both, determined under a deposit taker’s property valuation policy.

(1) For the purpose of classifying a property development loan, the loan-to-valuation ratio must be calculated using the formula—

(2) In the formula in subclause (1),—

• (a) loan value is the total amount of—

  • (i) all claims secured by way of first mortgage over the land, buildings, or both; and

  • (ii) subsequent claims of the deposit taker or members of the borrowing group (if the deposit taker is part of a borrowing group) that are secured over the same land, buildings, or both:

• (b) present value of the property is calculated using the formula—

  value × (1 − time to maturity × 0.12)

(3) In the formula in subclause (2)(b),—

• (a) value is the net realisable value of the land and buildings at completion as determined by an independent valuer in accordance with the deposit taker's property valuation policy:

• (b) time to maturity is the expected time to maturity of the credit exposure, in years (including part-years, expressed as a decimal), as at the date of calculation.

(1) For the purpose of classifying a first ranking loan secured over qualifying moveable machinery in respect of which a financing statement has been registered and perfected under the Personal Property Securities Act 1999, the loan-to-valuation ratio must be calculated using the formula—

(2) In the formula in subclause (1),—

• (a) loan value is the total amount of the first ranking loan secured over the qualifying moveable machinery:

• (b) property value is the value of the qualifying moveable machinery determined under the deposit taker's property valuation policy.

(1) A deposit taker may only exclude a transferred loan from the calculation of its amount for risk-weighted on-balance sheet exposures under regulation 12 if the transfer meets the following requirements:

• (a) the loan is transferred by novation or assignment; and

• (b) the transfer does not contravene the terms and conditions of the underlying loan agreement and all necessary consents have been obtained; and

• (c) the seller has no residual beneficial interest in the principal amount of the loan (or that part which has been transferred), and the buyer has no formal recourse to the seller for losses; and

• (d) the seller has no obligation to repurchase the loan, or any part of it, at any time; and

• (e) the seller has given notice to the buyer that it is under no obligation to repurchase the loan or support any losses suffered by the buyer, and the buyer has provided written acknowledgement of the absence of those obligations; and

• (f) the documented terms of the transfer are such that if the loan is rescheduled or renegotiated, the buyer, and not the seller, will be subject to the rescheduled or renegotiated terms; and

• (g) if payments are routed through the seller, the seller is under no obligation to remit funds to the buyer unless and until they are received from the borrower; and

• (h) if the buyer is subject to a trust arrangement, the trustees of that trust are independent of the seller or companies related to the seller both during and after the sale negotiations; and

• (i) a clean transfer within the meaning of subclause (2) is achieved.

(2) A clean transfer is achieved if, as a result of the transfer, the deposit taker or member of the borrowing group (as applicable)—

• (a) would incur no loss (of interest or principal) in the event of non-performance by the borrower; and

• (b) reasonably believes that it is not, in any circumstances, required to support the loan.

(1) A deposit taker may only exclude a loan, or any part of a loan, in respect of which the deposit taker (or member of the borrowing group, as applicable) has entered into a sub-participation from the calculation of its risk-weighted amount for on-balance sheet exposures under regulation 12 if the following requirements are met:

• (a) there are no terms or conditions in the underlying loan agreement that would prevent the deposit taker or member of the borrowing group from entering into the sub-participation and all necessary consents have been obtained; and

• (b) the deposit taker or member of the borrowing group, whether under the terms of the sub-participation agreement or any other agreement or arrangement,—

  • (i) is not under an obligation to assume all or any part of the risk of the sub-participant under the sub-participation in any circumstances; and

  • (ii) has no liability for any losses suffered by the sub-participant under the sub-participation as a result of default by the borrower under the underlying loan agreement; and

• (c) the sub-participant must have given written acknowledgement to the deposit taker or member of the borrowing group, confirming the matters in paragraph (b); and

• (d) the deposit taker or member of the borrowing group is not under an obligation to repay any amount to the sub-participant unless and until an equivalent amount is received by the deposit taker or member of the borrowing group under the underlying loan agreement, including if payments under the underlying loan agreement are rescheduled; and

• (e) if the sub-participation does not apply to the whole of the underlying loan, the parts of the loan that are subject to the sub-participation must rank equally with the parts of the loan that are not subject to the sub-participation in the event of default by the borrower.

(2) In this regulation, sub-participation means a transaction in which a person (the sub-participant) places a deposit with the deposit taker or the member of the borrowing group (A) in the amount of its participation in respect of a loan (the underlying loan) by A to a third party (the borrower) on terms under which A's obligation to repay the sub-participant depends on the borrower repaying A under the underlying loan agreement; and sub-participation agreement has a corresponding meaning.

A deposit taker must calculate its aggregate amount for market risk and operational risk by applying the book value for its total assets as at the date of calculation and its risk-weighted amount for credit risk, calculated in accordance with regulation 11, in the following formula:

(1) This regulation is intended only as a guide to the general scheme and effect of this Part.

(2) The limit on related party exposures is a limit, expressed as a ratio, on the exposures that a deposit taker may have to related parties, relative to the deposit taker's capital base.

(3) The limit applies to all exposures to related parties, in aggregate (and is not a limit on exposures to individual related parties), and, if the deposit taker is part of a borrowing group,—

• (a) applies to exposures to related parties of all members of the borrowing group (by virtue of the definition of related party); and

• (b) is relative to the capital of that borrowing group.

(4) This Part sets out what a trust deed must include about the maximum limit on related party exposures (see regulation 23) and how the maximum limit must be calculated.

(1) Every deposit taker and trustee must ensure that the trust deed includes a maximum limit on aggregate exposures to related parties that the deposit taker must not exceed.

(2) The maximum limit must be fixed by agreement between the deposit taker and the trustee (but see section 157ZD of the Act for provisions that apply if there is no agreement).

(3) The maximum limit must be expressed as a ratio that—

• (a) must be calculated in accordance with regulation 24; and

• (b) must not exceed 15%.

(1) A deposit taker must calculate the maximum limit (and measure whether or not it is exceeding that maximum limit) by—

• (a) determining the amount of the aggregate exposures as follows:

  • (i) identifying the exposures as set out in regulation 25; and

  • (ii) measuring those exposures as set out in regulations 26 and 27; and

  • (iii) adding together all of those exposures; and

• (b) determining the amount of capital under regulation 10, using the book values most recently reported to the trustee; and

• (c) applying those amounts in the following formula:

  		aggregate exposures		× 100
  		capital

(2) If the deposit taker is part of a borrowing group, both the aggregate exposures and the capital must be calculated on a consolidated basis (see regulation 5).

(3) If accounting standards require a securitisation special purpose vehicle to be consolidated for the purposes of group financial statements, the special purpose vehicle must be consolidated with the deposit taker or the borrowing group for the purposes of the calculations under this Part.

(1) The deposit taker must identify, for the purposes of regulation 24(1)(a)(i), all actual, potential, or contingent exposures to loss for the deposit taker (or a member of its borrowing group) under a contract or arrangement if a related party fails to discharge its obligations (whether or not the related party is a counterparty to the contract or arrangement).

(2) In identifying those exposures, the deposit taker must—

• (a) include those not recorded in the statement of financial position (for example, commitments, contingencies, stand-by lines, letters of credit); and

• (b) exclude those that are share capital or subordinated loans.

(1) An exposure identified under regulation 25 (other than a market-related contract) must then be measured on the following basis:

• (a) if it is included in the statement of financial position, the exposure is the book value most recently reported to the trustee:

• (b) if it is not included in the statement of financial position, the exposure is the maximum loss that the deposit taker (or member of the borrowing group) would incur, as at the date of calculation, as a result of the related party failing to discharge its obligations.

(2) In each case, however, the exposure must be measured net of allowances for impairment loss and without taking into account any credit risk mitigation arrangements.

(1) If an exposure identified under regulation 25 is a market-related contract, the exposure must be measured as the notional principal amount of the contract, as at the date of calculation, multiplied by the credit conversion factor that applies under subclauses (2) and (3).

(2) The credit conversion factor must be determined under the following table according to the type of contract and its original maturity:

(3) In this regulation and regulation 26,—

• (a) a market-related contract means a contract that is settled on a future date and the value of which is determined by reference to the price of an underlying equity or commodity, to an interest rate or exchange rate, to changes in any of those rates or prices, or to an index of any of them (the underlying market); and

• (b) a market-related contract is—

  • (i) an interest rate contract if the underlying market is an interest rate, changes in an interest rate, or an index of interest rates:

  • (ii) an exchange rate contract if the underlying market is an exchange rate, changes in an exchange rate, or an index of exchange rates:

  • (iii) an equity or commodity contract if the underlying market is an equity or commodity, or changes in the prices of an equity or commodity, or an index of equity or commodity prices; but

• (c) if a market-related contract is more than 1 type of market-related contract under paragraph (b), it must be classified as being the type of those market-related contracts that has the highest credit conversion factor under the table in subclause (2); and

• (d) original maturity means the maturity of the contract under its terms as at the date it takes effect (rather than the residual maturity at the time of the calculation).

The Deposit Takers (Credit Ratings) Regulations 2009 (SR 2009/420) are revoked.