Moderating Risk in New Zealand Retail Banks

29 Pages Posted: 25 Nov 2010

See all articles by William R. Wilson

William R. Wilson

Massey University - School of Economics & Finance

John F. Pinfold

Massey University - Department of Commerce

Lawrence C. Rose

Massey University

Date Written: November 24, 2010

Abstract

The prudential regulation of banks in New Zealand relies heavily on the public disclosure of risk information. This work reports a significant relationship between deposit risk premiums and disclosure risk indicators, suggesting New Zealand’s disclosure regime is effective in moderating excessive risk-taking in banks. But, as the relationship is found to be strongest prior to publication, it cannot be attributed directly to market-discipline. Instead, it is suggested self-discipline, which is arguably more effective than either market or regulator discipline, is the driving force behind the bank risk-return relationship. This is not surprising as management, with ready access to timely and accurate information, is best placed to supervise and apply prompt corrective action. In New Zealand, bank directors are held personally liable for the accuracy of disclosure. While disclosure statements may not be widely read by depositors, it is likely they are scrutinized by competitors looking for any advantage. The finding that New Zealand’s disclosure regime is made effective by self-discipline is a significant and valuable contribution to the disclosure literature, especially in a time of financial turmoil when many are calling for greater official regulation and supervision of banks.

Keywords: Prudential regulation, bank disclosure, market discipline, self discipline, crisis

JEL Classification: G01, G21, G28

Suggested Citation

Wilson, William R. and Pinfold, John F. and Rose, Lawrence (Larry) Craig, Moderating Risk in New Zealand Retail Banks (November 24, 2010). Finance and Corporate Governance Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1714641 or http://dx.doi.org/10.2139/ssrn.1714641

William R. Wilson (Contact Author)

Massey University - School of Economics & Finance ( email )

Private Bag 102904
North Shore Mail Centre
Auckland
New Zealand
+64 9 4140800, ext. 8177 (Phone)

John F. Pinfold

Massey University - Department of Commerce ( email )

Private Bag 102-904
North Shore Mail Centre
Auckland
New Zealand

Lawrence (Larry) Craig Rose

Massey University ( email )

Private Bag 102-904
North Shore Mail Centre
Auckland, 0745
New Zealand
+64 9 4140800, ex 9558 (Phone)
+64 9 441 8150 (Fax)

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