Regulating non-bank deposit takers

The non-bank deposit taking (NBDT) sector comprises building societies, credit unions and finance companies. NBDTs can play an important role in the economy, providing services complementary to those provided by banks. In recent years, many finance companies have failed, resulting in a significant loss of value in the sector. These failures have revealed weaknesses in the operating models of several finance companies, such as high levels of related party exposures and inadequate capitalisation relative to the risks taken. On 1 December 2010, NBDTs became subject to new regulatory requirements relating to capital adequacy, related party exposures, liquidity and governance. This represents a further step in the implementation of a new prudential regulatory regime administered by the Reserve Bank. Regulations setting out credit rating requirements came into force on 1 March 2010 and NBDTs have been required to have a risk management programme since September 2009. The new regulatory regime is aimed at promoting the soundness and efficiency of the financial system by setting minimum prudential standards that NBDTs must meet. The requirements have been modelled on the banking regime, but have been tailored so that they are fit for purpose for the NBDT sector. This article explains the requirements in force on 1 December 2010 and discusses the motivation for these requirements.