1. Section 158 provides a regime for bank accounts held by Crown entities, including school boards of trustees (BoTs), and covers accounts at a:

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1 Annex A: Bank accounts (section 158 of the Crown Entities Act). CROWN ENTITY BANK ACCOUNTS A. Overview of Provisions in the Crown Entities Act 1. Section 158 provides a regime for bank accounts held by Crown entities, including school boards of trustees (BoTs), and covers accounts at a: bank registered under the Reserve Bank of New Zealand Act 1989; building societies registered under the Building Societies Act 1965; and bank outside New Zealand. 2. Transitional provisions in section 195 provide a six-month grace period from 25 January 2005 before section 158 applies. 3. These and related provisions are set out in Annex D for ease of reference. B. New Zealand Bank Accounts: Registered Banks and Registered Building Societies Credit-Rating Test 4. Under section 158(1)(a) a BoT can establish, maintain and operate one or more accounts at a registered bank or a registered building society without further authority as long as the registered bank or registered building society satisfies a credit-rating test and the account(s) is denominated in New Zealand dollars. It is each BoTs responsibility to monitor the credit rating of registered banks or registered building societies at which it holds an account (discussed further below). Specification and Application 5. The proposed regulations specify that the credit-rating test as being met only if the credit of a registered bank or registered building society is rated by Standards & Poor s Ratings Group (S&P) at not less than A or by Moody s Investor Service Inc (Moody s) at not less than A For this purpose, credit refers to the registered bank s or registered building society s long-term unsubordinated, unsecured New Zealand-dollar debt obligations. Comparable ratings are specified if the credit is short-term. Departures 7. If a BoT wishes to hold an account at a registered bank or registered building society whose credit rating does not satisfy the test, then it must seek the approval of the Minister of Finance under section 158(1)(b). The Minister may apply conditions aside from, or instead of, the credit-rating test for registered banks or registered building societies. These conditions could, for example, impose limits on classes of BoTs which may hold such accounts, amounts that may be held, the time period for which the accounts may be maintained, etc. 1 Regulation 1 allows in addition any other credit-rating organisation prescribed that rates a registered bank or registered building society not less than the rating specified by the Minister of Finance by notice in the Gazette. 1/6

2 8. Several submissions to Parliament s Finance and Expenditure Committee on the Public Finance (State Sector Management) Bill expressed a concern that BoTs may be precluded by this provision from holding bank accounts at TSB Bank Limited. This Bank does not satisfy the credit-rating test at present, and has itself made representations to the Ministers of Finance and Education that Crown entities should not be so precluded. The Minister of Finance has indicated willingness to consider this request in due course. Thus BoTs need not make requests in respect of TSB Bank Limited. Any requests in respect of other registered banks or any registered building societies that do not meet the credit-rating test should outline reasons, including why it is not practical to transact with another registered bank or registered building society that satisfies the credit-rating test. Rating Agencies 9. All registered banks must be and are currently rated by S&P and/or Moody s. Where both agencies rate a registered bank, one may give a higher or lower rating than the other. In these circumstances, draft Regulation 1(2) requires that that the lower of the ratings assigned by S&P and Moody s, and by any other agency prescribed by the Minister of Finance, should be used. 10. To allow for rating by an agency other than S&P and Moody s, then evidence that its ratings are of comparable standing should be submitted with a request for the Minister of Finance s approval. Not all building societies are credit-rated, and none are rated by S&P or Moody s. Obtaining Credit Ratings 11. Credit ratings for registered banks are available on the Reserve Bank website. This listing is updated each time a registered bank issues its Key Information Summary (required by the Reserve Bank every quarter). More frequent credit ratings would need to be accessed from a bank itself or the ratings agencies. As noted above, each BoT must monitor the credit rating of registered banks or registered building societies at which it holds an account. Grace Period Where a Registered Bank Ceases to Satisfy the Credit-Rating Test 12. If a registered bank or registered building society at which a BoT hold an account suffers a credit-rating downgrade to a level below the test specified in draft Regulation 1, the BoT will have to either: close all accounts at that bank or building society by the earlier of two months of it ceasing to qualify or a date specified by the Minister of Finance, in accordance with section 158(8); or request approval of the Minister of Finance to maintain the account with that bank or building society, in accordance with section 158(1)(b). 13. If neither of these options is pursued, then a BoT will be in breach of the legislation. Other Requirements 14. Section 24 of the Public Finance Act 1989, the current default provision, does not allow a BoT to hold a bank account at other than a registered bank. Section 158(4) extends 2/6

3 this to include registered building societies. It is not possible for a BoT to hold a bank account with other non-bank financial institutions (eg. a credit union) Section 158(5) requires a BoT to obtain the approval of the Minister of Finance if it wishes to hold money denominated in other than New Zealand dollars in an account with a registered bank or a registered building society. C. Bank Accounts at Banks Outside New Zealand Definition and Authorisation 16. Unlike the current Public Finance Act provision, section 158(1) explicitly contemplates that a BoT may hold one or more accounts at a bank or banks outside New Zealand. The proposed regulations specify a definition of a bank outside New Zealand. This means a financial institution that is permitted to call itself a bank by the laws of the jurisdiction(s) in which it operates. A bank account with any other overseas financial institution will not be permitted. 17. The default position is that accounts at banks outside New Zealand will be required to meet the conditions of any relevant approval given by the Minister of Finance in terms of section 158(1)(c), or conditions specified by that Minister or by regulations in terms of section 158(1)(d) and (2). The distinction between these provisions is elaborated below. 18. Draft Regulation 2(1) under section 158(2) provides that an account at a bank outside New Zealand is authorised and approved if all of a number of requirements are met. Amongst other things, the account must comprise debt denominated in New Zealand dollars, and the bank outside New Zealand must satisfy the credit-rating test specified in Regulation 1 for registered banks. If a BoT has a business need for an account at a bank outside New Zealand that exceeds the conditions specified in this provision, then it should seek approval to other foreign banking arrangements and provide reasons in support. Distinction between Conditions Specified under Sections 158(1)(c) and (1)(d) 19. It is intended that: section 158(1)(c) be used to allow conditions about one or more banks outside New Zealand to be specified by the Minister of Finance by notice in the Gazette; and section 158(1)(d) and (2) be used to allow with respect to one or more banks outside New Zealand conditions related to a BoT or class of BoTs, and to types of bank accounts, to be specified either by the Minister of Finance by notice in the Gazette, or by regulations. 20. This distinction should allow sufficient flexibility to address BoTs legitimate foreign banking needs. It reflects submissions made to the Finance and Expenditure Committee by some entities with overseas operations. Credit-Rating Test: Specification and Grace Period 21. Amongst the conditions specified in Regulation 2 for pre-approval of an account at a bank outside New Zealand is a requirement that the bank satisfy the credit-rating test specified for registered banks and registered building societies in Regulation 1. It is likely that a credit-rating test will normally form part of conditions specified in an approval given by 2 A Crown entity subject to section 161 may, however, acquire a debt security issued by such institutions provided that they satisfy the credit-rating test specified in Regulation 3. 3/6

4 the Minister of Finance under section 158(1) or (2). 3 To avail this authority, however, a BoT will need to monitor the credit-ratings of banks outside New Zealand at which it holds an account. The ratings should be sought from either the bank itself or the credit-rating agency or agencies. The Reserve Bank does not list credit-ratings of other than registered banks. 22. Where a credit-rating test applies, expectations for exiting bank accounts at a bank outside New Zealand which no longer meets that test are the same as for accounts at registered banks (see paragraph 12 above). D. Drafting Instructions for Regulations on Bank Accounts Drafting Instructions for PCO Purpose of Regulations Definitions For the purposes of these Regulations and sections 158 to 164 of the Act, as the case may be: money means the lawful currency of New Zealand as defined by section 27 of the Reserve Bank of New Zealand Act 1989, any electronic funds transfer through the New Zealand financial system, and any negotiable or non-negotiable financial instrument customarily able to be deposited into a bank account but does not include any financial instrument, whether absolute or contingent, not customarily able to be deposited into a bank account without first being liquidated into money bank outside New Zealand means a financial institution that is entitled by the laws of the jurisdiction or jurisdictions in which it operates to include the word bank, banker, banking or any cognate word (as those words are rendered in any language) in its name or title bank account means a contract with a registered bank, a bank outside New Zealand or a registered building society pursuant to which the registered bank, bank outside New Zealand or registered building society covenants to keep a record of the amount it owes its account customer by reason of the deposit of money with the registered bank, bank outside New Zealand or registered building society, from time to time, for the account of its account customer and which is repayable in whole or in any part specified by, and upon demand by, the account customer with interest (if the contract so provides) but does not include any cash or term deposit, any fund or any other form of investment in the debt securities of the registered bank, bank outside of New Zealand or registered building society comprising a specified quantum of debt repayable in whole The purpose of the definition of money is to extend its scope from the legal definition of money (i.e. legal tender of notes and coins) to apply to other forms of financial value which are customarily deposited into bank accounts. It excludes financial instruments that would require liquidation (perhaps at considerable discount from face value) before they could be deposited on the grounds that the words as soon as practicable after it is received in section 158(1) are intended to exclude such instruments. The purpose of the definition of bank outside New Zealand is to discriminate between banks and other financial institutions outside New Zealand. Typically, only those financial organisations prudentially regulated by central banks are entitled to describe themselves as banks (whether they choose to do so or not (e.g. Credit Agricole) is immaterial). With the imprimatur of the name or title bank comes reputation for security and hence the attention of central banks. The purpose of the definition of bank account is to clarify that the lay definition of bank account is not intended. Cash or term deposits, funds etc would come within the ambit of the prohibition against investing in debt securities imposed by section Circumstances may arise in which a credit-rating test cannot be met, eg. if a BoT is forced to use a government bank in a particular jurisdiction. This is, however, likely to be an unusual situation. 4/6

5 Drafting Instructions for PCO credit, for the purposes of subsection (1) of Regulation 1, means the long-term (or if the relevant entity does not issue long-term unsubordinated debt, short-term) unsubordinated unsecured New Zealand dollar debt obligations payable in New Zealand, and, for the purposes of subsection (1) of Regulation 2, means the longterm (or if the relevant entity does not issue longterm unsubordinated debt, short-term) unsubordinated unsecured foreign currency debt obligations payable in the home jurisdiction of that foreign currency. Purpose of Regulations The purpose of the definition of credit is to pick out the credit for rating most likely to comprise the riskiest credit of the registered bank or registered building society to ensure that any other credit provided to that same registered bank or registered building society is less risky. For obvious reasons, long-term credit is the most risky credit in most circumstances. Bank Accounts 1 Specification of credit-rating test for bank accounts (1) A registered bank or registered building society satisfies the credit-rating test referred to in section 158(1)(a) of the Act, only if: (a) Standard & Poor s Ratings Group (howsoever named and its successors or assigns) rates the credit of that registered bank or registered building society not less than A- (or if that credit is short-term A-1); or (b) Moody s Investor Services Inc s (howsoever named and its successors or assigns) rates the credit of that registered bank or registered building society not less than A3 (or if that credit is short-term, Prime- 1); or (c) Any other credit-rating organisation that is prescribed by the Minister of Finance (whether generally or in respect of particular Crown entities or groups of Crown entities (whether named or described) or particular transactions, series of transactions or classes of transactions), by notice in the Gazette, rates the credit of that registered bank or registered building society not less than the credit-rating specified in that notice. (2) In addition to subsection (1), a registered bank or registered building society satisfies the credit-rating test referred to in section 158(1)(a) of the Act, only if each credit-rating actually assigned to that registered bank or registered building society by a credit-rating organisation referred to in subparagraphs (a), (b) and (c) of subsection (1) is not less than the credit-rating specified therein in respect of that credit-rating organisation. The purpose of Regulation 1 is to specify a credit-rating test which a registered bank or registered building society must satisfy before a Crown entity is permitted to deposit money into a bank account with that registered bank or registered building society pursuant to section 158(1)(a) of the Act. Standard & Poor s and Moody s are specified. Subparagraph (c) contemplates the Minister of Finance may prescribe other credit-rating agencies and the level of credit-rating, such as, for example, Fitch s, by notice in the Gazette. That specification may apply generally as is the case with S&P and Moody s or it may be limited to individual Crown entities or groups of Crown entities (whether named or described) or individual contracts or classes of contracts. The purpose of subsection (2) is to ensure that where the credit-ratings of a registered bank or registered building society diverge, the lowest credit rating assigned to that registered bank or registered building society must satisfy the credit rating test. 5/6

6 Drafting Instructions for PCO 2 Bank accounts held with banks outside New Zealand (1) A bank account at a bank outside New Zealand is authorised and approved within the meaning of section 158(2)(a) and (b) of the Act, only if: (a) the bank account at the bank outside New Zealand comprises debt owed and payable in New Zealand currency; and (b) that bank outside New Zealand satisfies the credit-rating test specified in Regulation 1 for registered banks; and (c) the laws of the jurisdiction pursuant to which that bank outside New Zealand operates the bank account do not discriminate between classes of unsecured creditors except upon grounds, and only to the extent, of a subordination covenant; and (d) the central bank of the jurisdiction in which that bank outside New Zealand operates is a shareholder in the Bank for International Settlements; and (e) [other?] Purpose of Regulations The purpose of subsection (1) is to impose the same credit-rating test on banks outside New Zealand as applies to registered banks. Consultation with Crown entities will determine which Crown entities will be permitted overseas bank accounts and what sort of bank accounts they will be permitted to have. 6/6