Foreign-Owned Banks: Implications for New Zealand's Financial Stability

Abstract

Of the five major banks in New Zealand three are owned by Australian parent companies, one operates as the New Zealand branch of an Australian bank, and one has a British parent. Thus, bank ownership in New Zealand is foreign, but not very diversified. The literature on foreign bank ownership predominately focuses on developing countries and highlights the fact that large, diversified banks can enhance stability. New Zealand differs from the developing countries previously studied, as it is a developed country with foreign, but not necessarily diversified ownership. This paper explores the composition of bank ownership in New Zealand and the implications for financial stability. The paper begins with an analysis of the diversification of parent companies' assets and discusses the implications of institutional arrangements between parents and their subsidiaries for financial stability. Next, the degree of interdependence between Australia and New Zealand is analysed. Finally, the paper presents stylised implications of the structure of the market on bank behaviour during a time of crisis. The interaction of these three factors dictates the implications of foreign bank ownership on financial stability in New Zealand.