The New Zealand Reserve Bank wants to toughen rules to require finance firms and other non-bank organisations to ensure they have enough cash to meet their financial obligations in case of trouble.
It has issued a discussion document, examining the policy options for managing the liquidity requirements of the non-bank financial sector, which includes finance companies, building societies and credit unions.
A number of finance company failures and erosion of investor confidence have recently made it hard for finance companies to raise new funds.
In turn, their ability to meet their liquidity requirements largely depended on the successful repayment of their loan books.
Finance companies in the consumer sector have had some success - but those in the property financing sector have been more vulnerable to shortfalls due to difficulty of selling property.
The Reserve Bank says it recognizes the problems primarily relate to the quality of the assets, rather than liquidity mismanagement - but it's examining whether changes need to be made.
The document outlines three options aimed at strengthening the sector's financial position, and provide greater protection for investors.
The first option is essentially the status quo, and would allow the financial institutions' trustees to set liquidity requirements on a case-by-case basis.
The second option would still allow trustees to determine their own liquidity requirements, but the Reserve Bank would introduce a standard framework to measure liquidity across the sector.
The final option would involve the Reserve Bank specifying precise liquidity requirements for all non-bank organisations.
Submissions close in mid-March and the bank intends to make policy recommendations to Cabinet in the second quarter of this year.
