The liquidity policy applying to banks in New Zealand is proving to be flexible for the largest of the country's banks, ANZ National.ANZ, with a market share approaching 40 per cent in New Zealand, operates two bank brands, under its principal incorporated entity, and a second banking entity that operates as a branch of its Australian parent.ANZ registered as a foreign bank in New Zealand in January 2009. Its conditions of registration vary from those usually applicable to branches. The branch has only one core function: to buy and hold mortgages originatingfrom ANZ National. The value of these mortgages can be up to NZ$15 billion.In line with this condition of registration, ANZ National has been selling mortgages to the branch. These currently amount to around NZ$10.6 billion, including a net sale of NZ$1.1 billion, in July 2010.As these mortgages leave the books of ANZ National they are no longer counted as assets of ANZ National and are not relevant to the calculation of the required level of liquid assets, including measures such as the core funding ratio. This means at the maximum amount of NZ$15 billion, and with a core funding ratio of 65 per cent, the liquidity relief ANZ can potentially secure for its New Zealand business is around NZ$9.75 billion.The RBNZ granted the licence to ANZ and decided on the conditions of registration after the RBNZ announced it was beginning work on a revised liquidity policy in November 2007. After obtaining registration, in January 2009, the next month ANZ National sold mortgages totalling NZ$4.9 billion to the branch, and the branch funded this with borrowing from its Australian parent. The in-flow was then used to reduce wholesale deposits on its books.Thus, ANZ National reduced certificates of deposits from around NZ$7 billion, in September 2008, to NZ$3.3 billion, in June 2010. Commercial paper issuance has fallen from NZ$12.6 billion, in September 2008, to NZ$5.6 billion, in June 2009, before rising again to NZ$10.3 billion, in June 2010.Asked to comment, RBNZ wrote in an email that "it disagrees that an arrangement of this sort undermines the purpose of the liquidity policy", arguing that if the branch to which the mortgages are sold has any liquidity problems, this is  an internal matter because the funding comes from the parent bank."It would not make sense for the parent bank to force its NZ branch into liquidation for non-payment of a debt." Westpac operates  a dual operating model in the New Zealand, which it  has had in place since 2000. Westpac's branch breached its condition of registration when its net liabilities exceeded the NZ$15 billion mark during 2008 (as reported previously in Banking Day).To correct the breach, Westpac, after discussions with the RBNZ, developed a new model that allows  it  to transfer loans from its branch back to the incorporated Westpac NZ bank. Westpac branch's loans, of around NZ$6.8 billion, comprise only non-housing loans. However, once transferred, these loans are assets in need of funding in line with the core funding ratio requirement