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The Government has changed its mind and decided not to give the Reserve Bank (RBNZ) statutory bail-in powers that would protect taxpayers if a bank became distressed.
Cabinet, in October, decided statutory bail-in would not be included in a piece of legislation being written as a part of a major review (which started in 2018) of the Reserve Bank Act 1989. This followed Cabinet in April saying bail-in would in fact be included in the Deposit Takers Act.
Statutory bail-in is designed to help authorities recapitalise a failing financial institution quickly by imposing losses on creditors. This shields the public purse and means the institution can keep its doors (at least partially) open.
The statutory power can recapitalise the institution by writing down and converting unsecured liabilities, like bonds, to equity. The RBNZ can make institutions maintain a certain amount of these bail-in-able instruments.
However, Finance Minister Grant Robertson said writing rules to accommodate for this, so that investors who buy certain bank bonds, for example, know these could be converted to equity if the bank runs into trouble, is “complex” and could delay the introduction of other provisions in the Deposit Takers Act, like the deposit insurance scheme.
“Statutory bail-in powers would require a significant reworking of the rules the Reserve Bank sets around the liabilities of deposit takers (for example, the wide range of eligible liabilities would all have to acknowledge the bail-in power in their terms and conditions),” Robertson said in an October Cabinet paper.
He suggested officials report back to him two years after the Deposit Takers Act is enacted (likely in 2023) on whether statutory bail-in is in fact needed.
A missed opportunity
Lawyer, Ross Pennington - a proponent of bail-in, who advised the RBNZ and Treasury on the matter as a part of their big review of the Reserve Bank Act 1989 - sees this as a missed opportunity.
“Bank failure is complicated, so does that mean you should have fewer or more tools to deal with it?” he told interest.co.nz, saying it’ll realistically probably be another 30 years before the matter is addressed again.
“The fact that it’s complicated is why you do it in advance [of a potential bank failure].”
Pennington said the mechanics of how statutory bail-in would work could be ironed out in regulation after the Deposit Takers Bill is passed. Hence, the detailed work required doesn’t need to slow the passage of the Bill.
Pennington noted Treasury and RBNZ officials had already done a mountain of work on bail-in, drawing on experience from the United Kingdom, Hong Kong and the European Union.
These jurisdictions have bail-in, so the international debt markets New Zealand banks participate in understand it.
Pennington said bail-in is “straight forward best practice”, recommended by the Financial Stability Board - a Swiss-based international body established in the wake of the 2008 Global Financial Crisis.
Not only does it protect the public purse, but it is transparent, can be done quickly, and incentivises sophisticated creditors to monitor banks to prevent a collapse in the first place, he said.
RBNZ focused on requiring banks to hold more equity
However, Robertson, in the October paper, recognised the RBNZ’s focus is preventing collapses by requiring banks to hold more capital - albeit “at significant cost to industry”.
He proposed “contractual bail-in” be introduced via the capital rules - but only after the beefed-up new capital requirements are fully implemented in seven years’ time.
While statutory bail-in would empower the regulator to convert the troubled bank’s bonds to equity straight away, contractual bail-in would mean this could only be done if detailed contractual terms and conditions were met.
So, the RBNZ would tell banks they have to hold X number of bail-in-able instruments to comply with the capital rules.
This approach aligns with that used in Australia.
A criticism of contractual bail-in is that when you have conversion based on detailed contractual terms, and investors with deep pockets, you risk being legally challenged over whether the terms and conditions have in fact been met.
Nonetheless, the RBNZ is happy to “kick the can down the road”, in Pennington’s words.
“The prepositioning of bail-in-able instruments is not expected for some time given the Reserve Bank’s current focus on boosting common equity capital levels within the banking system,” the RBNZ said in an explanatory note accompanying an exposure draft for the Deposit Takers Bill.
The RBNZ also claimed it already has resolution powers to impose losses on creditors.
In the event of a deposit taker collapsing, it could shift certain creditors and assets to another company or vehicle that is legally distinct from the deposit taker.
The pinch is, this process would take much longer than bail-in.
For readers interested in the details, see these snippets from the October Cabinet paper and the RBNZ’s explanatory note accompany the Deposit Takers Bill exposure draft:
"Bail-in, in the most general sense, provides that certain creditors of a failed deposit taker absorb losses in order to reduce the risk that the deposit taker requires public support. Bail-in can be achieved in a variety of ways – including by drafting liability contracts with explicit clauses that provide for bail-in in certain circumstances (contractual bail-in), a formal statutory power that imposes losses on creditors (statutory bail-in), and through the use of resolution powers that cause certain creditors to absorb losses. An example of relevant resolution powers are the transfer powers available in resolution to shift certain creditors and assets into another company or vehicle that is legally distinct from the deposit taker. These transfer powers are being carried over (with appropriate adaptations) from the 1989 Act.
"In April I asked Cabinet to agree to a series of proposals that would be drafted into a statutory bail-in regime [DEV-21-MIN-0079 refers]. I have subsequently decided that it is preferable to initially focus on contractual bail-in and transfer powers. Statutory bail-in powers would require a significant reworking of the rules the Reserve Bank sets around the liabilities of deposit takers (for example, the wide range of eligible liabilities would all have to acknowledge the bail-in power in their terms and conditions). In other countries these changes have been developed in detail at the same time as statutory powers are designed. The design of statutory bail-in powers, however, is also complex, and could delay the introduction of the broader provisions of the DTA.
"If ongoing policy development (which will happen as the Reserve Bank develops resolution plans and the Statement of Resolution Approach after the passage of the initial Deposit Takers Act) leads to a view that statutory bail-in powers are needed to implement effective resolution strategies, they can be legislated then with more clarity about how to design them. I will direct officials to report to the Minister of Finance on this within two years of the passage of the DTA.
"Contractual bail-in is a simple approach to loss absorbency where the conversion of the instruments occurs following rules established by the contractual terms of the debt, and can occur prior to resolution commencing. This would be coupled with rules requiring deposit takers to issue minimum amounts of ‘bail-in’ debt, which is subordinated to senior debt such as deposits, and has contractual terms that allow the Reserve Bank to convert it. The mechanism used to trigger this conversion would be a direction to the deposit taker (using the direction power set out in the April paper). This is how I propose the law should provide for what was described in the April paper as a deposit taker being “resolved in an open state”.
"This framework could be used to boost loss absorbency in a way that could be useful in working with a foreign regulator of the parent of a New Zealand deposit taker (such as APRA) to stabilise the parent and subsidiary without triggering formal resolution powers. However, I note that other simpler forms of loss absorbency are currently the priority for the Reserve Bank. Specifically, the Reserve Bank is gradually imposing significant increases in equity requirements on the banking sector. These increases in common equity requirements were introduced as part of a major consultation with the banking sector that has recently been completed and will be implemented over the next 7 years, at significant cost to industry, and will lead to large increases in loss absorbing capital across the implementation period. Requiring debt with contractual bail-in features would most naturally follow after those common equity requirements are fully implemented. The framework I am proposing in this paper would therefore provide the scope for the Reserve Bank to add contractual bail-in terms to debt instruments as part of prudential capital requirements in the future."
"The April Cabinet paper envisaged a statutory bail-in regime (a power in the Bill that could write down or convert certain liabilities without relying on contractual provisions in those liabilities). However, in October 2021, Cabinet decided that the initial resolution regime would rely on two other paths for imposing losses on creditors.
"Firstly, within resolution the broad transfer powers available to the Reserve Bank can be used to impose losses. Secondly, the Bill provides for a preresolution direction power that can be used to require deposit takers to exercise contractual rights to bail-in prepositioned bail-inable instruments.
"This second approach is broadly similar to the tier-2 debt regime used in Australia. The prepositioning of bail-inable instruments is not expected for some time given the Reserve Bank’s current focus on boosting common equity capital levels within the banking system. In the future, the prepositioning could occur via the introduction of standards mandating minimum levels of suitable liabilities. Also, a future review will consider whether statutory bail-in (as seen in the UK regime, for example) is necessary alongside the two paths provided for in the DTA."
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
38 Comments
Just buy Bitcoin, bail-in or bail-out.. Bitcoin doesn't care - Bitcoin is price-go-up technology.
Well I have a pretty large allocation to Bitcoin, but I still don't think the average person has the risk tolerance and mental fortitude for it yet. Too much work involved in working it out for yourself. They would prefer to stick with the central and commercial banks.
Nevertheless, I'm more comfortable with some of my capital in BTC than in a NZ bank. These are difficult times for people with substantial amounts of cash reserves.
There will no doubt be a Windows 95 moment though.
The hysteria has shifted from Bitcoin at the moment. It's all focused on NFTs and how they're going to blow up the world. I find it quite bizarre considering NFTs are owned by a small minority.
Big news y'day re IRS and crypto ("In Huge Precedent, IRS Says It Will Not Tax Unsold, Staked Crypto")
https://www.forbes.com/sites/kamranrosen/2022/02/02/in-huge-precedent-i…
9 per cent rise this year, 6 per cent the next, plateau for five years afterwards. The national housing market won't collapse, fortunately for us all because this clown car of a govt wouldn't have a clue how to stem the bloodbath if the collapse did occur.
If you can't put in depositors insurance as a backstop to chaos then no amount of fluffing around with financial levers is going to be able to achieve anything.
George Bush let Bear Sterns fail in 2007/2008 and nothing has been working very well in the world financial machinery since. A lack of understanding of what you are doing has consequences.
Yes, it does show you that coalition party's have real, valid input, even if they are minor players. It seems once in power completely parties think it gives them absolute right to do any bats$it crazy idea they think of and not focus on what they were voted in to solve.
For this lot, they are spending their whole time working on things that don't need to be worked on, making changes that don't need to be made, which are fluffing around the edges of the real issues anyway. You know, things like homelessness, housing affordability, health system management, re-balancing wealth inequality, bringing down the cost of living, helping the poor. Once in power, all those things which are their ideological home have been turned into the opposite. We see them here screwing depositors and rewarding home owners, yet again. While a few days ago it was screwing the productive with new taxes that aren't needed.
Clearly they are losing popularity on their current trajectory, but it looks like they are doubling down as much as possible.
When I opened mine (a few years back now) the exchange rate was just hitting 0.93 - I was concerned about transferring funds incase it fell - though I did transfer funds.
It pays to transfer a reasonable amount or find a good overseas remittance provider - obviously traditional transfer fees will more than cancel out interest payments on small amounts. Most Australian banks will let you have zero monthly fees if you're not living in Australia and ASK.
Opening a Perth Mint 'unallocated-metals-account' online, dollar-cost-averaging into silver and linking your Australian bank account could be a good trade.. just transfer your silver balance into your Aussie account when you want AUD.. that or open a forex account lol
Just thinking out loud mawhahaha har
Government bails on bail-in, ditching the opportunity to give the Reserve Bank a tool to shield taxpayers in the event of a bank becoming distressed
This headline speaks volumes. We've come to accept the fact that a taxpayer-funded bailout is inevitable if a bank gets itself into trouble. A private, for-profit institution being gifted taxpayer money when times get tough is so normal, so natural, that we don't even bother to think twice about it.
We've completely capitulated at this point. This must be what late-stage capitalism looks like.
-- Regarding BAIL-OUTS
YOU deposit with a bank, YOU should take the risk. If a bank fails too bad!!.. government bail-outs of banks only encourages reckless lending practices.
It dramatically encourages the blowing of asset bubbles and therefore concentrates houses in fewer and fewer hands. It's EVIL.
-- Regarding BAIL-INS
QUESTION: What would happen to KiwiSaver accounts in a bail-in situation? Could such holdings be seized or forced to take a haircut?
Zack you are conflating two things.
First we have little choice these days in having to have a bank account, so there is little choice. and usually it will be a market problem rather than a single bank.
Second bailing out the banks; I suggest Governments should not bail out the banks. I think depositors should be bailed out, but not by a payment to the bank. Secondly i think the law needs to be changed to make depositors fund the property of the depositor and not the bank. Up front this would make the banks much more liable for how they handle the money, and treat their depositors. I also think that there would need to be some other regulation around that.
"I think depositors should be bailed out"
I DON'T.. Live by the Ponzi, die by the Ponzi. Bankruptcies clear bad debt from the system.
Banks loan money into existence; when they do so they create more debt (due to interest obligations) than spendable fiat, therefore under the broken MMT system bankruptcies are required to clear bad debt..
Unfortunately the Regime wants to avoid this reality and indenture a Neo-Feudal System through bail-outs (especially for banks) directly or indirectly and the ensuing INFLATION.
In the end everybody loses monopoly, the winner hasn't won.. he's LOST all his customers.
What you are saying is that a bank bankruptcy or failure should be able to take it's depositors with it. Remember that a bank can refuse to let depositors withdraw their money, so when depositors finally get to hear a bank is in trouble, the bank will likely to have already slammed the door on them. This is along the lines or 'Rats leaving a sinking ship" but the rat in this case is the bank. Why should it be able to take its depositors with it? A banks failure will be due to its practices, and the average Joe Cabbage does not have the skills or knowledge to properly gauge the risk early enough to protect themselves adequately.
"Remember that a bank can refuse to let depositors withdraw their money"
When you deposit money you become a creditor, that is to say the bank agrees to owe you money.
It's NOT the 'depositor's money' anymore.
If you loan your proverbial paycheck to a drug addict and they shoot it up their arm.. should your employer bail you out?
I hold Dry Power:
That is to say some cash is necessary for emergencies and financial asset opportunities. I dollar cost average into various things both weekly and monthly.
I'm only still young but I try to be wise with my money. interest.co.nz has taught me a lot to-be-honest. Sometimes I get out of line here but David Chaston usually slaps me down at least a couple of times per year lol
Exactly: Banks don't take deposits and they never lend money. They are in the business of purchasing securities. When one gets a bank loan, the loan contract is a promissory note. The bank purchases that contract from the borrower. Now the bank owes the borrower money and it creates a record of the money it owes, which we call deposits - source.
How many people do you know who aren’t paid directly into a bank account? How many people do you know who are paid cash? How many businesses offer to pay their workers in above board cash? Etc
Now if the vast majority of employees are paid directly into a bank account without choice of cash, they NEED a bank account. If a bank account is an essential service to basically every person, it should be protected by government by a system like Glass-Steagall, keeping cash deposits and commercial banking seperate from speculative investment banking practices. This system made banking stable for most of last century before it was removed during deregulation, and allowed the banking system to become a Ponzi procreator.
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