Opinion: It's time for NZ to adopt bank deposit insurance

Back in March I called for New Zealand to debate the adoption of a bank deposit insurance scheme before a crisis robbed us of the time and flexibility to have a considered and public discussion. The time for that debate may have passed. Action is now required across New Zealand's political and economic leadership to ensure New Zealand is no longer the only country in the OECD without any form of bank deposit insurance or deposit guarantee. We at Interest.co.nz are today calling on the National and Labour parties to work with the Reserve Bank of New Zealand to neutralise this issue before it becomes a political football and before banks are anywhere near where they might need it. This leadership group should announce a deposit guarantee scheme to guarantee at least NZ$25,000 per person in any licensed bank or registered building society. This would be a government guarantee until an insurance scheme can be created. Several events since March and in recent weeks have increased the urgency of this issue.

Firstly, Australia has announced plans for a "Financial Claims Scheme" that would guarantee A$20,000 in any account per person. Obviously our major banks, ASB, BNZ, Westpac, ANZ and National, are owned by Australian banks. In any crisis this disparity will become destabilising. New Zealanders wanting some protection will open Australian accounts with the parents of their New Zealand banks. We are nowhere near this stage yet, but reducing the risk of a Trans-Tasman exodus should be a top priority. Secondly, governments around the world are rapidly beefing up their deposit insurance schemes and deposit protection in response to the risks posed by the rapidly deteriorating credit crunch. America has just increased its deposit insurance scheme from US$100,000 per account to US$250,000 per account. Last week the Irish and Greek governments took the extraordinary steps of guaranteeing all bank deposits to forestall banking collapses. Overnight the German government guaranteed all private savings accounts as it fights to rescue the second biggest mortgage bank, Hypo Real Estate, in Europe's largest economy. Meanwhile, credit markets remain frozen and banks in the Northern Hemisphere don't trust each other. The commercial paper market which allows large corporations to fund their daily cash flows has also frozen. Many corporates are relying on emergency bank lending facilities and the banks in turn are relying on money they are borrowing from central banks. There is not the same extreme levels of dislocation in Australasia yet. We agree with the Reserve Bank that our banks are sound and that they in a much stronger shape to cope with this disruption than many European and US banks. Here's our previous comments on why our banks are much safer than US banks and 10 key reasons why our banks are different from Northern Hemisphere bank. We stand by these articles. New Zealand's banks are well capitalised, have extremely high credit ratings, are well regulated and are not materially exposed to the US sub prime crisis. But there are risks. Australia's banks, which own ours, have to refinance at least A$100 billion of short term foreign debt every 90 days or so. If international credit markets remain frozen for months rather than weeks and if the European and US banking systems have an extended catastrophic breakdown then our banks will not be immune from these stresses. If this crisis goes beyond the next few weeks then our banks will have to sharply curtail new lending, particularly housing lending. Credit rationing of shorter term credit to businesses will intensify. Regardless of the fundamental soundness of our banks, this will make people nervous about the NZ$90 billion of deposits in our banks. That's when we need to have acted ahead of time and guaranteed deposits of at least NZ$25,000 per person. A even better option would be a full NZ$100,000 deposit protection, which would bring us closer into line with Britain, which has just increased its protection from 35,000 pounds to 50,000 pounds and America, which has just lifted its protection from US$100,000 to US$250,000. (Updated to include call for as much as NZ$100,000 protection.) We cannot afford the unthinkable. Hopes that the US$700 billion bailout would solve the crisis are now dashed. See my piece here from late on Friday on why a European and US banking catastrophe is now a possibility.