By Bernard Hickey
How would you feel if someone muscled in ahead of you in the queue at the bank?
How would you feel if bank manager actually encouraged the queue jumping?
Would you want to be compensated?
That is what has just happened to hundreds of thousands of New Zealanders who have over NZ$110 billion in term deposits in banks.
Up until a couple of years ago, term depositers had priority over other bank creditors. That meant they would be paid out first if the bank was to collapse.
They were at the front of the queue.
But starting in mid 2010 New Zealand's big four banks started issuing covered bonds to mostly European investors. These bonds are securities that are 'covered' by the underlying assets owned by banks, which is in this case means mortgages.
If a bank were to collapse, these bonds have to be paid back from the proceeds of those mortgages.
These covered bond holders, therefore, have first dibs on the rubble left over after a bank collapse. They also have the pick of the 'rubble' because the mortgages underpinning these covered bonds are often the best quality ones. For example, Westpac excluded earthquake affected post codes from its mortgage cover pool for its covered bonds.
These bond holders, mostly pension funds in Europe, have essentially jumped the queue ahead of New Zealand term deposit holders. This was done initially with the Reserve Bank's tacit approval, and more recently with Reserve Bank guidelines.
Now Parliament is considering a bill to enshrine this queue jumping in law.
Both the Reserve Bank and most of the parliament have been relatively relaxed about this move by the big four banks (and Kiwibank is also planning to issue covered bonds too) to issue covered bonds. The Reserve Bank imposed a 10% limit on the issue of covered bonds as a percentage of total assets. This is above an 8% limit in Australia, where they had been banned until this year, and above a 4% limit in Canada.
The Reserve Bank and the banks have argued these issues of covered bonds make banks safer because it secures a more reliable and cheaper source of funding than the 'hot' commercial paper funding on wholesale markets that proved so dangerous during the Global Financial Crisis. For example, ANZ New Zealand raised NZ$1.2 billion earlier this month through an issue of five year covered bonds in Europe with an effective interest rate of around 2.4%.
That is certainly cheaper than the 5% ANZ and its soon-to-be subsumed sister brand National Bank offer for five year term deposits to 'Mum and Dad' investors in New Zealand.
No wonder the banks are keen on this funding. The big four banks have issued NZ$11 billion worth of covered bonds since mid 2010 and have room to issue another NZ$20 billion worth these bonds.
The Parliamentary Select Committee examining the bill (retrospectively) approving these covered bond issues has given them the big tick, even suggesting that the lower funding costs from these bond issues could be passed on to 'Mums and Dads' in the form of higher term deposit rates. That certainly hasn't happened so far, given the lower funding costs have helped boost bank net interest or profit margins by about 20 basis points.
The National-led committee even suggested the 10% limit could be relaxed if the banks needed it.
This issue has received little public attention and only one submission to the committee was against it. Yet this practice of issuing covered bonds has shunted almost NZ$110 billion of savings back down the queue, and without any compensation in the form of higher term deposit rates for the slightly higher risk.
Choosing to refinance the 'hot' foreign money with 'cold' foreign money also reduces the incentive for New Zealand as a nation to cut its foreign debts.
If covered bonds had not been issued and the Reserve Bank had encouraged the banks to raise more long term and stable funds from New Zealand savers, term deposit rates would have risen and there would not have been so much upward pressure on the New Zealand dollar.
However, it has meant higher profits for the big Australian owned banks, which ultimately means a bigger current account deficit for New Zealand as those profits are at least partially repatriated to Australia.
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This article first appeared in the Herald on Sunday. It is used here with permission.
37 Comments
Yup, it's a step backwards. It's a wonder Winston hasn't raised this issue....
Legalised theft is exactly what it would be and it could literally happen overnight.
I do wish more commentators had publicised this more and asked the hard questions on depositors' behalf......perhaps some publicity and some withdrawals would prompt some discussion in the media who have been asleep over this.
I have not banked with Australian banks for years, preferring the PSIS, now The Cooperative Bank. It is a good policy to keep a sum of cash on hand anyway (securely stashed of course) in case of civil emergency.
It was an interesting, yet unreported fact, that after the first earthquake, where we had a long power outage, there was a high demand for cash. No ATMs were working and EFTPOS was down.
The local supermarket opened briefly, just to sell some basics but it was cash only. I knew some people who had no cash at all. It would have been very interesting had the power outage continued for 24 hours or more.
You tend to get serious civil unrest when that happens. Of course, you might get a new local currency spring up overnight, such as the Lyttelton Timebank :-)
I have suggested that there is a need for some form of community currencies, available for use in emergency situations. Human kindness stretches only so far, when people are thristy or hungry.
Unfolding events are not looking good for the uncovered, subordinated retail depositors - the junk speculator mortgaged rental landlords are falling over since solvent tenants are harder to find..
Stephen, having recently been through a number of open homes, the panic on potential buyers faces is something to behold, it is bordering on hysteria. Houses certainly in average suburbs of Auckland are being auctioned off, in most cases, at least 30% above CV, and no I'm not talking about the leafy suburbs either, but Te Atatu South, Massey, Henderson, Beach Haven etc
IMO, I think you'll find the later part of 2012 will see less forced sales as the housing bubble gains momentum, especially in Auckland and most certainly in the Garden City. It would be interesting to see a break down of regions in those stats.
One little 3 beddie matchbox (80 sqm) CV 325k went for 450k in West Harbour last weekend... the purchaser a property investor, told the agent he was going to go as high as he had to to get it as he kept missing out on other properties... bidding was furious!
In the slightly better areas, Asian buyers just out bid any other bidder... prices are insane. One told me he's getting a loan from his bank in China at just 1% (ONE PERCENT!!!!) He's bringing his elderly parents over and his kids, then he's heading back for work...
Dare I say it, the premise of the article you have posted will be as accurate as Bernard's prediction of - 30%...
I am no property bull, no bull... but it's going off in Auckland!
It may well be that its going crazy....in Auckland at least...it will be interesting to see how this summer's season goes.
What f**ks me off though is when this goes bad I'll be one of the tax payers paying for the inevitable bailout both wil lost deposits and tax burden...
I just wish it could be isolated to only the fools....
regards
Am not sure there will be a collapse any time soon in Auckland... the dynamics are just too dynamic... and as young Kiwis head overseas for a better life, cashed up immigrants will pour in to the gap, desperate to live in what the latest National Geographic calls the third most liveable city in the world! Expect prices to get a whole lot higher...
Now else where in the country...well things could get mean pretty quick!
General HubHub
Thanks for the on the ground intelligence - I wish the reality would find it's way into the REINZ statistics.
As for:
In the slightly better areas, Asian buyers just out bid any other bidder... prices are insane. One told me he's getting a loan from his bank in China at just 1% (ONE PERCENT!!!!) He's bringing his elderly parents over and his kids, then he's heading back for work...
I know a starving NZ buyer who did a similar thing with cheap (~3.0%) Swiss loan four or five years back.- the Chinese cross border borrowers will end up the same.
Without doubt and with the RBNZ's blessing.
Perhaps the experts at the Commission for Financial Literacy (!!!) could start by explaining to everyone that bank deposits are unsecured liabilities of the bank and as a depositor, you are simply a creditor.
It is therefore not your "money". Your money is the folding stuff in your pocket.....about $4b all up in NZ....the rest is debt secured by bank assets, sort of. If the "assets" decline in value, then the "money"....disappears...in the same way it appeared.
Pretty cool really.
Anyone for tennis?
Stephen,
I don't think they are the same thing. One is an immediate loss of "capital", and the further potential for a catatrophic loss, if there is contagion or a liqudity crunch. Inflating the money supply by printing new fiat currency can cause loss of purchasing power, if there is no change in the supply of goods and services i.e the economy is operating at full capacity but where there is capacity, it doesn't necessarily cause a problem. This is even more so, where the overall country position is of indebtedness, as some of that new money will go straight into paying off debt.
A lower currency doesn't necessarily lead to a loss of domestic purchasing power, depending on how your balance of payments account looks, so I would say it's not the equivalent of a straight haircut on your capital.
That's not to say I would countenance printing new fiat currency alone. I would, however, do that whilst at the same time restraining new bank credit. The overall quantity of the money supply is key for me.
To me this is much more than an attempt by the banks to to short change depositors. It represents a a failure by our Democratic government to protect the people in the electorates from the scourges of large, foreign, monopolistic businesses . We are now run by a Cabal a small plutocracy of people who put self interest ahead of all else. We see them in high paid government positions as deverse as Landcorp, the Education department,Doc,Corrections and councils, scores of civil servants on over $500k a year, as well as in the private sector, seeking monopoly rents at every turn, helped and abetted by the very people we elect to protect us. Whether we vote Labour or National the rape of the middle and lower classes continues to the benefit of the elite, men such as Bollard work in the interests of the cabal not the people who pay his excessive salary.
How do we fix this before its too big a problem. It starts with motives such as appointing a government panel to replace a democraticly elected councils in Canterbury and Kaipara, to safe guard loans to banks and to encourage development but where does it end? Its comes in the form of Fonterras TAF vote and the disfranchisement of the average dairy farmer and the turning of a co-operative to a foreign controlled machine, expert in the rape of it's suppliers
Is this century the century of the Oligarch, or will we fight?
I must be missing something here. Was under the impression it has always been this way. By way of comparison if one owned their own home mortgage free, but owing $30,000 on credit cards and another (say) $50,000 in loans, the creditors owed the $80,000 are "unsecured creditors". Should the home owner subsequently get themselves into a bit of financial bother and goes and raises a mortgage on their home, the mortgagor becomes a "secured creditor" with security over the asset, while the other, existing, unsecured creditors get shunted further down the food-chain. DONT THEY? Hasn't it always been that way? What is the Government going to enshrine in law that isn't already so (in commercial law)?
The only point of contention is, the risk for depositors is increased, and the banks should reflect that in the form of increased rates of interest on deposits. On "at call", savings accounts and "term deposits".
If someone is that bad a credit (or stupid enough) to pay 19-20% in interest rates, I'd question whether banks should lend them at all. The second part of your question, yes I have no doubt that if your personal or business equity is at the billions of dollar levels of the banks, you could ask alot of the banks as a depositer, in fact I sure they'll love to get the call :-)
Lets be clear here, New Zealanders have shown no desire to live within their means for the past several decades. Accordingly, unlike many other countries, we can not internally fund the borrowings of our own people. As such we have more limited choices than others, most particuarly, because the banks are forced to borrow these funds overseas, we are always at risk in the event of a crisis that those markets will either force up our funding spreads considerably (as they have done in the past 3-4 years) or those markets will freeze totally and force the banks to either stop lending, or having to revert to the RBNZ for back stop funding.
So we have created less choices for ourselves because of our desire to consume rather than invest - with regards Bernard's hang up about covered bonds, our choices are clear; permit them to a limited level with some small risk to that, or don't permit them and......pay higher rates on our mortgages, and know that when the next crisis comes either lending stops, and house prices collapse, or the RBNZ bails out (a big risk in itself).
Considering that we have the Aussie banking industry here who sit in the top 25 most conservatively ran banks in the recent IFM survey, and the RBNZ has been ahead of the game bringing in regulator controls, such as core funding ratios, years ahead of the Basel 3 requirements, I'm comfortable with risks/rewards involved - others are dreamers who act irresponsibly and yet expect to have the same situation as those (countries) that don't
Let's not be clear and blast all Kiwi as wasteful indebted fools!.....some of us have no debt..pay our taxes...and we know the parasites will steal from us, so we put our cash where we can grab it right quick..
The day one of these puppet masters folds is the day the rest of NZ takes all the deposit cash from the rest....that will be fun to see.
No lets be clear here Wally, I have no debt and less than 15% of my assets in a house. We aren't talking you and I apparantly, we're talking about NZ as a whole. If one folds, a massive number of NZers will be stuffed - Unlike you, I don't wish for that for my fellow NZers as I wouldn't consider it fun - each to their own I guess
With the National Bank brand being submerged into the ANZ empire, the time is ripe for me to review my own circumstances. The covered bond situation seems to follow on remarkably well from the MF Global meltdown as far as a wake-up call for all depositors/investors.
My own decision is to exit the large banks asap, futureproof my lifestyle as much as possible through providing, as far as reasonable, for my own needs, and diversify my money into products/services that I see a continuing need for.
Look, for most people the train has well and truly left the station and it wont be until the smoke clears that they realise how poorly the powers-that-be have let them down. Most politicians of any consequence have their eye out for the gravy train after politics a-la Simon Upton et al.
I no longer waste my time or energy on trying to widen the news horizons of the gratefully fooled. The reason Banks grab at physical assets, especially high equity mortgages, is because they realise their own assets are merely digital IOU"s.
What is a covered bond?
What do the banks do with the money raised?
Don't these aussie owned banks take out about 2 billion profit every year surely they must be living beyond their means if they have to continually raise money or are they just replacing old debt with new debt.
Ngakonui gold - who do you think they're lending to, its NZers who are living beyond their means. In general, banks are just intermediaries between depositors and borrowers and make their money from the spread they take by taking on the assciated credit risk. There are not enough savers in NZ to fund NZers borrowings ! Who living beyond their means ?
So wotcha saying , Bernard , is that term deposits are not safe in the bank ....... well duh !
..... the hallmark of a healthy capitalist economy is that risks abound ......
And if Kiwis choose to stash $ 110 billion in term deposits at Aussie banks , three times the total capitalisation of all the companies listed on the NZX , then that is their look-out ......
..... stop bleating , Bernard .... if you must rabbit on about something , have a crack at journalists who shoot from the lip at entrepreneurs , and then refuse to apologise when they totally get it wrong ......
We do not need or really even want the foreign money in the first place. Many people intuitively believe our demand for debt is the driving force in this money turning up. I strongly believe that our current account is in fact driven by a supply of credit, from both our main banks, who profit extremely well from the process, and from foreign investors who not only get a very good return, but also keep their currencies down (and ours up) in doing so.
The single largest compelling reason for our overvalued exchange rate is this inwards capital flow. Even Bollard to his credit is shouting this from the rooftops now he's on the way out. Maybe there really were pressures to stop him pointing it out while he theoretically had any power to do anything about it.
Stop the capital flow and the NZ economy most certainly won't stop. The currency would decline, making all our industry more competitive. Any undersupply of NZ$ credit in the local economy, could either be met with higher interest rates, and so more supply from depositors; or if any real shortage at all, then supply from the Reserve Bank.
Exporters and import substituters would gain immediately from such a move, as would the inbound and domestic tourism industry. Yes our petrol prices and overseas holidays would go up in price. Important price signals to balance the economy in my view.
If the economy slowed down at all due to relative increases in imported prices, the Reserve Bank has tools to improve the economy, including the OCR, but also monetary loosening, and a short term "seeing through" of any short term higher inflation caused by the lower currency we would then have. The only profits that would be lost would be in the foreign banking system, and among importers.
That's a long way of saying we most certainly should not be rewarding these euro bonds with queue jumping ahead of our own depositors. If that means less or none of their money, great news.
FYI from a reader via email:
One thing I would like to know is:
What do the foreign funds who have previously bought bonds off the Oz banks, whose funds will now be subordinated by the cover bonds, what do they think about these new covered bonds? Surely they would not be happy. It changes the security of their investment part way through the term. Surely they would be worried about this just like retail depositers are. (Should be).
It could be that some of these foreign entities will buy the covered bonds as well, so their risk profile is not on balance, worsened. But these guys, surely they would not like be forced to do that. They may not have any new money to invest right now. Others may step in.
I know it not identical, but it’s similar to share offers isn’t it. If you don’t participate, your current shareholding is effectively diluted. In this case, if you don’t buy covered bonds, the risks go up.
We know where the benefits of the lower finding costs will go. Not into higher bond rates or higher deposit rates, not into retained earnings, it will go into dividends.
Regards
And my replay:
Many thanks. Those foreign funds who bought unsecured bank bonds are not pushed down the queue. They were always behind term depositors.
It may increase their risk slightly. But you're right many funds will be the same people and their risks are diluted through all this.
I agree the benefits are going to dividends.
cheers
Bernard
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