By Bernard Hickey
Imagine this.
It's the afternoon of Saturday November 17, 2018 and Prime Minister Steven Joyce has called an urgent news conference in the Beehive theatre-ette.
This follows vague unreported rumours in the previous two days that Bank XYZ, one of the big four, had been unable to refinance its 90 day Commercial Paper in international markets because of investor concerns about a 30% slump in house prices in the previous two years and unemployment rising over 15%.
Mr Joyce steps up to the lecturn and announces Bank XYZ will be closed immediately and reopen on Monday morning after an Open Bank Resolution process.
Bank XYZ's systems were changed in 2012 and 2013 to allow the bank to close for a day and reopen after a portion of term deposit accounts can be frozen and then given a 'haircut' to help recapitalise the bank.
Mr Joyce says term depositors will have their deposits shaved by 8% to ensure the bank has sufficient capital and because the government will not use taxpayers funds to bail out an Australian owned bank.
"We cannot allow private bankers and shareholders and depositors to privatise the profits of banking while the losses are socialised and paid for by taxpayers," Joyce says.
"Unless we do this, banks will believe they are too big to fail in future and take advantage of the biggest moral hazard we've ever seen," Joyce says.
"Depositors knew the risks that a bank could fail. Now they must take that loss," he says before walking off the stage without taking questions.
The press release handed out at the news conference says covered bond holders in Switzerland and Germany will not be subject to the 8% haircut because these bonds are secured directly by Bank XYZ's best mortgages.
I can imagine this happening, but I and everyone else knows in their bones it would never be allowed to happen.
Firstly, New Zealand's banks are reasonably well capitalised and have passed stress tests for just such scenarios of house price slumps and unemployment spikes.
Secondly their Australian parents are very unlikely to let one of their New Zealand subsidiaries fail.
And finally, a New Zealand Government could never realistically impose those sorts of haircuts on depositors without unleashing utter chaos.
The Government would first nationalise and bail out the bank.
If Prime Minister Steven Joyce ever were to use the OBR process on one of the banks then this would immediately spark runs on the other three.
New Zealand's banking system is far too concentrated and 'Too Big To Fail' for that not to happen.
There would be lines at ATMs for Banks ABC, DEF and GHI.
Their websites would crash under the weight of people trying to transfer their money.
Australian bank executives and ministers would be on the next plane to Wellington to personally kick Mr Joyce in the goolies and demand a reversal of his announcement.
So we all know OBR will never be used.
So why is it being created at all?
It's a fig leaf for the government say the big four banks are not government guaranteed, when we all know in our bones they are of course government guaranteed.
It means that guarantee is not accounted for and expressed in the form of a deposit insurance scheme that would reduce bank profits. Labour and the Greens are right. Our banks are too big to fail and we should be honest about that by creating a Deposit Insurance Scheme for deposits under NZ$250,000.
The big boys and girls with deposits bigger than that can fend and analyse for themselves.
This is not radical.
Almost every other OECD country, including Australia, has such schemes or is planning them.
We should do the same and give up the figleaf and the pretension.
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This article was first published in the Weekend Herald. It is used here with permission.
41 Comments
Shouldn't a sensible insurance scheme have a reasonable excess to discourage misuse? Say 5% or so.
Don't insurance schemes encourage lots of wastage? When my 20 year old car got a minor dent when someone ran into it, the repair brought that up to as new condition, which was nice but excessive - the cost of this excessiveness is factored into my insurance premium. Isn't one reason the US spend 15% of GDP on heathcare whereas we spend 5% (and have a better system) because they use an insurance based system?
I do not understand insurance, but it clearly often leads to rorts. Be careful what you ask for Bernard. This was how Ireland became bankrupt.
I see you are on fire today. There was I was just talking about Ireland's deposit guarantee scheme being the thing that set off the Aussies and us to have one too; and that it caused Ireland to transfer the debts of their bankrupt banks to the government and the next three generations of Irish taxpayers.
I hope the Irish enjoy being a vassal state to the Germans. Methinks they overdo their dislike of England. Yes, Oliver Cromwell did slaughter a third of Irish, men, women and children. He was a tyrant, slaughter is what tyrants do best. Eventually the moderate people of England voted to have a constitutional monarch and those with more extreme beliefs sailed to America. Hence the Bible Belt. (Where GW Bush comes from, who was a tyrant, and slaughter is what tyrants do best, but I digress).
We cannot allow private bankers and shareholders and depositors to privatise the profits of banking while the losses are socialised and paid for by taxpayers," Joyce says.
"Unless we do this, banks will believe they are too big to fail in future and take advantage of the biggest moral hazard we've ever seen," Joyce says.
But It's ok to enjoy the rewards of sucking the wealth out of US citizen's pockets by borrowing zero interest bound freshly printed USD credits. That's what good subservient vassal states are allowed to do in return for supporting the Washington Consensus in all forums and jurisdictions.
Moral hazard be damned, right?.
Two figleaves
Bernard you seem to have forgotten that we recently had a deposit insurance scheme. It didn't work out too well for taxpayers in the case of South Canterbury Finance and others. That despite the government having the analytical resources to fend for itself.
...... and it emboldened the government to storm into Allan Hubbard's business , and wreck it , before he had a chance to right the ship ....
We're creating an enormous moral hazard for government and investors alike , by creating guarantee schemes ....
..... not to mention that there's no free lunch , someone has to pay for this , and a whole new bureaucracy will be created to oversee it ...
Firstly, stress tests are bogus. Cyprus' banks were stress tested not long ago.
Secondly, they would to save themselves. Btw, "unlikely" is a very suspect word these days.
Finaly, hey another such word; "never".
Here you hit the nail full on; "that would reduce bank profits". Because a deposit guarantee is just one of the possible implementations to protect customer money. Another way would be sound accounting and a regulator doing its job. Also bad for profits.
Instead, now government and regulators are working for the financial sector and telling us absolute crap like pulling the plug on banks before they become zombies is bad for the economy. Oh wait, if the ecomony is a housing ponzi pyramid scheme it would.
I see "experts" suggesting bank customers should investigate were they invest their money and check if a bank is creditworthy. First, deposits in savings accounts aren't investments. A bank customer expect the value of her/his compensation for work, already done mind you, back. Plus a modest extra for the use of it by others (time value). Nothing more.
Second, We are right to expect the government and regulators to make sure any bank to be 100% safe for bank accounts and give banking licenses to sound businesses and close banks before there is any risk for customers. That is why we pay tax, right?
Third, what if all banks are not creditworthy? Well? That is the case now, the financial sector is floating on a ponzi housing/property market. The government will tax bank customers to backstop losses for their banking buddies. Btw. I didn't see where the Open Bankster Robbery says the deposit tax will be limited to deposit holders of the bank in trouble.
It looks like the government has been corrupted and is actively assisting the banks to plunder us or chase us into debt.
It appears money is not worth to work for anymore, it can't be relied on as a store of value.
It appears money is not worth to work for anymore, it can't be relied on as a store of value.
Recipients of irredeemable currency better hope the supposed owners or suppliers of it are willing to cough up the expected haircut in extra wages - maybe an insurance contract with a premium reflecting the most likely haircut will be made available to all whom rely on others to support their lifestyle in exchange for time worked.
There is a sensible way forward - but it does not include the OBR scheme which the extremely well paid academics at Treasury and RBNZ are so keen on. They will never be accountable for their ill-advised policies.
Firstly - prevent the financial collapse of the banks (one or more) by requiring more sensible lending - now. As in Australia, the banks should require separate mortgage insurance for any loan exceeding 80% of current valuation (for houses) - so that any default on mortgage payments is covered by insurance. The risk then is where it should be, on the banks to make sensible loans and on the borrowers to cover their repayments in case circumstances change. If it costs more to borrow money to purchase something at 90% or 95% of its current valuation, then so be it.
Secondly - cover all bank deposits (as most civilised countries do) up to some reasonable limit - say $250,000 as in Australia and the USA. (Noting that depositors in those two countries have many more institutions to put their deposits in - and get coverage well beyond the $250,000 amount)
There is no reason to blame depositors for trying to save or to punish them later. The costly aspect of the previous guarantee scheme in NZ is directly the fault of The NZ Treasury and RBNZ and the politicians who chose to look the other way. Don't blame people trying to save. After all virtually every bit of current financial advice from the government is that people should save more. Let's make it safe to do this.
Okay, forgive my ignorance on that matter. But thinking on the fly, it isn't so much protection for individual depositor but depositors as a collective. So the Bank could se up a fund with contributions from depositors and use that fund to buy the CDS. Probably want to ringfence that fund, I mean we do want to make sure the insurance fund is safe as well right?
there are plenty of sensible countries protecting depositors - no need for NZ to re-invent insurance.
The US, while not a shining example of everything financial, has had no bank failure affecting depositors in over 70 years. And in that period there have been many individual bank failures - most sorted out (so far as depositors were concerned) without losing any of the guaranteed deposit monies (now at $250,000 per bank per depositor). The FDIC insurance fund covers this - and the fund has not been depleted since it started.
http://www.fdic.gov/deposit/deposits/international/index.html
While Treasury and the RBNZ might not have any practical experience, I'm sure they could be trained to do something non-academic and useful.
Hell - even Australians are able to run a deposit guarantee scheme for A$250,000 per depositor per bank. And this covers the same banks which are able to expatriate billions in profits per year, but can't protect NZ depositors.
The concern about moral hazard is grossly mis-placed in somehow blaming depositors for the situation.
Scene from Reality show:-
It’s 20 March 2013
"Prime Minister Poker Face Lock said the OBR policy was a "last-resort facility" and when told that few people seemed to know about it he responded that it was unlikely to be used."
A Bank Insurance scheme was fobbed off by the logic that it would make the banks become reckless and take unnecessary risk.
OMG that is why there are so many car accidents, home destructions and ship wrecks. The insurance companies have been exposed! It’s revealed, Insurance causes people to be sloppy and make accidents.
In the 2008 general world financial collapse ( The Super Heist ) “ Its was the raid the Public Coffers”, now that Governments resources and abilities are down to printing money ( bankruptcy – debasement of currency ) lets set up contingency plans for stealing depositors money called OBR especially if you can sell it as Russian depositors money. Hmmm make that North Korean deposit money here NZ.
Mr Hickey the fig leaf covers the fact that a double faced coin is used in the game and Joe Pleb is always the loser.
It isnt insurance though is it. ie the ppl who may cause the damage bank staff benefit from the actions that might cause the loss suffered by someone(s) else (depositors, shareholders and lenders). Those same someones or at least their equiv in another financial institution will take on that insurance, quite possibly knowing full well it wont be honoured due to the CDS ponzi schemes its parceled into.
regards
Personally I odnt see the OBR as a one bank event...I think it covers all of them going more or less at the same time. Given they have broadly the same risk profile, broadly the same ethos, and this is global then these factors will impact all of teh 4 or 5 all at more or less the same time...
So the choice is be in the deep poo like Ireland or not so deep poo like Iceland....presonanlly I choose the latter.
Wont happen of course too many grey power votes to be lost...
regards
I keep asking myself the same question .What is the real reason the NZ Govt refuses to re introduce the retail deposit guarrantee scheme? Forget the weak spin put out to distract us from the scheme! So these other countries with such a scheme in place have got it all wrong then? Did I see recently something like 100 b or over currently in NZ term deposit schemes.
What is commonly regarded as the safest investment with naturally the lowest return.Everybody is Ok with this. But with absolutely no form of guarantee accompanying these deposits. Something odd about all of this. Is this because this topic is of a really really sensitive nature in the scheme of things?
So in 2018 Prime Minister Joyce will tell a hell of a lot of NZ mums and dads that they should have known the risk of placing their well earned cash in a bank term deposit.So then what are NZ people expected to do with cash they have saved? I know .,..they could borrow at 5.19% and buy six rental houses.Great!..No..I know ..they could hide it under their mattress.No this idea would soon become common knowledge and there would immediately be some grusome robberies and home invasions.I know...they could put it on term deposit across the ditch. No ,,bad luck the banks there don't guarantee off shore deposits. Well then I could move to Australia trouble with this is NZ is where I choose to live.
I give in..
Good article Bernard but I would find it lighter reading if I could think that no no this scenario could never never happen.
I have to laugh. I wrote a long article on the New Zealand banking system and the OBR in 2011 as part of a diploma. No one in the MSM was interested. Only Scoop would publish it as opinion. A non-issue apparently :)
http://www.scoop.co.nz/stories/HL1111/S00130/what-is-the-position-of-new-zealands-big-banks.htm
FYI from a reader via email:
Good morning, Well I never ever thought that I would write anything in defence of the impractical intellectuals who run (word used loosely) the central bank, but there are some aspects of the Open Bank Resolution (OBR) that need clearing up. Consider carefully the full intent of the OBR ‘programme’: its aim is to ensure that customers, both big and small, both personal and business, are able to carry on with their 'normal' lives after an OBR event. Sure their deposits will have been ‘haircut’ by a percentage, but there are no subsequent restrictions on what they can do with the remainder of their funds and the remainder is also fully guaranteed by the Government, thus no further loss can be incurred. Should the bank under OBR be able to trade its way out of the crisis, and/or should the funds ‘haircut’ prove to be more than is required to cover shortfalls, then those excess funds will be returned to the original depositor. It is entirely possible that a depositor could get all their funds back. The alternative to this mechanism is that the bank closes and does not reopen: customers would have access to none of their funds thus no ATM, EFTPOS or internet banking facilities. Short story: no money! OBR is not a tax, as is being done in Cyprus, but rather a mechanism to protect all a bank’s customers in the event of a significant problem. A deposit insurance scheme may well ensure that all depositors eventually get their funds, but how do they exist or run their business if their bank is closed? Regards
Alan
Cheers. All good in theory.
What do you think will happen the day after the freeze is lifted?
And to the deposits in the other 3 big banks?
Bank runs inevitable. OBR will never be used. It's a figleaf to save
the banks having to pay deposit insurance levies
cheers
Bernard
It is laughable the idea that domestic and foreign depositors will calmly and rationally sit there and decide "oh well its only one bank, the rest are safe as houses" and not panic first and ask questions later by yanking their money from all NZ banks. The contagion would collapse the whole banking system in days without a broad government backed guarantee.
Neither the RB or consecutive governments have wanted to crimp bank profits by forcing them to hold more capital/reserves or impose any levies. Now that the banks have made themselves so systemically important they just laugh at moral hazard and warn darkly about the consequences if they are made "weaker". They have everyone over a barrell.
Oh lets stop pussy footing around. Nationalise the banks, sieze their assets, protect depositors and sack management. Thats what should happen and most likely would if our leaders had any balls. This way the banks know whats coming if they stuff up, total loss to shareholders and management, would make them more 'carefull out there'.
Dont forget banks have special privilge in our society, if they want that privilage to continue then we expect expediency,if they fail they get nationalised, profits stay in NZ, instead of being bleed dry, many businesses now have a chance.
Iain Parker for chief banker.
The idea of Kiwi Bank as both the Government's bank for its transactions and also a guaranteed depository for business and personal transaction accounts sans interest is a good one I think. No mortgage book or other lending. Term deposits etc that earn interest and mortgage lending left to trading banks and at own risk subject to OBR. Would protect the payment system too.
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