By Bernard Hickey
Do you think the money you have in a bank term deposit is government guaranteed?
If you think it is then you're not alone.
You're wrong, but you're not alone.
A survey conducted for the Financial Markets Authority by Colmar Brunton and published during Money Week found 52% believed the money in a bank term deposit was guaranteed.
To be fair, there was a period during the Global Financial Crisis from October 2008 to December 2011 when these deposits were guaranteed. Banks paid a fee for the privilege, but that scheme is over now.
Those term deposits are 'naked'.
So what would happen if a bank fell over?
Would you get all your money back and would the taxpayers of New Zealand step into to make sure you got all your money back?
The simple answer is we don't know for sure.
The Reserve Bank has created a system that would allow a bank to be shut down over a weekend and reopen after a restructure that could see those deposits given a 'hair-cut'.
This means the Reserve Bank would arbitrarily freeze a portion of the deposit to ensure the bank can open again on a Monday. You might eventually get all your money back. You might not.
This system is called Open Bank Resolution (OBR) and is designed as another option for the Government, if it chooses not to bail out a bank.
That's all fine and in line with what many central banks are doing overseas to solve the problem of moral hazard. That's the problem of where savers, shareholders and bankers bet they can take lots of extra risk because taxpayers will always bail them out.
Essentially these type of OBR or 'living will' systems being adopted around the world mean regulators and politicians are saying to these bankers and savers that they must understand there's a risk they could lose their money.
The idea is those savers and bankers will take that risk into account and demand an appropriate and probably higher return for that risk.
But this big bargain, which is designed to reduce the problem of 'Too Big To Fail' banks, all depends on savers and bankers actually knowing there is that risk of failure and loss. Those expectations need to be changed for the system to work.
New Zealand's bankers and regulators are well aware of OBR, but this survey shows that at least 52% of New Zealanders are not and that's a dangerous situation.
It means at least half of these depositors would expect the Prime Minister to force taxpayers in general to stump up to pay them out in full. That's a big expectation for any politician to stare down and even less likely when taxpayers have no idea they don't have to be on the hook.
It means that, essentially, there is currently an implicit government guarantee.
Hundreds of thousands of New Zealanders have over NZ$127 billion in bank accounts, yet they are effectively guaranteed for free by their fellow four million taxpayers. That's simply not fair on taxpayers in general who are in effect providing a guarantee they don't known about to a much smaller group of savers.
Bankers are also getting something of a free ride. It is an implicit guarantee without the deposit insurance fees they had to pay from 2008 to 2011.
The way to solve this problem of the implicit and unspoken guarantee that encourages yet more moral hazard is to inform the public.
The Reserve Bank is very good at public information campaigns and does a great job explaining how it operates monetary policy and manages our currency and payments systems. Shouldn't it also be explaining to those 52% of term depositors about how OBR works and the risks of a haircut?
It's true those risks are very small, but they are there and should be taken into account when savers accept a return for that risk.
It may mean savers demand a slightly higher interest rate, which would be the cost that bank shareholders would either have to bear or choose to pass on to borrowers in marginally higher rates.
Either way, it would be a better informed and less risky market for everyone - bankers, savers, regulators and politicians alike.
Now is a good time to have this type of public education campaign when financial markets are stable and our banking systems are seen as very strong and reliable. There is little risk of 'scaring the horses' at the moment. That would be a big risk if savers and voters were suddenly to find out all about the chances of an OBR haircut or a bailout on some nervous Friday night.
A frenzied press conference is the wrong way to explain this stuff.
This is increasingly relevant and pressing for Prime Minister John Key as he prepares for the G20 Leaders meeting in Brisbane in November. The Bank of England Governor Mark Carney explained this week that the leaders would agree at that meeting to global standards to ensure banks could be restructured without taxpayer bailouts - effectively a set of global OBRs.
The best type of public education campaign would be an explanation from the Reserve Bank and the Government together about what OBR means for savers and taxpayers.
A good system has been built. It works best when we all know about it and can use it.
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A version of this article was first published in the Herald on Sunday. It is here with permission.
28 Comments
I will admit to being mystified, no endevour/investment is risk free, why do ppl think this? Just because they have never suffered a loss? they have not died yet either, doesnt mean its not inevitable.
***shakes head***
Looking at that graph though I think its not just deposits ppl need educating on.
regards
When people carry on about the joys of Kiwisaver and how much they are socking away I ask them whether they realise that their provider is gambling on the stock/property market (ie whatever the funds are lodged in) going up continuously....and that there is no government guarantee on that money. Without fail they all look sick to think that its not guaranteed safe, and they argue that it is. Only one person has thanked me for pointing it out (they argued, went away looked it up, and the next time I saw them thanked me), they all on the whole just don't want to think of what could happen to those savings.
Its one of the main reasons we have stayed out of the scheme plus the fact that $$ bribery just doesn't work on us...in fact it makes us go in the opposite direction! We are socking all ours onto the mortgage instead and saving tens of thousands in interest. Once its gone in another 4 yrs (25 yr mortgage paid off in full in 9yrs) we continue our same $ saving habits and will have significantly more than what any scheme could provide (at which point I'll then start looking around for the 'safest' place to park it). The economy isn't going to be saved by the likes of us - we just don't waste money on consumerist spending.
In my book free money is free money and you are foolish not to take it when offered. Buying kiwisaver funds is not gambling , it's investing. It comes with risks that investors need to understand. I have been investing for 20 years and my average return is a lot more than the mortgage interest I have paid. Have seen some massive declines over that time (2000, 2007) but since we didn't panic and sell, those were paper losses only - just like the big gains recently are only paper gains since I have 20 more years until retiring.
If you're parAnoid on KS, then just join for a year, then take multiple 1 year holidays dec to dec every second year, which allows the 512 govt gift. So you'll get 3% from your employer every other year and the govt 512. Your Holiday can be used for extra mortgage repayment, so you hedge your bets both ways.
In my book free money is free money and you are foolish not to take it when offered.
Not all money is derived equally - the free version generally dilutes the value of the earned variety.
And that investment return you talk of has a lot of hot air surrounding the veraciy of it's maintenance and support system - namely US Federal Reserve QE. Read more
Sure, which is why a few months ago we sold the funds we bought on '07 (which was gambling/speculating) and used them to pay off the last of our mortgage. Most people should put enough into kiwisaver to maximize the free money (from govt and employer) and then put the rest towards the mortgage. We'll be lucky to average more than mortgage rates in the next few years I think (and risks are very high). But when the govt says here's free money I still maintain its foolish not to take it. One can always put it in a conservative fund.
Nothing is ever free, there is always a cost somewhere. Until they make it compulsory we will not be interested, when they do then count the years until the govt of the day nationalises it all, just like Muldoon did. That much loot lying around will be too good to pass up - it'll all be done in your best interests of course. We have no interest in being wealthy, as we have no kids to pass anything onto. Our named siblings get something as per our will, the rest of our siblings can go to hell.
I lived through the aftermath of the 87 crash - I was 16 - my parents lost their businesses because of its consequences on consumer spending. Didn't lose the house, but then everything was done to save it....we were minimalists before it was trendy (everything was sold, and I mean everything). Ever had a door as your dining room table (no chairs), bean bags as no lounge suite, or eaten dog food because that was all the meat that could be afforded? Or gone to school hungry and with nothing to eat during the day because you left it for the younger siblings? Well I have. I knew plenty of kids that went to shcool hungry and with no lunch - didn't see society giving a damn back then like they do now. Its why I swore I'd never have kids. Its also why I swore I wanted no part of chasing the almighty dollar, and so we haven't.
We don't expect there to be a pension scheme when we get to whatever age they set it to. But we also don't expect to sell our place (lifestyle prop 10mins from Dunedin, 2 houses, one a rental) for anything more than what we bought it for - ie its not our retirement plan if thats what you are thinking. In fact we have no intention of 'retiring' as we couldn't imagine anything so boring, we believe in euthanasia - so when I say we'll work till we die, well thats exactly what I mean - we'll decide when to cash out (we hold gun licenses for that purpose, plus varmint control of course). We eat our own meat, grow some veges, and all in all live a good life, its just not a modern consumerists life. We could do that if we wanted as we have 50% of our $$ spare each pay day, but, we just have zero interest in society and its problems, so happily ignore it all until the gov passes some law meaning we have to adapt how we live. Secretly, we're cheering on ebola as the best 'kick up the western lifestyle arse' that ever came along.
Our retirement plan is locked away in a cupboard and makes a loud noise. Thats our choice. You choose to chase the buck, good luck with that, but in my experience that has only bought misery.
have done without the table, and went on skip a day for meals. No bean bags, used old sallies blankets and duvets that were bedding w/ pillow heaped in pile if needed a "chair", normally just sat on the single bed got from the sallies for $10.
That's why I never trust government or company that promises to take care of me - at the end of the day when pay out time comes they're far more likely to point to the fine print and say "you don't qualify, not our problem"
Ahh a fellow person who understands. Yeah, one thing that living through it all after 87 was that I found out who my friends really were - funnily enough those whose parents also had businesses....we were all in the same camp so to speak. The wage slaves never knew how much business owners sacrificed so that they could feed their kids. It really peeved me that we were going hungry just so that the staff's parasitic offspring could eat - and then lord it over those of us who didn't during the shcool day - ahh the joys of a private Catholic school: great education, but staffed and studented by some real two-faced gitts.
That period taught me one thing: the only person interested in my well-being is me, so I might as well live and end it as I see fit, not how society says it should be.
Yeah nothing like being told how your staff deserve time off and work-life balance, when you're pulling huge hours just to keep things afloat.
Listening to the employees complain about having no cash, looking at their consumption based lifestyles, listening to the experts telling me I have to give them all my money because it's "fair" or because I might need if when I get to 60...65...75? IF they don't lose it in the meantime, because , yeah hey, they've done so well looking after everyone so far, right?
Only way to protect my own, is to own it. Otheriwse someone will just make an excuse to sell it to the next high bidder - and possession is 9/10 ownership...hey you want to buy back your country? Well work in my factory, pay these taxes...ha ha ha... how stupid do people have to be to believe that stuff
That's great. In the case where property prices fell and were stagnant for the rest of your life. do you think that there is any potential for you to feel jacked by the situation, especially if Kiwisaver provided spoils worth more than you have saved by paying off your mortgage faster?
Sh*t happens, its what makes life so interesting. We didn't buy with the notion of sometime in the future selling for a massive captial gain. Our property is not our retirement plan, its merely a place where we live for the time being. We could have rented, but have you seen the crap that passes for housing stock in Dunedin?!! We bought, we live, in time we may sell - and on that day whatever the price is, is what we get. So be it.....thats life.
The idea is those savers and bankers will take that risk into account and demand an appropriate and probably higher return for that risk.
But this big bargain, which is designed to reduce the problem of 'Too Big To Fail' banks, all depends on savers and bankers actually knowing there is that risk of failure and loss. Those expectations need to be changed for the system to work.
As Chalkie from Stuff points out, deception is a major issue in respect of investors seeking to determine the risk attached to personal cash investments. It seems institutionalised economy with the truth can be a major disclosure impediment.
Justice Paul Heath's long judgment on the fraud charges against South Canty directors Edward Sullivan and Robert White, and CEO Lachie McLeod, is well worth reading for its casual mention of some alarming stuff.
One of the big issues was the company's claim of a $150 million credit line from two big banks.
By April 2009 it was blindingly obvious South Canty could not get its hands on this money - the arrangement for $50m of it had expired, while in a letter the banks "made it very clear that drawings under the $100m three-year facility are not currently available."
That led to a whole bunch of arguments about prospectus claims of a $150m funding line, but there's another remarkable detail in the judgment.
In mid-2009, the company took legal advice about whether it had to disclose the block on its funding line to the stock exchange, where its bonds and preference shares were listed.
According to the judgment, former chief financial officer Graeme Brown said he had "received oral advice from a partner at Bell Gully, a firm of solicitors. He said he was told that the ‘draw stop' was not material because South Canterbury had no intention of making any request for funds and that it had no impact on liquidity."
Bearing in mind this is what the judge said Brown said Bell Gully said, it still boggles the mind that a reputable law firm could advise such irresponsible rubbish.
Sheesh, how could the non-existence of a claimed $150m funding line fail to be material?
For a start, why was it highlighted in prospectus documents if it wasn't material? The October 2008 debenture document drew attention to it alongside South Canty's BBB- credit rating, saying it had strong cash reserves "further supported by undrawn banking lines". Read more
Governments had created this expectation of guarantee, after bailing out banks and by having the guarantee scheme for a limited time, under which the infamous SCF bailout was effected. Now the OBR is a silent attempt by the government here to get out of that expectation, but they are scared to talk about it openly, because that itself may create another panic.
It is also naive to think that public can get the right price from the banks for the risk of unguaranteed deposits. The Banks work as monopoly and cartel, so any fair deal to the customer is a dream only.
The Government and Banks call all the shots. The only hope is when it comes to a crunch, the Too Big to Fail (Jail) rule will apply again and the Governments will ride to the rescue of the economy. The pattern has been set. Witness the continued support to the banks abroad with low(no) cost money being made available to them.
the only 2 types of guaranteed investments are:
(1) insured investments through a third party insurer - but that's limited to the value of your underwriter.
(2) "Government Guaranteed" banks, and then only specifically designated "savings accounts". And then it's still conditional (max payout, not necessarily on demand, and requires bank to meet some particular levels of operation that might result in no payout).
I have some funds in KS. Not a lot, just the normal 3 or 4% of PAYE wage. with the occasional kick-in to maximise the government rebate/matching.
It seemed the easiest diversification I could make, and at a modest risk that I didn't have to pay to police.
Can't be much worse than the old "goldline" policies that financial experts were swearing by back in the 80's
Did the people of Cyprus know they had their money in banks with an OBR policy? Of course not - that's why the hair cut was so effective! Only the russians were given some forewarning.
If the sheeple know their deposits are at risk and bank financial reporting/the media are up to task then there would be bank runs every time things looked a little dicey. Better the sheeple don't know?
For the virually 'risk free' levels of interest savers get in savings accounts, banks should be much better capitalised and in Australia banks are likely to have capital requirements raised shortly as a result of the Murray financial inquiry (deposits are guaranteed also).
Kiwisaver providers will be open to buy out when the TPPA is signed, all the money will go poof when companies go bankrupt. Why do people think its money they have when it isnt in their bank, its a big gamble. The markets due for a crash when the Chinese property bubble bursts. Since men die5 years earlier than women, this scheme is a boon for women, and its part of matrimonial property Better to buy Silver bars, or marry a rich women, theirs going to be a lot around after the government raises the retirement age. Money devalues 20% every decade, and you can bet a future National government will tax payouts.
I believe there is no certain thing. The investments I have might work out badly - or marvellously - and I might then get run over by a bus just as I come to utilise them. I think all of us need to provide for our futures and to expect others to fork up for us when we are old is quite presumptious. I think we all have a responsibility to invest in various ways accordingly to our ability.
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