The Reserve Bank says it will review its Open Bank Resolution (OBR) bank failure tool once the planned depositor compensation scheme is rolled out amid suggestions from the New Zealand Bankers' Association (NZBA) that the OBR will remain the Reserve Bank's primary resolution and depositor protection tool for large banks.
Bank lobby group NZBA makes this suggestion in its submission to Parliament's Finance and Expenditure Committee on the Deposit Takers Bill. The Bill will introduce a depositor compensation scheme (DCS) to cover bank depositors in the event of bank, or non-bank deposit taker such as a building society, failing. Depositors will be covered for a total of $100,000 per institution, per depositor.
OBR is a tool that could be used if a bank failed, as an alternative to a liquidation or a bailout funded with public money, that would keep a bank open for business. There's a detailed explanation on how OBR could work here.
'An extremely complicated and novel issue'
Describing OBR as the Reserve Bank’s current primary resolution tool for large banks, NZBA says it largely exists outside of legislation. NZBA goes on to say OBR was developed by the Reserve Bank to make use of general statutory management powers and was created to provide bank customers with potential ongoing access to their money if their bank failed.
"NZBA understands that, after the Bill is enacted and the DCS is created, the Reserve Bank intends to maintain OBR as its primary resolution and depositor protection tool for large banks. Even if a deposit taker enters liquidation, receivership or resolution, DCS payouts are only triggered if the Reserve Bank determines to issue a notice under clause 193 of the Bill," NZBA says.
"Under the Bill OBR continues to be built from legislated powers provided to the Reserve Bank, including inputs from the DCS, but will itself remain as an internal process of the Reserve Bank."
"However, OBR is technical, not well understood by the public generally, and was created specifically to serve a system that did not provide a Government deposit guarantee or insurance scheme to depositors. OBR is also entirely unique to New Zealand. This means there are no examples of OBR and a deposit guarantee or insurance scheme successfully co-existing," says NZBA.
"At a base level, therefore, meshing OBR and DCS, as well as the Reserve Bank’s new general resolution powers under the Bill and the overlapping ‘statutory management’ powers under the Corporations (Investigation and Management) Act 1989 that we understand are proposed to remain, is an extremely complicated and novel issue."
"NZBA submits that further Reserve Bank engagement and work should be factored in to resolve core concerns, before the DCS comes into force," NZBA says.
'Introduction of DCS will enhance the depositor protection provided by OBR'
Asked about NZBA's suggestion that the Reserve Bank plans to keep OBR as its primary bank failure and depositor protection tool for large banks after the DCS is introduced, a Reserve Bank spokeswoman says OBR is currently the primary tool to manage the failure of banks with more than $1 billion in retail deposits, which covers small as well as large banks.
OBR provides for a failed bank to remain open for business, with customers able to access their accounts the following business day, the spokeswoman says. She says the introduction of the DCS will "enhance the depositor protection provided by OBR," with depositors protected up to $100,000 per depositor per institution as part of the OBR process.
"Once the Deposit Takers Bill comes into full force, the Reserve Bank will be required to publish a statement of approach to resolution on expected resolution strategies for dealing with failed deposit takers. As part of producing that document, we expect to undertake a review of the current OBR policy settings. This would involve seeking the views of industry and other stakeholders," the Reserve Bank spokeswoman says.
Deposit insurance fund 'won't be big enough' for the largest banks
Speaking in interest.co.nz's Of Interest podcast in August, international financial regulatory consultant Geof Mortlock suggested the DCS might not be used if one of the country's biggest banks failed.
Mortlock said he anticipates a deposit insurance fund will be built up through levies paid by deposit takers over seven to 10 years. It's value might ultimately be equivalent to 3% to 4% of the total amount of deposits insured throughout the banking system.
"Realistically would it be used to facilitate a resolution for a very large bank? I don't think so because it won't be a big enough size to really make much of a difference to the resolution of the largest banks. In the case of the largest banks the resolution would probably take the form of some type of recapitalisation of a slimmed down version of that bank, or some kind of business transfer," Mortlock said.
"And some of the funding would come from shareholders' funds being written down, maybe some from bail-in, depending on how that is structured, maybe there might be a need for a contribution from the deposit insurance fund, but that would have to be capped at what it would have paid out under a least cost depositor payout. And I think realistically for a large bank it would be quite constrained in what a deposit insurance scheme could really contribute."
Any need for a government bailout using public money would depend on the extent of losses.
"If the large bank that is failing has got a pretty significant capital base, and if it does have a tranche of contractual bail-in debt, that might be sufficient depending on just how big the losses are, that might be sufficient to finance the resolution of it without the need for government funding," said Mortlock.
"If the losses are very deep, and if the government did not want to go beyond any contractual bail-in debt, so if it did not want, for example, to apply a haircut to wholesale funds through a statutory bail-in mechanism, then some form of government resolution funding might be needed."
"If you look at Britain or Europe they have a separate systemic resolution fund that the large banks pay into designed to cover this sort of situation. Other jurisdictions such as Australia have an ex-post systemic resolution funding mechanism, so there's no ex-ante systemic resolution fund paid into by large banks in Australia. But the government has a pre-appropriation mechanism in law that enables funding to be used for, potentially, large bank failures," said Mortlock.
"But the aim should always be to minimise the amount of taxpayer funding that is put in, to try to fund the resolution as much as one can through the balance sheet of the failed entity."
In the Government's Half-Year Economic and Fiscal Update this week Treasury noted Cabinet has agreed to implement a DCS with a target timeframe of 2023/24. The Deposit Takers Bill has been introduced to Parliament and is at the select committee stage.
"The DCS will be administered by the Reserve Bank of New Zealand and will be fully funded over time by levies on licensed deposit takers," Treasury says.
"The funding framework for the DCS will be determined through a funding strategy and levy regulations set by the Minister of Finance. The funding strategy and levies are expected to be determined prior to implementation of the DCS."
The Reserve Bank expects the Bill to come into force in mid-to-late 2023.
What about bail-in standards?
Meanwhile, NZBA notes the potential for bail-in standards is included in the Bill. This is even though it emerged in February that the Government had decided not to give the Reserve Bank statutory bail-in powers.
Bail-in powers are designed to help authorities recapitalise failing financial institutions quickly, helping restore viability and capital ratios above regulatory minimums. Statutory bail-in is a resolution tool where unsecured liabilities may be written down or converted into equity. Bank liabilities typically include deposits and bonds. The idea is the costs of a deposit taker’s failure would therefore fall on its investors and creditors rather than the public purse.
"The Reserve Bank’s recent capital review expressly removed all contractual bail-in instruments from recognition as regulatory capital, setting New Zealand apart from international practice on the basis that instruments with contractual bail-in were not considered appropriate in the New Zealand context," NZBA says.
"Further guidance (and, given the cost to deposit takers already incurred to move away from contractual bail-in, consultation) is needed if bail-in instruments are being considered for reinstatement."
"The Bill should also be clarified that any required contractual bail-in is not retrospective and will not affect existing instruments, either by deeming amendments to be made to the contractual terms or requiring issuers to change those terms. Without such clarification there is a risk of confusion and undue concern for existing investors," says NZBA.
Although there have been no bank failures in New Zealand in recent years, there have been banking crises in the past, and much of the finance company sector dissolved between 2006 and 2012.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
25 Comments
What's the bet that the housing ponzi causes such an 'event' before any of these protections are in place? It seems almost certain that there will be an event before the 7-10 years have passed to build that (somewhat feeble) 3-4% pot of reserve funds.
So for Joe Average in the longer term, 'protection' may be in the form of splitting his monies into 100K deposits in seperate banks (protected by OBR and without DCS), and any sum over that amount could then be deposited with DCS, which likely means it will be deposited at a lower interest rate... but in ... Read more
What's the bet that the housing ponzi causes such an 'event' before any of these protections are in place? It seems almost certain that there will be an event before the 7-10 years have passed to build that (somewhat feeble) 3-4% pot of reserve funds.
So for Joe Average in the longer term, 'protection' may be in the form of splitting his monies into 100K deposits in seperate banks (protected by OBR and without DCS), and any sum over that amount could then be deposited with DCS, which likely means it will be deposited at a lower interest rate... but in theory is safe.
This might be good for getting more depositors into the smaller banks and ultimately growing their share of the market.
Read lessPretty much sums this comment in the article.
"However, OBR is technical, not well understood by the public generally"
But definitely not the publics fault.
Also the article notes OBR is there to protect the depositors access to funds, but no mention of the likely shrinking of those funds because OBR is the antithesis of this.
And the sad thing is, the OBR doesn't discriminate. By that, I mean someone who has saved $150k from their salary over 20 years will get just as much of a haircut as someone who has $150k sitting there from the sale of overvalued property, funds handed over by FHB scraping through with a mortgage. The latter being more likely to contribute to an OBR event.
It won't. In an OBR event the bank goes into Statuatory Management (SM) at say 5pm on a Wednesday. Bank workers provide a list of assets and liabilities to the SM, Some assets are in scope for a "Haircut". How big that "Haircut" is depends on the state of the bank. Lets say its determined to be 15%, well 15% of all the assets that can be cut get taken from their rightful owners and swept into a refunding acc inside the bank. The SM and Government may need to add additional funding as well.
The bank opens the next ... Read more
It won't. In an OBR event the bank goes into Statuatory Management (SM) at say 5pm on a Wednesday. Bank workers provide a list of assets and liabilities to the SM, Some assets are in scope for a "Haircut". How big that "Haircut" is depends on the state of the bank. Lets say its determined to be 15%, well 15% of all the assets that can be cut get taken from their rightful owners and swept into a refunding acc inside the bank. The SM and Government may need to add additional funding as well.
The bank opens the next day, you can access your money less the 15%.
If things are ever made good you may get your haircut back.
There is a concept inside the law that calls for a de minimus (an amount which will be left uncut, lets say it might be $10k) again its up tot he SM
Very bad luck if you have just received funds for a house sale.
Bank reopens the next day as if nothing has ever happened. All the c-suite are missing they have been replaced by the SMs team.
Banks have to practice this once a year, most IT systems are pre positioned for the haircut, having worked on this stuff personally.
https://www.treasury.govt.nz/sites/default/files/2013-04/di-2282497.pdf
Read lessIt actually the liabilities i.e. retail deposits, wholesale funding etc, that are "in scope" for the haircut, NOT the assets. The assets are simply being re-evaluated to determine whether their likely actual value e.g. should the $600,000 residential loan that is 3 months in arrears and secured over a property whose value is now less than $600,000 really be valued in the banks accounts at $600,000 or would a lesser figure be appropriate.
The assets/haircut are NOT "taken from their rightful owners...". All that has happened in the first instance is that the value of those assets has been written down ... Read more
It actually the liabilities i.e. retail deposits, wholesale funding etc, that are "in scope" for the haircut, NOT the assets. The assets are simply being re-evaluated to determine whether their likely actual value e.g. should the $600,000 residential loan that is 3 months in arrears and secured over a property whose value is now less than $600,000 really be valued in the banks accounts at $600,000 or would a lesser figure be appropriate.
The assets/haircut are NOT "taken from their rightful owners...". All that has happened in the first instance is that the value of those assets has been written down to better reflect their market value at that time.
Read lessI'm just going with my gut feeling and that is the government would be forced to back the banks anyway to prevent total riots in the streets. Lets face it society as we know it would totally collapse if the banks folded. At the end of the day its just a load of numbers so you either fix it with a load more numbers or you get a complete breakdown. The numbers don't really exist anyway and society carries on as normal.
Carlos- agree with your gut feeling especially if the Bail in occurred during a recession with the more intelligent and resourceful members of society now having more time to plan and execute for whatever their perception of revenge or retribution is on those deemed responsible who may see Pitcairn as a more attractive new home than Sandringham.
It makes me wonder what is so fundamentally different to banking in NZ that we need an OBR, when so far deposits are not guaranteed anyway to any amount worthwhile mentioning.
Somehow, we must be eons behind the rest of the world who has much better depositor protection in place.
Meanwhile, we are experimenting with rules and regulations outside the law.
There are deposits held by institutions. I understand these will not be protected by the deposit scheme. As such these will be subject to OBR so if you have a kiwisaver or a unit trust investment you'll take a haircut, the shortness of which will depend on the specific fund deposits.
perahps someone with better knowledge on the matter can comment.
An excercise done by RBNZ should give an estimate of the amount of funds held by institutions which would be subject to OBR. Obviously this is a moving target but could be done monthly to give at least some idea of ... Read more
There are deposits held by institutions. I understand these will not be protected by the deposit scheme. As such these will be subject to OBR so if you have a kiwisaver or a unit trust investment you'll take a haircut, the shortness of which will depend on the specific fund deposits.
perahps someone with better knowledge on the matter can comment.
An excercise done by RBNZ should give an estimate of the amount of funds held by institutions which would be subject to OBR. Obviously this is a moving target but could be done monthly to give at least some idea of the situation.
In addition any financial institution should publish monthly its funds held which would be subject to OBR. That'll put the cat amongst the pigeons if joe public do not understand OBR. Likely to lead to large scale withdrawal of funds from financial institutions.
In the event of an OBR as I understand the bank should be back in "operation" within 24h or certainly no more than 48h. I don't believe it for a minute. Not less than a week and a cap put on the amount one can withdraw. I'd bet on an absolute withdrawal amount rather than % of your funds held while RBNZ run around like a cat on a hot tin roof deciding what to do.
Read lessThis is incorrect, Most bank kiwi savers are run inside a seperate company structure. So they are NOT IN SCOPE for an OBR haircut. They maybe marketed as that banks kiwisaver product but take a closer look at the fine print re the investment management company, which also has independant management, with a duty to their investors.
i thought Sir john said everything would be.... hunky dory. Why all the concern?
Every day each bank has to report to the reserve bank liquidity reports showing assets and liabilities. There is likely to be a lot of warning if its property causing ... Read more
This is incorrect, Most bank kiwi savers are run inside a seperate company structure. So they are NOT IN SCOPE for an OBR haircut. They maybe marketed as that banks kiwisaver product but take a closer look at the fine print re the investment management company, which also has independant management, with a duty to their investors.
i thought Sir john said everything would be.... hunky dory. Why all the concern?
Every day each bank has to report to the reserve bank liquidity reports showing assets and liabilities. There is likely to be a lot of warning if its property causing the headaches, also the Aussie parent banks have a lower percentage of loans to residential lenders so they should, in theory, be well placed to help their NZ bank through any tough periods.
Read lessThe Government has acquired 100 percent of Kiwibank's parent company, Kiwi Group Holdings (KGH), ensuring the bank remains fully Kiwi-owned. (beehive.govt.nz 22.08.22) . Presently it would appear that 1 bank would likely have no problem getting a bailout from the taxpayers ...because its owned by the taxpayers...further does this bank even need a depositor insurance scheme ?. So why do folk choose to bank elsewhere? Maybe Kbank should make it quite clear that if your not banking with the Kiwi owned bank your taking risks... Why should the government be concerned about other banks? Why not throw all those that chose ... Read more
The Government has acquired 100 percent of Kiwibank's parent company, Kiwi Group Holdings (KGH), ensuring the bank remains fully Kiwi-owned. (beehive.govt.nz 22.08.22) . Presently it would appear that 1 bank would likely have no problem getting a bailout from the taxpayers ...because its owned by the taxpayers...further does this bank even need a depositor insurance scheme ?. So why do folk choose to bank elsewhere? Maybe Kbank should make it quite clear that if your not banking with the Kiwi owned bank your taking risks... Why should the government be concerned about other banks? Why not throw all those that chose to bank with the Ozzies to the wolves.... Time folk put more thought into who they do business with. Last point ... Has anyone received a Xmas gift from their lenders or their utilities provider ? Was a time when a calendar or key ring turned up in the mail.... Worlds turned into all take no give place in the last few decades...sad.
Read lessI view it as a lower order bank. (I do have investments with it). IT not upto scratch with a particular investment type.
05 April, 2018 16:29 Parliament's Finance and Expenditure Committee has grilled Kiwibank over the state and fitness of its core banking system after the bank wrote off a four-year, $90 million investment in SAP software last year. "We do not believe we have received a satisfactory account of the reasons for the decision to discontinue the project," a committee report from last month said. After the write-off, the only component of the CoreMod replacement project to go live ... Read more
I view it as a lower order bank. (I do have investments with it). IT not upto scratch with a particular investment type.
05 April, 2018 16:29 Parliament's Finance and Expenditure Committee has grilled Kiwibank over the state and fitness of its core banking system after the bank wrote off a four-year, $90 million investment in SAP software last year. "We do not believe we have received a satisfactory account of the reasons for the decision to discontinue the project," a committee report from last month said. After the write-off, the only component of the CoreMod replacement project to go live and remain in use is an SAP payments engine, which has been operational since 2015. Apart from that, Kiwibank is still reliant on Australian software called Ultracs, which it has used since it was founded in 2001. A Kiwibank spokesman told Reseller News last month that Ultracs had received a number of upgrades over the last few years to ensure its stability and resilience.
There's more but this should be suffcient for Scottnip to re-assess
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