The National-led government ought to force the Reserve Bank to abandon its "Cyprus-style solution" to any bank failures in favour of an Australian style deposit insurance scheme, Green Party co-leader Russel Norman says.
Over the weekend financially stricken Cyprus said it would impose a levy of 6.7% on bank deposits of up to €100,000 and 9.9% thereafter as part of a €10 billion bailout by the European Union. Here in New Zealand the Reserve Bank is moving to add an Open Bank Resolution Policy (OBR) to tools it could potentially use in the event of a bank failure.
The implementation of OBR would see all unsecured liabilities that rank equally among themselves, including deposits, having a portion frozen. The Reserve Bank says the OBR policy could save taxpayers' more than NZ$1 billion regardless of whether there is a bank failure or not.
However, Norman points out that if a bank fails under OBR, all depositors will have their savings reduced overnight to help fund the bank’s bail out.
“(Finance Minister) Bill English is proposing a Cyprus-style solution for managing bank failure here in New Zealand - a solution that will see small depositors lose some of their savings to fund big bank bailouts,” Norman said.
“While the details are still to be finalised, nearly all depositors will see their savings reduced by the same proportions"
“Bill English is wrong to assume everyday people are able to judge the soundness of their bank. Not even sophisticated investors like Merrill Lynch saw the global financial crisis coming," added Norman.
“If he (English) insists on pushing through this unfair scheme, small depositors can be protected ahead of time with a notified savings threshold below which their savings will be safe from any interference.”
But Norman questioned the Government’s insistence on pursuing OBR given few other Organisation for Economic Co-operation and Development countries use it, instead opting for deposit insurance schemes. In Australia bank deposits are protected up to A$250,000 per person per institution. The Aussie scheme evolved out of the country's retail deposit guarantee scheme, which was introduced at the height of the global financial crisis in October 2008.
Aussie depositors also benefit from the preferred status granted to Australian depositors over other unsecured creditors in the event of the insolvency of an Australian authorised deposit taking institutions. This legislative provision is referred to as depositor preference.
New Zealand's own Crown retail deposit guarantee scheme ran for 38 months from October 2008 until the end of 2011 and cost taxpayers' around NZ$1 billion largely due to the demise of South Canterbury Finance.
“A deposit insurance scheme is a much simpler, well-tested alternative to Open Bank Resolution. It rewards safe banks with lower premiums and limits the cost to taxpayers of a bank failure," said Norman. “Deposit insurance will, however, require the Reserve Bank to oversee and regulate our banks more closely, a measure that is ultimately the best protection against bank failure.”
Debt for equity swap
Christian Hawkesby, Harbour Asset Management's head of fixed income, points out that although the Cyprus levy on bank deposits is being described as a special tax on deposits, in practice it's actually a debt for equity swap. This means the depositor exchanges a proportion of their deposit for a shareholding in their bank.
"This helps the bank recapitalise its balance sheet. The depositor shares the burden of the bank failure, but can benefit from an eventual recovery in the banking sector," said Hawkesby.
He said this type of debt for equity swap is one tool the Reserve Bank wants at its disposal as part of its OBR policy.
"The beauty of having this tool available in peace time is that provides depositors with a strong incentive to ensure their bank is sound, and this acts as a discipline on banks. It reduces the moral hazard of expecting a government funded bailout," Hawkesby said.
Making policy on the hoof
"The problem with the Cyprus rescue is that it is highly unusual for policymakers to introduce new policies to deal with moral hazard in the middle of a bank collapse, when their priority is normally crisis management and minimising spillovers to the rest of the system," added Hawkesby.
"In fact, as well as sending depositors into Cyprus onto the streets to withdrawal their funds, international markets are now worried that bailout conditions for other countries could be renegotiated on these tough terms."
All locally incorporated banks with retail deposits of more than NZ$1 billion are required to pre-position their technology and banking systems to meet Reserve Bank OBR requirements by the end of June this year. This includes banks ranging from newcomers the Co-operative Bank and Heartland Bank right through to the country's biggest bank, ANZ New Zealand. See all our OBR related stories here.
The Reserve Bank says the key processes of OBR would include the following phases:
• imposition of statutory management;
• closure of access channels and freezing liabilities;
• freezing a portion of pre-positioned customer accounts and freezing all other creditors’ claims in full (overnight process);
• bank re-opens for core transaction business and allows customers to access the non-frozen portion of their funds;
• release of an equivalent portion of all other liabilities in due course;
• release of additional frozen funds, if available, following more accurate assessment of losses; and
• decisions on the bank’s final resolution.
The chart below, sourced from the Reserve Bank of Australia, shows deposit guarantee arrangements in selected jurisdictions.
(Updates add RBA chart, comments from Christian Hawkesby, detail on the Australian deposit guarantee scheme).
57 Comments
Finally a politician is on to this. Go for it storming Norman. If Labour has any sense they will get onto this to. This idiotic policy must be stopped in its tracks.
As for a deposit scheme costing the taxpayer - simple, make the banks pay for it. Shareholders and bondholders must take the pain when a bank gets into trouble, NOT depositors.
I get the impression John Key expressed a similar opinion today. Read article
State-owned Enterprises are not government-guaranteed and the banks that lent to Solid Energy should expect to wear the loss, Prime Minister John Key says.
The Government has said it won't let the company fail, but Key today made it clear that didn't mean it was picking up the total bill.
"The banks will definitely have to wear some of the loss," Key said.
"If anyone thinks that we're just going to accept all of the loss and let the banks off scot-free, they need to think again."
"I don't think New Zealanders would want me to sit there and say to Australian-owned banks 'by the way, you can make lots of money on every deal that does right, and if it goes wrong I'll pick up the tab'."
It's great for Key to say that but it doesn't stack up with his other statements or actions ie saying he would not do anything that affected house prices or Telecom/Chorus shares detrimentally. Like to see him say explicitly no corporation or bank will be government guaranteed or its profits and dividends
I think he just babbles whatever he thinks most people want to hear. PR speak. Say one thing for public consumption but don't back it up with action that really affects the status quo. Like Obama's call for "Change". Nice words delivered eloquently but really, empty and meaningless promises.
I agree Mist and the banks should have to hold a certain amount of assets slighty higher than their depositors funds. Instead of selling all the mortgage intruments off which is current practice they should be made to keep a proportion of these instruments in the asset fund of which depositors would instantly own a share of equivalent to the amount of their deposits.
Depositors should be able to have the same security over assets that the banks or any other business requires.
Banks already leverage heavily off depositors funds and I think it would be prudent for the RBA and Government to require this simple yet effective mechanism.
but andy, Just who is the backstop? ie who does the bank hand over $s to for the cover? Us the tax payer? be serious how does that help things? Just how are premiums calculated? From my perspective its a dead cert for a failure inside 5 years so a 25% premium? (Greece is at 33% right now I think) who'd pay that? so 1%? the banks wont even pay that. What happems to the moral hazard? (not that there is much evidence of that now anyway).
Not depositors, well, at least depositors have the money in the bank knowingly, tax payers expected to bail out the depositors are captive.
OBR is actually I think the best way, or maybe the lesser fo several evils.
The Q is why are so many voters not holding the Govn(s) they voted in accountable for the mis-management? Oh wait of course all the political parties are doing the same thing, like lemmings or doing pork barrel politics...handouts to those same voters.
regards
It's hardly likely that when a bank doesn't have enough money to pay it's debts it will be in any position to fund any kind of deposit scheme.
Norman's logic seems somewhat circular. Depositors, especially small depositors, are the very same tax payers who are going to guarantee their own deposits.
The insurance idea is a good one, but could be better. Insure the depositors funds, and for any payout they must go to the depositor, not the bank. If the Bank must go under let it! i am very sick of over paid wallies with egos significantly larger than their abilities getting bailed out by Governemnts when they have screwed the pooch because they are good at playing politics rather than serving their customers.
While yes, the problem is if a bank closes then no one gets to eat, hence the idea of an OBR.
The bad assets/problems are seperated from day to day banking and hence we can use eftpos to buy food, and pak-n-save can buy it wholsale, and wholesale can buy it off farmers/producers etc etc.
Depositors are in effect shareholders, they have put their money knowingly in a bank and and received profits as interest and there is a risk of loss involved in all investment.
regards
Depositors are in effect shareholders, they have put their money knowingly in a bank and and received profits as interest and there is a risk of loss involved in all investment.
Depositors are not shareholders - they are unsecured creditors, hence deprived of any voice in determining bank policy. The interest rates on offer for the assumed risk you mention are derisory - if the RBNZ was not authorised to artificially set the OCR bank deposit rates would more adequately reflect the risks of bank policy -such as high LVR mortgages, just as a stock market does for shareholders when corporate incompetence is detected.
Steven, you don't seriously expect every single depositor to seek financial advice every time their bank issues a new credit default swap or enters a futures contract? It's up to our regulators to ensure the soundness of our banking system, not the likes of you and me.
coming to a town near you? Via Golem
Semi-government Organisations
1. State-owned enterprises will be listed in an inventory and considered for divestment, liquidation, privatisation or restructuring, depending on the financial health of the company in question.
2. By the end of 2013, state-owned enterprises will have to reduce their running costs by at least 15 percent versus 2010.
3. If necessary to restore debt sustainability, the authorities will consider a privatisation programme for state-owned and semi-government organisations.
The west will liqidate the Cyprus banks and insurance companies and will bring own ones. Just small example. Cypurs state will be in permanent need of cash to cover its deficits because of its weak economy. The source will be, of course: IMF.
Maybe we need to urgently stop publc money being transferred to private interests to facilitate utopian extravaganzas way beyond the capacity of ill-informed but nontheless captured rate payers to underwrite. Read article
A new $36 million plan for a stalled aquarium development on Wellington's south coast has been revealed.
The Wellington Marine Conservation Trust this morning unveiled its new plan to the Wellington City Council, four years after its original project was scuppered by the Environment Court.
The council had pledged a $7m interest-free loan for the construction of the Te Raekaihau centre and spent about $700,000 on the plan.
It is very difficult, even for well organised ratepayer groups, to stop these Council funded boondoggles. In Cambridge, Waikato, they are currently building the National Cycling velodrome in the grounds of a private school. There was huge ratepayer opposition to this project but both Waipa D.C and Waikato Regional Council both ended up putting in funding. The only way Councils can be stopped from wasting ratepayers money on these extravagant projects is if Gov't legislation prevents spending on all non-essential projects.
And getting worse
Good grief Ralph open your eyes. On average NZ bank assets exceed shareholder funds by nearly THIRTEEN TIMES:
http://www.interest.co.nz/saving/bank-leverage
We also have private and farming debt up to our eyeballs. We don't need any Russian involvement to boost our debt to unsustainable levels.
I can think of anyone of a number of scenarios that would make that situation unstable very rapidly (or have you already forgotten 2008?).
I know this won't cheer you up - but - in the wider scheme that's not bad.
Tier one capital ratios in Europe:
Credit Agricole SA - 62.9x
Deutsche Bank - 51,7x
Societe Generale - 33.1x
Barclays LC - 31,9x
US Banks:
Bank of America - 13.9x
Morgan Stanley - 13.8x
Goldmand Sachs - 13.6x
And yet the US Federal Reserve remains unconvinced of banks' ability to stand alone.
- From December 2008 to August 2010, to help reduce the cost and increase the availability of credit for the purchase of houses, the Federal Reserve purchased $175 million in direct obligations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In addition, from January 2009 to August 2010, the Federal Reserve purchased $1.25 trillion in mortgage-backed securities (MBS) guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Detailed transaction level information for the MBS purchase program is available at the link below.
- From March 2009 to October 2009, the Federal Reserve purchased $300 billion of longer-term Treasury securities to help improve conditions in private credit markets.
- From November 2010 to June 2011, the Federal Reserve further expanded its holdings by purchasing an additional $600 billion of longer-term Treasury securities.
- Starting in September 2012, the Federal Reserve further increased policy accommodation by purchasing additional MBS at a pace of $40 billion per month.
- Starting in January 2013, the Federal Reserve began purchasing longer-term Treasury securities at a pace of $45 billion per month, following the completion of the maturity extension program in December 2012.
- Currently, the Federal Reserve also purchases MBS under a policy announced on September 21, 2011, in which principal payments from its holdings of agency debt and agency MBS are reinvested in agency MBS.
Our banking system is not used by Russian Mafia as a clearing house.
No it's not Ralphie but it is well used by the Tong Laundry Co.( Investment Arm.)
Inevitabley, it's a proposal to socialise losses incurred by Banks, spreading the load beyond the share/ bond holders.
Essentially Engish is of the notion that any deposit holder with a bank is an active participant in it's fortunes and losses, now that is a nonsense as shareholders ,debenture/bondholders are not viewed by the Banks as cannon fodder when the shooting starts.
I take that onboard Ralph, that it is a hypothetical scenerio...unfortunately, life has a nasty habit of imitating art.
Those who saw no sense in QE, myself included, the offering of the public teat though financial instruments , until the long game starts to play out.
The U.S. print and partly to make their export produce more competitive, while their competetors initially respond with cries of foul , soon they join the game and those who are in a position to refrain find themselves within two short years increasing their investment holdings in U.S. dollars just to maintain some balance.
China, this year having done so despite the position of contempt they hold the U.S. economy in.
Now was that a byproduct of QE or an intentional goal in part..captured money Ralph.
As it plays out though I am left wondering just how the Central banks are going to wean the brat that is the Financial Market.
Cheers for your response , nice to see you in there.
Under the current system a deposit guarantee just gives a green light to banks to take risks knowing they are too big to fail and too systemically important via the payment system. The OBR assumes that everyone will access a banks financial disclosure document, read it, analyse and understand it and assume it is accurate and not fudged. Pretty unrealistic assumptions.
Separate the payment system from the trading banks and ring fence deposits with designated savings accounts held at the Reserve Bank on behalf of account holders but accessed via a banks internet portal.
Want 100% guarantee - no interest. Any investment product at a bank earning interest is at your own risk like any other investment. Level playing field.
OBR would oversee the liquidation but the payment system and savings accounts would be unaffected. Banks would hate it because it removes their armegeddon threat to the economy they blackmail us all with.
Or.. make banks what they were intended to be, companies which offer transaction services and saving services, nothing more. no more risky lending, no more creation of currency, let us kiwis create our own currency instead of being indebted to multi-million bank managers.
Totally, Kiwibank is there now, it is not currently foreign owned and could just provide basic transaction services for citizens. You want interest on your current account, take your chance with an Aussie bank that can't print NZD.
Replace Westpac with KiwiBank for Govt banking for IRD etc, might take some up skilling but i am sure it could be done.
Eftpos and all other electronic banking is now the the norm, and required for most transactions.
Either let people deal in Cash or provide an alternative to being nickel and dimed by Aussie banks.
If one or more of New Zealand’s big banks fails it will almost certainly be bailed out regardless of Reserve Bank doctrine. The precedent has already been set and Australia’s recent permanent deposit guarantee scheme threatens a mass exodus of depositors from New Zealand banks to their Australian counterparts. For the Reserve Bank and Bill English to think otherwise is surely naïve. The time to have addressed moral hazard and enforce market discipline on the banks has long since passed, unless they intend to break up the goliaths into smaller less systemic organisations.
Even that champion of the free market Don Brash has altered his purist views. “I was very keen not to acknowledge, even to myself, that any institution was too big to fail, but try as I might I could not escape the conclusion that the closure of any one of the four would have unthinkably grave consequences for the New Zealand economy as a whole, and would not, indeed should not, be tolerated by any New Zealand government” and goes on to say “I have some sympathy with the view of Nassim Taleb, the author of Black Swan, who early in 2009 wrote ‘Nothing should ever become too big to fail…Whatever may need to be bailed out should be nationalised; whatever does not need a bailout should be free, small and risk bearing.’” As one of the architects of the original deregulation, this is a big admission.
http://www.scoop.co.nz/stories/HL1111/S00130/what-is-the-position-of-new-zealands-big-banks.htm
Perhaps our government are playing chicken with the Aussie Banks; and tactically that just may be optimal. If we adopt something like the Aussie insurance scheme, then we ask the Aussie banks (and Kiwibank) to pay a percentage of their deposits into an insurance fund, but fully expect them to on charge that extra percentage to their customers either in lower interest out, or higher interest in. So we pay.
Under an OBR (Cyprus like) policy, assuming that one bank (being a NZ subsidiary of an Aussie bank) fails, it could legally presumably steal money from depositors to make up the shortfall. That though would be a massive reputational risk to their parent bank in their home market; such that in reality, the parent would most likely top up its NZ bank's capital, as it should. If Kiwibank failed, I would similarly expect the NZ govt to top it up, rather than steal from depositors- the political risk of not doing so would be too high. In this scenario, the shareholders pay, and that is all good.
If the Aussie parent bank failed, that would potentially be a bigger problem; but here the solution in my view should be to ensure the NZ subsidiary is self contained enough not to have to repatriate its assets. I understand the RBNZ has such rules with the NZ subsidiaries.
The fact that Australia has taken a different approach is valid; they are their banks, and they have most of their business in Australia.
Curious as to who underwrites all these insurance schemes. AIG? If there was a cascading systemic failure how could any fund cope?
I think reputational risk is overstated. Once the executives have their salary and bonus in the bank (probably not their own) or property, do they really care about the reputation of their corporation or even their own. Millions of dollars and an overseas bolt hole can ease a lot of reputational damage
I understand the Aussie government underwrites their insurance scheme (but could be wrong). They are taking in the premiums, and could worst case of course print extra Aussie dollars to sort things out in their market.
Your point on reputational risk is valid; though here I think it would be wider than just reputation. My hope and expectation is that a NZ banking licence is somehow dependent on being able to meet any deposit claims. The Aussie banks probably rightly value their NZ susidiaries in the tens of billions of dollars. That would be a big write off to make in the event of a default.
So I'm not sure we should be paying them extra to protect themselves; they take a very healthy dividend out thank you very much already.
For what its worth I also believe the chance of a default by any of the big 5 is very remote; even if the housing market came down by say 30-40% (also fairly unlikely).
With just the Commonwealth Bank supposedly being bigger than all the banks in Germany by capitalisation, good luck to the Aussie government on underwriting their banking system. At present NZ and Aussie banks have zero deposit reserve requirements, only Tier 1 capital, stuff that can hopefully be liquidated and converted to cash quickly. In a crisis good luck getting 100 cents on the dollar.
On reputation, Don Brash, who should know, said in an interview about NZ's banking system -
“Self regulation works provided the people doing the self regulation have their proverbial's on the line. If they’ve got nothing to lose they’ll gamble with your money if they can. So you have to be in a position where you lose your shirt, you get absolutely thrashed…. If you think there is no downside in taking any position you eliminate any caution or prudence.”
It reduces the moral hazard of expecting a government funded bailout," Hawkesby said.
Nobody seems to mind the execution of moral hazard undertaken each time one of the Australian owned NZ banks secures super cheap funding in the US rule 144 market probably from a primary dealer credit recipient of freshly Fed monetised US Treasury debt.
Now come on Ralphie, that is just sooooo not you.....Norman has just done what you would want a probing opposition to do, in presenting a reasoned response while asking the questions we would expect to be asked, but are so often not, when left to the Invisible Man with the invisible offshore bank account .
He's just at the very least doing his job Ralph, and when it comes to the pigs at the trough it's a step up from being head down in the swill.
The precedent being set by this event is monumental and inescapable provided one has any money deposited in any bank, anywhere! And that means all of us...
Why are people not marching in the streets? ...supporting the Cypriots!!
Not even gold deposits will be safe...
HGW
PRINCIPLES OF MORDERN BANKING AND FINANCE:
1. Dont trust any Bank
2. Don't trust any politician...especially your Prime Minister or Finance Minister .
3. Keep only the minimun cash in your bank account necessary for banking transactions.
4. Keep a maximum amount of cash that is safely possible to keep (eg safe deposit box)
5. Keep an overseas foreign currency account that you can safely and quickly transfer cash into.....(yes it can be done)
6.Keep an internet stock trading account that can be access via internet instantly.
AT THE FIRST SIGHT OF TROUBLE :
a. Transfer ALL the monies from your bank account to your creditors/employees for payments. This will enable you to keep in business in the event the banking system is shut down, not to mention the gratitude of your creditors and employees.
b. Transfer ALL other monies out of the country in another currency into your overseas account.
c.In even b. above cannot be done, buy any stock possible using your share trading account and transfer ALL your cash into Shares. This way, you have excess to cash later when your sell your shares. At least it prevents your cash from being consficated in event of a Bank failure.
d. Spend monies from your safe deposit box slowly......
Could the OBR policy have a silver lining for exporters?
ASB Institutional Head of FX Sales Tim Kelleher said the kiwi seemed to be "struggling" after news of the OBR plan was posted on a well-known United States website.
"We think that the dairy offer's been ignored due to the news of the Open Bank Resolution," he said.
http://www.stuff.co.nz/business/market-data/currencies/8448974/Reserve-…
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