By Gareth Vaughan
Reserve Bank head of prudential supervision Toby Fiennes has reiterated the bank's opposition to deposit insurance, arguing it blunts incentives for banks and depositors to monitor and manage risks properly.
In a speech to the New Zealand Bankers' Association and BNZ, Fiennes said the importance the Reserve Bank places on market discipline is "strongly reflected" in its prudential regulatory regime.
"It's also one of the reasons we don't have, and are not advocating, deposit insurance - a clear difference between New Zealand and most other developed countries. Deposit insurance blunts incentives for banks and depositors to monitor and manage risks properly. Research by the World Bank finds that deposit insurance lowers banks' interest expenses and makes interest payments less sensitive, though not insensitive, to bank risk and liquidity," said Fiennes.
"While these effects could be ameliorated somewhat by risk-based pricing of deposit insurance, in practice this is extremely difficult to achieve. It also favours some parties relative to others: for example, people with larger deposits and those who manage their affairs to create multiple protected deposits."
"Market participants must have incentives to monitor banks, and some aspects of the regulatory framework such as the Open Bank Resolution (OBR) Policy and no deposit insurance, reinforce these incentives, Fiennes added.
NZ an outlier
New Zealand is an outlier among developed countries in not having deposit insurance. The likes of Australia, Canada, Hong Kong, Singapore, the USA, India, Britain, and major other European Union countries all have deposit insurance. Under the Australian scheme, deposits are protected up to a limit of A$250,000 for each account-holder at any bank, building society or credit union that's authorised by the Australian Prudential Regulation Authority. In New Zealand all of the Labour Party, the Greens and NZ First have advocated for deposit insurance.
(You can see my recent opinion article on deposit insurance here, and also George Friedman on the lurking crisis of bank deposits here).
Fiennes, meanwhile, went on to say a financial system in which depositors can afford to be indifferent to the risk of the bank they invest in will be a weaker financial system with people chasing return with no regard for risk.
"It is of course true that many people expect governments to stand behind their deposits. That expectation was reinforced by the widespread government guarantees, including in New Zealand, during the Global Financial Crisis. The existence of an expectation, though, is not a sound reason to adopt deposit insurance. A key virtue of our OBR tool is that it provides authorities with the ability to impose losses on creditors without closing the bank. This supports market discipline and improves incentives on investors and larger depositors to monitor banks," said Fiennes.
(Here's our story on how the OBR might work, if implemented after a bank failure).
'Deposit insurance could reduce market monitoring incentives'
Fiennes also noted this year's IMF Financial Sector Assessment Programme (FSAP) review of New Zealand will be a major focus for the Reserve Bank this year. This will involve the IMF assessing the regulatory frameworks overseeing the banking, insurance and non-bank deposit taker sectors, financial market infrastructures, and the Reserve Bank's macro-prudential policy framework. The last IMF FSAP of New Zealand was in 2004.
"We recognise the benefits of regulatory discipline in many areas, while wishing to retain and indeed strengthen the market discipline pillar. As a result, we are not advocating for measures such as deposit insurance that could reduce market monitoring incentives, or watering down disclosure obligations," Fiennes said.
The Reserve Bank will shortly be consulting on its "dashboard" concept, which it's proposing to introduce in place of banks' off-quarter disclosure statements. The dashboard is touted as an electronic form of bank reporting that's more accessible, comparable and timely, and that should reduce costs for banks.
"Our current focus is on a quarterly rather than a monthly dashboard, covering a sub-set of the information we receive through private reporting," Fiennes said.
(Here's Fiennes' full speech, and a Bulletin article on market discipline the Reserve Bank has released).
58 Comments
Reserve Bank head of prudential supervision Toby Fiennes has reiterated the bank's opposition to deposit insurance, arguing it blunts incentives for banks and depositors to monitor and manage risks properly.
How might unsecured depositors secure knowledge of the self imposed capital risk weightings large New Zealand banks are approved to apply to their residential mortgage assets?
indeed - not possible in NZ and avoided in Australia by the RBA requiring deposit insurance by the banks for depositors.... The RBA says
"In the absence of depositor confidence, there is a heightened risk of deposit runs and contagion to other institutions given the limited scope for most depositors to differentiate between safe and unsafe banks."
and
"An essential feature of a well-functioning financial system is its ability to channel funds from savers to borrowers. Banks and other deposit-taking institutions provide this function by accepting deposits and issuing debt into capital markets, and then lending these funds on to borrowers, typically at longer maturities. For this process of financial intermediation to work effectively, depositors and other creditors need to have a sufficient degree of confidence that their funds are safe."
The RBNZ says depositors in NZ must evaluate the risks themselves for the banks that the RBNZ regulates - but does not provide sufficient public information on their operations for that to happen. This is a recipe for financial instability which is unfortunate given NZ's reliance on a few banks. NZ remains unique in this regard. Financial stability can be fragile - and is more fragile given the current RBNZ focus.
Plain English investment disclosure statements stating the obvious impairments demanded by the regulator of each asset building bank. In this case the regulator is the RBNZ.
Since all need to be aware, courtesy of the BoE, that : "Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits" … "In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money 'multiplied up' into more loans and deposits." Read more
How might unsecured depositors secure knowledge of the self imposed capital risk weightings large New Zealand banks are approved to apply to their residential mortgage assets?
You could, you know, look at a disclosure statement?
For example, page 52 of ANZ's September 2014 report.
http://www.anz.co.nz/resources/0/e/0ee9cd87-9ebb-4afe-941c-c4215f36b258…
I wonder if the RBNZ are calling the Aussie Banks' bluff. There is one obvious different dynamic in banking structure between NZ and Australia- namely that our banks are primarily digestible subsidiaries of their Australian parents. If a NZ bank fails , the brand and business reputational loss of that bank being wound up would, you would think, cause the parent to stump up more capital. If all NZ banks fail, then there would by definition be a systemic economy wide problem that would need the RBNZ and government to step in in any case. Collectively they are too big to fail, even if you could easily enough let one go.
Conversely if the parent fails in Oz, my understanding is that although there would inevitably be a run on the NZ subsidiary by customers here, there are regulatory valves that protect the Aussie parent sucking deposits from NZ to pay off their bad debts there. And if an Aussie bank fails, that is primarily a concern for the Aussie government, and shouldn't be funded by NZ taxpayers or depositors.
and the example of ASB paying its Australian owners (Commonwealth Bank) 135% of its annual profit in recent year is not a comforting thought. Nor is their reducing their retained NZ earnings by 304 million dollars in the same year.
Both these actions could be moderated by the RBNZ. They issue the NZ banking licenses and have ability to regulate these aspects.
It is not the time to allow excessive expatriation of profits off shore, nor to allow retained NZ earnings to be dramatically reduced. There is an up side to increased profits, but no upside at all if the profits are super-expatriated off shore, not to return.
http://www.interest.co.nz/business/77032/asb-profit-hits-859-mln-income…
"there are regulatory valves that protect the Aussie parent sucking deposits from NZ to pay off their bad debts there" prevent? I hope so.
However personally when it goes to custard in OZ (or NZ) I think it will be a global driven event of huge magnitude.
Also if OZ goes to custard then would any overseas investors continue to lend to the NZ subsidiary's even if appearing sound? somehow I doubt it.
"shouldn't be funded by NZ taxpayers or depositors." agree.
I will just point something out that most seem to of forgotten. Public knowledge of the OBR only came about via a media OIA request. They weren't even going to tell the public of their plans for a worst case NZ bank scenario. And to this day most NZder's still have no idea what it is or the effects it would have on their personal finances. As stated many times by others, the system is set up so we MUST use or at least have a bank account to get paid our salaries/wages, but the main reason being was so IRD had most of us by the balls with a very efficient official paper trail of all income payments and transactions of our personal lives. Many may recall some of the more recent police investigations and cash seizures of individuals who claim not to trust banks, thus they then must prove every cent they have in cash (at home) is actually theirs and obtained via legal means, along with the nice IRD audit to boot. So be aware when cashing up that you make sure you have proof in official documentation of your withdrawal/s and the reason why, PLUS any major cash purchases there after in particular. Even a case of redepositing with another bank or finance company or trying to move large amounts abroad will bring about a compulsory IRD report
I'd like to know whether Mr Fiennes himself has a few million in the ASB,exposed to an OBR, having got out of the housing ponzi and gone light on shares which have been scary this year.
If the OBR is such a sh.t hot scheme, could he go on TV and explain exactly what would happen to savers, when he inflicts the OBR that he almost seems to be lusting for, to prove how wonderfully it works(I'll teach those hard working self denying savers, they'll get a haircut they'll remember, and the blighters won't live long enough to earn it back haha! . Stupid B's should have bought houses!!)
Can he tell us which bank/mattress the is safest?? if not why not? iI he does not know 90 year old Elsie May won't!!
I reckon the fear of an OBR event could actually cause a bank run!!
Mr Fiennes is making an assumption that is hugely flawed -"Deposit insurance blunts incentives for banks and depositors to monitor and manage risks properly." He assumes that the average depositor is knowledgeable, equipped and has the time to adequately monitor the banks for the level of risk each poses so that he can then protect his funds. In this case he is clearly proving that the Ass in this assumption is himself as the current systems leave average kiwis with little option but to use a bank. He also forgets that it has long been an identified issue that financial literacy is an issue for ordinary kiwis.
There are options though - if as identified in yesterdays article comments on the banks in Europe, the law was changed to make the depositors funds the property of the depositor/account holder then the account holder could be argued as responsible, and then to assist them in this, the insurance companies could provide that guidance directly or indirectly through premiums and written guidance on banks risk. Something that largely doesn't exist today.
a) So why should a deposit be a unique protection from being competent or seeking financial advice on an investment if not?
b) Most of the saved are retired, so there is 40~50 hours a week to use some of right there. Then there is U3A etc ie opportunities to learn.
If the money is owned by the depositor then that also is a moral hazard, ie the saved can lend to any risky enterprise knowing their money is safe.
a) it shouldn't be a unique protection. But under current law depositors are signing over ownership of their own money (usually without being aware that they are doing so (is this a government sponsored fraud?)) with the expectation that banks will behave responsibly, but as the recent news about the ANZ trading room indicates, is not a certainty. As it stands at the moment because they are giving their money to the bank, there is an expectation that because the Government placed this law into effect, that there be some form of further protection that compensates for that loss. To re-write the law to make the money the property of the depositor, will effectively put the onus firmly back into the hands of the depositor to protect themselves. Also as discussed here in part, the RBNZ is clearly expecting depositors to be more responsible about where they are putting their money, but is not acknowledging either the lack of information available to assess the level of risk for each bank (identified by other commentators here and discussed at other times) or their general lack of ability to understand what information is available.
b) do you really expect a retiree to suddenly start educating themselves about things financial? Again is there sufficient robust information to be able to make a sound decision? The information that the RBNZ is seriously filtered and presumes the reader to be financially literate. Also stuff like the behaviours exhibited by the ANZ trading room staff is not unique to the ANZ and generally not identified until it hits the media for some reason, and demonstrates that banks are largely a law unto themselves. So making good decisions on what provider to use is problematic at best, impossible at worst.
Steven, apologise for being a bit repetitive above. Another question - As an alternative to banks how would P2P fare? It could be argued that in that case depositors(lenders) are taking more responsibility for their risks, but are the returns worth it? A down side of course is the availability of any funds in the P2P scheme, but as an investment?
under current law depositors are signing over ownership of their own money (usually without being aware that they are doing so (is this a government sponsored fraud?))
There you have it Murray. It is a government sponsored fraud. The depositors' money should be held in trust as Mervyn King suggested. Perhaps Toby hasn't read any of the excellent material put out by the Bank of England over the last few years.
I appreciate the argument that OBR keeps the government's options open, but it is possible to craft a functional deposit guarantee scheme, perhaps with a 10% excess. It is necessary because of the fraudulent transfer of ownership in the first place.
Really, banking has so many extraordinary privileges that no other business enjoys.
They are the law
when you are told to jump you will ask "how high"
http://www.smh.com.au/federal-politics/political-news/labor-senator-sam…
Read the article slowly - it's the same 4 banks - if you think they don't expect to wield the same level of power here - you are dreaming
If I recall correctly the CEO's of 2 of those 4 banks are kiwis, NZ trained in the ways of exploiting that power
"A key virtue of our OBR tool is that it provides authorities with the ability to impose losses on creditors without closing the bank"
as a depositor I couldn't care less if the bank closes (bank-rupcy anyone?). Just want my money that I paid for their storage back.
Toby Fiennes seemingly makes an extraordinary claim that one of the reasons to not have deposit guarantees of any sort is that they would favor those with wealth in that
"for example, people with larger deposits and those who manage their affairs to create multiple protected deposits."
i.e. spreading risk across banks would be rewarded!
On the other hand, it might reduce several other possible scenarios with those with connections having prior knowledge not available to those not in the know - and avoiding OBR at a particular bank.
And those with larger amounts of money transferring portions of their wealth now to some of the more than 100 Australian financial institutions which currently have government guarantees by their government. This is exactly the situation which caused the panic introduction of the temporary guarantees by Cullen - which then was so poorly regulated by RBNZ and The Treasury.
It is not to late to prevent the potential damage to the NZ financial system introduced by OBR.
It's still worth re-reading the warnings by Rod Oram -
http://www.stuff.co.nz/business/opinion-analysis/8490711/Oram-Reserve-B…
.
I raised the idea of banks offering secured deposits here - http://www.interest.co.nz/opinion/63880/opinion-govt-and-rbnz-may-be-un…
"Reserve Bank head of prudential supervision Toby Fiennes"
It would be interesting to know the role this senior public servant had during the past few years - especially during the ill-supervised introduction and operation of the short lived NZ deposit protection. Prudential supervision perhaps?
Then perhaps we as knowledgeable depositors could evaluate his current public statements.
WOW. I am astounded at the financial illiteracy of Tony Fiennes comments. It looks by the comment threads here that most people feel the same as I do.
So what makes Fiennes think he is so much smarter to come out with comments that go against nearly every other financial regulator of importance in the developed world, with regard to his abhorrence of deposit insurance? He's got B--lls, I'll give him that. Or is he just totally ignorant? I would honestly like to know this guys education? As normal, it will be the little guy that pays for these blunders.
Why in the hell did the RBNZ introduce temporary deposit guarantees during the GFC if they talk down these methods categorically now????
The whole purpose is to create financial stability. THATS why they did it during the GFC. Fiennes is categorically stating that he absolutely does not give one crap about the little guy, or financial stability.
This is such a no-brainer, you would have to be a no-brainer NOT to institute deposit insurance. There is just no downside and to say otherwise is, as I said, going against all financial literacy and fiducial responsibility of the developed world.
You know, on reflection, the fact that the RBNZ employs people who come out this aggressively AGAINST depositors is the scariest realization I have come to make in a long while. I thought the RBNZ should have the interests of all NZer's, not just an elite few.
I don't understand why anyone, given the rhetoric from Fiennes, would put any money in a NZ bank.
Quite correct, and if you, or anyone else has the intellectual capacity to fully understand the consequences, then there is only one thing you CAN do. It is also what I have done already when OBR came into effect (actually a bit prior to that). That is to ask for your money back, withdrawn in the shape of physical bank notes. The only time anyone high up in the financial world will take notice of you, me or anyone else who is a typical average citizen, is when you stop playing their game. Take full responsibility for your own savings! Take the only action you can to ensure you are NOT EXPOSED TO COUNTERPARTY RISK YOU SIMPLY CAN NOT HOPE TO EVER TRULY KNOW. I sleep extremely well since I took that step and am sitting here now, looking over the comments and wonder just how long will it take the rest of you to just go and actually act on the information in plain sight...
So wait ... we're seriously expected to accept that insurance is a disincentive for responsible conduct by banks, but the ability to dip into depositors accounts and steal the dough when things go bad is somehow not a disincentive for responsible conduct by banks? As incentives for responsible conduct go, not much to choose between them.
What surprises me (somewhat) is that people have not done a run on NZ banks. With the exception of a few wealthy individuals that I know personally who keep the bulk of their cash in other currencies overseas, most of the people I talk to seem to be willingly waiting to get a “haircut” and lose their savings.
most I talk too have no idea what the OBR is or that they money is at any risk at all sitting in a bank account.
that is why I am of the belief that the party in government of the day will step otherwise they will become known as the party that stole my money to give to the banks
It isn't a surprise to me, as the majority generally wake up after the event...i.e. too late.
The central banks are trying to protect banks (i.e. by making depositors take on their losses, given that govts (read taxpayers) won't next time) as well as keeping govts solvent through ultra low interest rates. This will lead to savers getting fried and pension funds collapsing - i.e. more pressure on govts. A downward spiral of epic proportions. Either way, the savers and the battlers in this world will get screwed. Basically, you need your head read to have your life savings in term deposits...
I believe the government of the day WILL step in and set a level they will cover.
my reasons
most transactions go through the banking system i.e who gets paid in cash nowadays.
and if we went back to a cash based economy the noncompliance with paying taxes would skyrocket
"It is alleged that weekly meetings were held at [Jain's house], or at the home address of Mr Chahil ... where restaurant managers would undertake a reconciliation of the till system, cashbook and the cash takings from the restaurant. Physical cash would be given to Ms Jain or Mr Chahil at this time."
and they would get voted out and not be returned to power for a long time
It's low interest rates that are causing the banking crisis. In the States a man with 250k in deposits earns enough to buy a cup of coffee at Starbucks each day. A man who saved all his life gets one cup of coffee a day.
Low interest rates have fueled a wave of mal-investment, whether its our milk industry, California's wine industry and it's 38 million+ case wine surplus or mining in Australia.
Low interest rates have made our economies high risk, so much so we need an 'OBR', but it's never going to work, talking peoples saving was never going to be easy and that's what they have been anyway with low interest rates.
http://www.abc.net.au/news/2014-06-29/bis-warns-low-rate-policies-may-g…
http://davidstockmanscontracorner.com/the-war-on-savers-and-the-200-rul…
I have read the whole lengthy article. If he is right,then what's the answer? A sharp rise in interest rates? That might cure the disease,but it would certainly kill the patient.
A great deal of global debt is unrepayable and however offensive many of us find it,much of it must be written-off.We have to force banks back to their old commercial functions(boring and not terribly well paid,but pretty safe) and let the investment banks sink or swim-no bail-outs.Credit needs to be more tightly controlled,executive pay reined-in and so on,but I'm not holding my breath.
I do not agree with you here.
Also you seem to be commenting that farm returns are awful? That $250k has to earn after being lent to a business enough to make a profit, pay taxes, and pay the bank back. So if the business cannot make money it is not going to borrow, ergo that $250k capital is worthless. So the owner of that capital has to make that capital work for him just like that poor bugger running a business and not be lazy and leave it in a deposit.
well that depends on how you look at capital. For him it was life times work and savings for others it represents the increase in the value of their AKL house in the last 18 months. The problem with returns is the sick and dying have been put on CB life support and they are adding to the pressure from over production which is in turn now affecting legitimate conservative businesses.
>>>
Stop for a minute. Let that sink in. The total value of all the world’s oil reserves is over $100 trillion less than it was just a year and a half ago.
(By the way, I verified Mr. Levine’s reserve total by consulting the CIA’s World Fact Book. It says total world “proved” oil reserves were 1.656 trillion barrels as of January 1, 2015.)
To put these figures in perspective, consider that Google’s parent company, Alphabet (GOOG), briefly surpassed Apple (AAPL) last week as the planet’s largest publicly traded company. Both are worth around $500 billion, depending on the day. The lost value in crude oil is equivalent to a couple of hundred Googles and Apples going up in smoke.
If stock values were crashing to that degree, we would call the losses earth-shattering. Yet otherwise intelligent people are saying the oil collapse is a minor issue.
http://ggc-mauldin-images.s3.amazonaws.com/uploads/pdf/160206_TFTF.pdf
So a life's work at exploiting the finite planet just as fast as possible, now however what is left isnt copious and rich enough for the next generation to continue that same pillage. Or for that matter enough to pay him back at the interest rate he thinks he deserves for his hard earned money. On top of that he also expects others to guarantee his capital against losses due to the very system(s) he used coming back to bite him.
Did you look up what "proved” oil reserves' actually means? ""the estimated quantities of oil which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under current economic and operating conditions"
So that will vary depending on whether oil is $30 or $100. Some of that oil is probably $200 and even $300, ergo since we cannot afford to pay $8US a gallon a % of that estimate is actually un-recoverable.
Another thing, those numbers are based on what is reported, that is again questionable.
As a different approach another method say there was actually about 2.2 to 2.6trillion barrels of which we have used about 1/2. So 1.1 to 1.3trillion remaining. That is also conventional oil not including tar sands and heavy, deep water or shale.
Then there ie EROEI which then takes out the price and gives us a cost in energy used to extract energy. Our modern industrial society / economy needs 8 to 1 so any process under that is damaging ie a loss.
Raghuram Rajan, the governor of India's central bank, said the cheap and easy money had only served to ramp up asset prices to unrealistic levels and that there would be a day of reckoning if values failed to match reality.
If we continue down this path long enough, the reckoning will be pretty significant.
Raghuram Rajan, Reserve Bank of India
"By intervening directly in asset prices, we have distorted some of them to the extent that the markets are not sure of what pricing is, as well as markets are not sure what the central bank reaction function will be," he warned.
"My sense is that at some point the market has to live on its own.
"If you keep rates at such a level, you better hope that at the end of it those asset prices in fact materialise.
http://www.abc.net.au/news/2016-01-22/low-interest-rates-creating-next-…
Again, it seem some confuse the cause with the symptom. Low interest rates are the symptom of a sick economy and not the cause. Sure there is mal-investment but that is because "real" investment is making no return so ppl are running around like headless chickens desperate to make money and instead of returns they are gambling there is a bigger fool to buy their over-inflated asset.
This really means we need to get growth going again on a finite planet with oil peaking......bound to work.
Yes an interesting point of view. Capitalism is finished IMHO, it needs a high profit margin to survive and grow and we are on one planet. What is really biding its time is nature with climate change and math, ie a finite resource(s) cannot be consumed exponentially. Nature will win, we will lose.
I took Toby"s advice and had a look at the statements of the two banks that I have deposits with, Kiwi Bank and ANZ. Kiwi Bank has little if any corporate or dairy industry exposure, their derivative exposure is about 2% of total assets. ANZ has both corporate and dairy industry exposure, derivative exposure being at least 100% of total assets. Based on this Kiwi Bank would be "safer"? unless there is a huge 40% plus lowering of household values throughout NZ. Would I be best to keep any deposits with Kiwi Bank. Your thoughts and expertise would be appreciated.
Based on the way things are going, yes kiwibank looks a bit better as dairy looks bad and thats for an extended period. Not sure on your 40% as with leverage on the few that have massive mortgages? I certianly would like to see a chart of this, then you could compare % drop of assets (houses) v retained capital and say at 14% drops ANZ (say) is technically insolvent. With that for each bank you would know which ones to avoid?
Typical attitute of incompetent "professionals" which are unable to accept responsibility for their work paid by taxpayers. A retired person that lives on the interest of their term deposits should - in the opinion of the Governor of the RNBNZ and his assistants "economists" - monitor the banking markets risks that RBNZ and rating agencies around the world are unable to do...lol. I watched the video of the presentation and it appeared that the Governor was also upset by the question. If Australian banks in AUS, and all Banks in the OECD, have a deposit guarantee to protect the deposits it only means that there are good reasons for it.
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