By Gareth Vaughan
The old chestnut of deposit insurance has reared its head in the International Monetary Fund's assessment of the New Zealand financial sector, with the IMF recommending its introduction to enhance the credibility of the Reserve Bank's Open Bank Resolution (OBR) policy and strengthen the financial safety net.
The IMF suggests this in its Financial Sector Assessment Program (FSAP) and Financial System Stability Assessment of New Zealand, released on Tuesday.
"The crisis resolution framework needs to be enhanced further. The Open Bank Resolution (OBR) framework, which aims to avoid the use of public funds when resolving systemically important banks, is a step in the right direction. To enhance its credibility and strengthen the financial safety net, the introduction of deposit insurance would be the best option," the IMF says.
It notes the lack of deposit insurance in NZ, making the country an outlier amongst OECD counterparts, reflects both current government policy and the Reserve Bank's long-standing view that the emphasis should be on reducing the moral hazard attached to any public perception of the government backstopping all or part of the financial system through an implicit guarantee. Additionally, the IMF points out the Reserve Bank considers deposit insurance to be challenging in a highly concentrated banking system like NZ, and that it's not well suited to dealing with systemic failures.
Whether NZ should have deposit insurance is a long running debate. NZ did, of course, have deposit insurance through the Crown Retail Deposit Guarantee Scheme, which ran for 38 months from October 2008 until the end of 2011 costing taxpayers' the thick end of $1 billion. See all our stories on deposit insurance here.
"The introduction of a deposit insurance framework is the first-best element to complete the financial safety net. OBR involves freezing a portion of balances - including deposits - to cover any losses beyond what the bank’s capital position could absorb. As the authorities have reiterated their long-standing opposition to deposit insurance, it is recommended, as a second best option, to introduce limited deposit preference to provide a clear legal foundation for a de minimis exemption from freezing and haircutting deposits in OBR," the IMF says.
"The RBNZ public consultation has suggested a de minimis [minimum] exemption of NZ$500, but it is recommended that a higher amount, established in legislation, would provide some of the benefits of deposit insurance - such as mitigating against runs and reducing the political pressure to bail out depositors. Authorities’ analysis suggests that NZ$10,000 per depositor would exempt the full amount of 80 percent of the number of bank deposits, while still leaving the bulk by value of deposits at risk. Moreover, the issuance of additional capital instruments with write-down and convertibility features could be considered, to provide a further buffer of bail-inable liabilities. However, caution is needed as the majority of these instruments have been purchased by individual investors who may not fully appreciate the assumed risks," says the IMF.
The IMF notes that the $10,000 figure is well below the two to three times per capita GDP rule of thumb commonly used in determining deposit insurance limits, and reflects the fact that most New Zealanders do not accumulate large savings in bank deposits. Deposits in registered banks and equity in investment fund shares represented about 60% and 23%, respectively, of NZ household financial assets as at June 2016.
Under the Australian deposit insurance 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.
Joyce welcomes IMF recognition of government's approach
Asked about the IMF report Finance Minister Steven Joyce said the Government is considering making some "tweaks" to the OBR framework.
"We're looking at something like a de minimis as an alternative to deposit insurance. We looked at deposit insurance and found that wasn't necessarily going to work from a New Zealand perspective. And it's good to see the IMF recognises the approach that we are thinking about taking might meet the needs of a potential crisis management," Joyce said.
Meanwhile, the IMF also argues the decision-making process in a NZ banking crisis and the exercise of resolution powers needs clarification.
"The RBNZ should be the sole resolution authority, with clear mandates and responsibilities, requiring the approval of the Minister of Finance only for resolutions with fiscal or systemic implications."
*This article was first published in our email for paying subscribers early on Wednesday morning. See here for more details and how to subscribe.
32 Comments
The $1B paid by the govt relates mostly to the failure of SCF. The receivers performance should be analysed against good practise. A colleague had his $12M SCF loan sold to the colleague's company for $4M. Everyone happy. Except you and me tax payer who have footed the $8m difference.
Colleague's company had no financial issues whatsoever.
Deposit insurance is needed for depositors - would suggest matching AUD $250K . Better still, take a loan and buy a house.
It notes the lack of deposit insurance in NZ, making the country an outlier amongst OECD counterparts, reflects both current government policy and the Reserve Bank's long-standing view that the emphasis should be on reducing the moral hazard attached to any public perception of the government backstopping all or part of the financial system through an implicit guarantee.
Given banks don't intermediate depositor's savings from other undefined money sources to lend to the deserving, the government, including the RBNZ, should cease actions that patently invoke questionable moral hazard issues. The pointless and evidenceless association of reducing official interest rates to raise the CPI metric must stop.
I can't imagine insurance being reliable. I expect the insurance companies would take the premiums and then, in the event of significant economic stress, go bust themselves - Similar to the way insurance companies got into trouble with the Christchurch earthquakes.
Robt,
This would not be done through a premium paid to an insurance company,but with the government as the insurer. certainly that is the case in Australia and I don't know of any country which actually uses an insurer for this purpose. There are at least 113 jurisdictions with some level of depositor protection.
i think even if the OBR was implemented the government of the day would gaurantee the first 10K, i might be wrong but i can not se a government not stepping in in some fashion, as they did during the GFC,
they would not want to risk the people across the house picking up the disgruntled voters in the next election
So how would that work with the OBR provisions? Those with deposits less than $10K are OK, and in the event of a collapse all the burden would fall on those with deposits greater than that? My Take is that if the Government is not prepared to stand behind the banks then in the first instance, don't trust them with any significant amount of money. In the second instance I believe that if an OBR event does occur then the ownership of the bank should fully pass to the depositors. I have an uncomfortable suspicion that what will happen however is that depositors will loose money, the government will toss in some cash and use that as a justification to sell it cheaply to somebody overseas who will receive a huge asset for next to nothing. Recall what happened with the Rural Bank.
If a government didn't bail one of the big four, forget about losing an election, it is more likely they would get lynched in the street. Most people don't feel like investors when they wages and salaries are deposited in the bank so the idea that the average person is discerning risk for each bank is nonsense.
A retail deposit scheme could be easily to operate with a central pool of funds - like the Cullen fund - and it pays out if and when required (hopefully never). If there isn't a problem in a few years the fund could be safe funding.
Why only the big 4 banks though? Or doesit just come down to customer numbers? The thing is that the deposit rates for most banks are very similar, so there doesn't seem to be much of a risk factor built into the rates if you chose to go with a bank with a lower credit rating.
What I was saying is that the current model (the OBR) assumes that that government will not bail out banks. I think if one of the big four were to fail, like the BNZ again, the government for very political reasons would act. Therefore, there is an implicit guarantee but it is down to how principled the PM of the day is. Let's move to an actual guarantee scheme that we know the costs of and can actually guarantee.
If there were an OBR event and my savings disappear and I know that the CEO of said bank earned $10 million dollars that year and proved so incompetent that his business became insolvent - my blood would boil....How could you justify paying the leader of a business so much each year and yet they provide no guarentee of performance?
Your savings would likely disappear, OBR or not.
An OBR at least gives some sort of option that the bank will open again ( the next day!). Without it - who knows!
I know that many are nervous about The OBR, but think about the alternative - every depositor and creditor for themselves, and I can pretty much guarantee you who the last in the queue will be to get any sort of payment.....
But why are we paying someone $10 million a year for a product/service that has no associated guarentees? I might start up my own bank and say hey, everyone give me your money, I'm going to play around wth it, take a decent margin of it for my own pocket, but no guarentee that if I've read the market/economy wrong, that you'll get your money back. What an insane system we've endorsed. We're being played.
There were dozens of banks which failed in the USA during the GFC and (at most) there was a weekend without banking for the clients of the failed bank. Not one depositor lost their deposits (up to the insured amounts). That isn't a bad alternative to the NZ situation.
In Australia all depositors are insured up to $250,000 per depositor per bank - across more than 100 banks. That isn't a bad alternative compared to the NZ situation and will help to prevent runs on banks - at least in Australia.
NZ is unique with the entire onus being put onto local depositors. That's a bad alternative.
It's generally distasteful for a government to be bailing out a private business for it's risky behaviour, when those private businesses get to keep the lion's share of profits they make from taking such risks. Rather than a straight bailout, I'd prefer to see perhaps an element of the Icelandic approach - require equity from the banks in exchange for the bailout.
Isn't that the case anyway. All the shareholders equity has to be gone before an OBR event is triggered. The problem with the NZ banks is that their equity ratios have fallen below acceptable levels, and the government sat by and did nothing while the banks money flew out of the country when the ARB forced them to raise their equity in Australia. At the time I suggested here that they should force them to raise their margins and use a significant slice of their (total) profits to raise their equity in their NZ operations. This would have put upward pressure on mortgage rates and downward pressure on deposit rates, thereby simultaneously
- Increasing the security of the banks
- Lowering the exchange rate
- putting downward pressure on house prices
In all these posts it make make things somewhat clearer, if while reading, one substitutes the words "government" and "deposit holder" for "taxpayer".
That way the sentence, "The government should guarantee the deposit holder" could become, The tax payer should guarantee the tax payer".
It is possible for some tax payers to guarantee other tax payers -but- impossible for all tax payers to guarantee all tax payers.
Isn't that exactly what insurance is though? Your can insure a house, but if you decide to instead put that money in the bank, you can't insure it. It gives property ownership another big advantage over other forms of investment.
Should a bank fail, then only some people will be affected, not all people.
I would suggest the fact it is not structured like insurance is the warning bell.
What large pool of insurance money did the Australian government create for its guarantee of every deposit in the whole country to $250,000? The clue is none.
The problem isn't an open market where people could go and buy insurance from third parties for their deposits if they so choose and as a matter of their own personal business. The problem is when no third party is engaged, nothing is purchased by anyone and we all use the word guarantee as if insurance exists.
Remember, when the bills comes due, government just means tax payer.
The current system with no changes can probably deal with an isolated incident, as it did with South Canty Finance but if there is a *global* meltdown then it won't be just one bank.
Our bank deposits should be insured at the same amount as in Australia - $250,000 especially as all the main banks here are Australian, does our government want NZ depositors to bail out Australian banks on top of allowing Aussies to come here and claim all sorts of benefits. The Australian government seems to care all lot more for their citizens than our sycophantic mob who are more interested in kowtowing to the rest of the world
I am not sure how it works, I certainly believe the shareholders need to be held accountable in the first instance, but then there needs to be some sort of guarantee that depositors will be able to retain $250,000 without having to take a haircut on that amount. Maybe a combination of both systems but certainly something rather than our government blatantly saying all depositors are on their own or that they will essentially only divulge their plan after the event when it is impossible to move any deposits. By not stipulating an amount people can't plan to put savings into a safe place. The government does not want people to be able to minimize their risks, they want to protect the banks not the average citizen
How can you say that hough when you dont know how it works? The OBR is misunderstood widely (blame rbnz i guess) but does not protect banks. It protects customers, in that a run on banks is no good for those at the back of the queue. Shareholders still foot the bill first.
and how do the shareholders foot the bill? Presumably if it is the parent Australian bank which fails, then the share price might approach zero. But if the NZ bank fails, then it seems that the RBNZ has set up the NZ depositors to get a haircut after covered bond holders are paid.
If anything OBR is likely to cause a run on some of the NZ banks rather than insure financial stability of the system. All it will take is a rumor of a fragile bank.
There have been no bank runs in the USA for instance since the 1930s, with deposit insurance and banking regulations and oversight. Even with dozens of bank failures during the GFC no depositors lost money and banking operations at those failed banks continued after an overnight (or weekend) pause.
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