Standard and Poor's says it doesn't believe the RBNZ's open bank resolution policy means the Govt would let a distressed major bank fail

By Gareth Vaughan

Credit rating agency Standard & Poor's (S&P) says the development of the Reserve Bank's Open Bank Resolution (OBR) policy doesn't mean the Government would let a distressed big bank fail.

S&P says that although the OBR policy, which requires all banks with retail funding of more than NZ$1 billion to position their systems so customers could access accounts the day after an insolvency event, does in theory raise the prospect that government support for different classes of creditor could vary. And, although it "in some way" signals the New Zealand government might not fully support a distressed bank, the OBR policy doesn't eliminate the potential for the government to extend "extraordinary" support to a bank, S&P says.

"Furthermore, the existence of a resolution regime is not indicative, in our view, that a government would let a highly systemically important bank fail in the future, particularly if the economic spillover would be great," says S&P.

"(But) all this said, the existence of a resolution regime might make it more difficult for authorities to defend the use of public funds to support distressed banks."

Earlier this month the Reserve Bank said its new tool for dealing with a bank failure could save taxpayers' more than NZ$1 billion regardless of whether there is a bank failure or not. The central bank and bank prudential regulator says implementing its OBR policy will reduce economic and bailout costs, and reduce government debt servicing costs. However, it suggests the OBR will increase bank funding costs, and comes with set-up and ongoing maintenance costs for the banks. See more details here.

S&P says New Zealand bank credit ratings won't themselves be negatively impacted by progression of an OBR policy.

"The potential for a negative impact on the ratings is also moderated because explicit government support is not factored into most bank ratings. Resolution regimes, such as New Zealand's OBR policy, are generally established by governments to lessen the damage to the economy and the cost for the taxpayer of a distressed systemically important bank," says S&P.

The Reserve Bank describes the OBR policy as a creditor loss sharing mechanism that puts in place systems to enable creditors to share the losses - or take haircuts - associated with resolving bank failures, in addition to shareholders assuming the burden of first loss.  Under OBR, a bank would be open for business within one business day after an insolvency event and be able to provide depositors with full or partial access to their accounts and other bank services.

S&P's comments on the OBR come in a fresh report from the credit rating agency on New Zealand banks entitled New Zealand Bank Credit Ratings Remain Stable As Banks Navigate A Range Of Market Challenges. The report concludes that: "New Zealand's banking sector is well placed to deal with any issues."

S&P says the sector's overall operating performance outlook is reasonably sound, supported by a stable level of repeatable net interest revenue generated by the banks, and the "good asset-quality experience currently being enjoyed."  See our credit ratings explained section here.

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