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Opinion: It's time for NZ to adopt bank deposit insurance

Posted in News

Back in March I called for New Zealand to debate the adoption of a bank deposit insurance scheme before a crisis robbed us of the time and flexibility to have a considered and public discussion. The time for that debate may have passed. Action is now required across New Zealand's political and economic leadership to ensure New Zealand is no longer the only country in the OECD without any form of bank deposit insurance or deposit guarantee. We at Interest.co.nz are today calling on the National and Labour parties to work with the Reserve Bank of New Zealand to neutralise this issue before it becomes a political football and before banks are anywhere near where they might need it. This leadership group should announce a deposit guarantee scheme to guarantee at least NZ$25,000 per person in any licensed bank or registered building society. This would be a government guarantee until an insurance scheme can be created. Several events since March and in recent weeks have increased the urgency of this issue.

Firstly, Australia has announced plans for a "Financial Claims Scheme" that would guarantee A$20,000 in any account per person. Obviously our major banks, ASB, BNZ, Westpac, ANZ and National, are owned by Australian banks. In any crisis this disparity will become destabilising. New Zealanders wanting some protection will open Australian accounts with the parents of their New Zealand banks. We are nowhere near this stage yet, but reducing the risk of a Trans-Tasman exodus should be a top priority. Secondly, governments around the world are rapidly beefing up their deposit insurance schemes and deposit protection in response to the risks posed by the rapidly deteriorating credit crunch. America has just increased its deposit insurance scheme from US$100,000 per account to US$250,000 per account. Last week the Irish and Greek governments took the extraordinary steps of guaranteeing all bank deposits to forestall banking collapses. Overnight the German government guaranteed all private savings accounts as it fights to rescue the second biggest mortgage bank, Hypo Real Estate, in Europe's largest economy. Meanwhile, credit markets remain frozen and banks in the Northern Hemisphere don't trust each other. The commercial paper market which allows large corporations to fund their daily cash flows has also frozen. Many corporates are relying on emergency bank lending facilities and the banks in turn are relying on money they are borrowing from central banks. There is not the same extreme levels of dislocation in Australasia yet. We agree with the Reserve Bank that our banks are sound and that they in a much stronger shape to cope with this disruption than many European and US banks. Here's our previous comments on why our banks are much safer than US banks and 10 key reasons why our banks are different from Northern Hemisphere bank. We stand by these articles. New Zealand's banks are well capitalised, have extremely high credit ratings, are well regulated and are not materially exposed to the US sub prime crisis. But there are risks. Australia's banks, which own ours, have to refinance at least A$100 billion of short term foreign debt every 90 days or so. If international credit markets remain frozen for months rather than weeks and if the European and US banking systems have an extended catastrophic breakdown then our banks will not be immune from these stresses. If this crisis goes beyond the next few weeks then our banks will have to sharply curtail new lending, particularly housing lending. Credit rationing of shorter term credit to businesses will intensify. Regardless of the fundamental soundness of our banks, this will make people nervous about the NZ$90 billion of deposits in our banks. That's when we need to have acted ahead of time and guaranteed deposits of at least NZ$25,000 per person. A even better option would be a full NZ$100,000 deposit protection, which would bring us closer into line with Britain, which has just increased its protection from 35,000 pounds to 50,000 pounds and America, which has just lifted its protection from US$100,000 to US$250,000. (Updated to include call for as much as NZ$100,000 protection.) We cannot afford the unthinkable. Hopes that the US$700 billion bailout would solve the crisis are now dashed. See my piece here from late on Friday on why a European and US banking catastrophe is now a possibility.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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32 Comments

I am reading your blog

I am reading your blog in Ireland, and here there is a lot of talk about the economy and a black budget approaching. The recent guarantee has calmed people down but a deposit insurance scheme may not result in things improving as the Irish experience shows.

In the run up to the guarantee being given the insurance amount on deposits was raised from 90% or €20'000 per depositor to 100% or €100'000 per depositor. This did not work. Also there were complaints by the government to RTE (Irish Radio) about one show which resulted in people placing €50 million into the government guaranteed savings account at An Post.

Before the guarantee was given to the major Irish lending institutions (not all banks in Ireland are covered) they were a day or so away before somebody here collapsed. the law was rushed through in a few days and has improved things here a lot with bank liquidity system.

I hope that somebody back home decides to introduce at least some form of deposit insurance. But as the Irish experiance shows this may not solve the problem.

The UK is now bumping

The UK is now bumping their scheme up to £50,000 per account holder per parent bank. The FSA advised some months ago for people to spread amounts above this between unrelated institutions. So if NZ was to introduce such cover, kiwis should therefore be able to secure at least $100K between different banks. Can't believe government are dragging the chain on this. No - on second thoughts I wouldn't expect any kind of foresight from them.

good to see you echoing

good to see you echoing my call from last friday..on the urgencies of/around this..

http://whoar.co.nz/2008/here-is-an-election-winning-policy-plankwe-must-...

and..i wonder how long key/clark can keep pretending this meltdown/these elephants rampaging through the room..

..just aren't happening..?

phil(whoar.co.nz)

At this stage of the

At this stage of the game the only option is to guarantee bank deposits of any size. The preference is for the announcement to be made in a coordinated way through a multilateral organisation such as the BIS, IMF or OECD. Ireland faced a choice last week after one or more major corporates signalled they would shift billions out of Ireland - either let its banks go under, or guarantee all deposits. Public corporations have an obligation to safeguard shareholders' interests and will be worried about legal claims from shareholders if their funds are left in a bank that goes under in a country where there's no deposit insurance. At the end of the day, Ma and Pa depositors will be left high and dry if large corporates shift their much larger wodges of cash offshore, so's there's no point in prevaricating with a $25,000 cap just to prove that you're not protecting rich pricks.

Sharon, You are right of

Sharon,
You are right of course. I have updated to say at least NZ$25,000 (which would at least bring us into line with the Aussies) and more like NZ$100,000.

cheers
Bernard

25k? How much of the

25k? How much of the savings of people who refused to pay the bubble prices for housing the last couple of years would be covered. Savers didn't cause this mess. All deposits should be safe, 100%. It's our money, not the banks'.

I would have thought that

I would have thought that a %100 guarantee is on the way. If Aussie banks have 100 billion $ of short term borrowing falling due, to get that rolled over they will have to %100 guarantee it or you may as well shove it in Europe where it is %100 safe in theory anyway, or face very high interest on it.

Of course it's got to

Of course it's got to be 100% - and if it's a government sponsored insurance scheme (as opposed to a depositor or bank sponsored scheme, which is what I believe they have been in the past in other countries?), then the legislation passing it should make the government a secured creditor - so that, should the bank be placed in receivership, the government has first dibs on sale proceeds. If a bank doesn't want to accept that, then I suppose they could choose to opt-out of the scheme.... and thereby let their depositors make their own decisions about whether they stay with them.

"We at Interest.co.nz are today

"We at Interest.co.nz are today calling on the National and Labour parties to work with the Reserve Bank of New Zealand to neutralise this issue before it becomes a political football"

Gets my vote.

Steptoe That will depend on

Steptoe
That will depend on what the books look like this afternoon. Id be selling the Kiwi now. Labour will want to keep its spending Nat will want to slash end of the day Politicians may not get to have much choice.

My problem with this is

My problem with this is that it relies on a small percentage of market failure, ie if one bank fails the scheme pays out, if there is a systematic failure (as is happening now) the deposit insurance scheme fails (since insurance is simply distributed risk), when it comes down to it the govt is the underwriter of last resort (as in the bailout).

So we don't need a deposit insurance scheme, but as the government issues banking licenses, regulates banks, then it should guarantee the function of those banks

Abdicating this responsibility to another enterprise is very "free market" but in fact is pointless, after all who insures the insurer?

Neven

I support the call for

I support the call for a deposit protection scheme (not least for the welfare of my own savings).

The government/reserve bank argument for not having such a scheme is that deposits would be used to fund risky ventures, and that depositors should be responsible for assessing the risk factors of all their saving vehicles. That's fine to say in principle, but flies in the face of experience. The majority of mum & dad savers are not financially astute enough to do such analysis. Also, the flip-side of this argument is that with no risk-burden faced by the state, there is no incentive to legislate for the analysis and publication of risk factors by saving institutions. The purpose of the state is to protect the public from risks that cannot be faced by individuals alone. Management of the world economy has stumbled due to a lack of supervision and responsibility at the top echelons, it's not the fault of joe public.

I think our hand will

I think our hand will be forced. Australia will move to guarantee deposits and we will look a bit stupid sitting on the sideline , piles of debt no insurance and a lot of money heading across the Tasman for security.

Here in the USA the

Here in the USA the FDIC deposit insurance is $250,000 per person / per bank.

In other words half a million dollars per couple per bank. If you have more than $500,000 (or $250,000 for a single account holder) just move the rest to another bank.

Therefore we are covered for 100% our deposits.
The result is none of us are making a run on the banks.
They will survive.

AU$20,000 per account in Australia is pathetic. NZ$00 is criminal.

I think allowing deposit insurance

I think allowing deposit insurance is just adding more dominoes to the line in this current climate. (The insurance giant AIG's woes being a reminder). Govt guarantees look more realistic/effective.

Yes, Josh, I agree -

Yes, Josh, I agree - I was under the impression all the current 'guarantees' by governments that we are hearing of are indeed 'insurance' by the Federal Reserves to effectively print more money, loan it to Treasury, who would pay out to depositors whose banks have defaulted? And one would expect therefore that the Treasury becomes a secured creditor of the defaulting bank in the event of receivership?

Kiwis are all obviously now

Kiwis are all obviously now very worried about their hard cash and desire insurance. The high interest you received is now of no consequence as another earlier, not even considered consequence looms.

Yen mums loved NZ's high interest (JP Bank dep interest less 2%) almost as much as NZ's cute sheep....beware the Japanese are not cute sheep when it comes to money and if they find out NZ Banks are risky look out for the silent run.

As I have noted before it is taking a while for the world's financial woes to get to the JP public (few speak or read engrish well even if the world's most literate nation..quite a proportion of their reading is manga!!) NZ certainly does not feature in the news. Japan's recession and inflation is in the news but nothing of JP bank instability.Japan is at present a safe haven but things may go pear shaped if trading with their biggest trade partner (USA) slows down rapidly.

Perhaps that your worries about your personal bank deposits are not known not up here in Japan is a good thing in terms of yen mum backed NZ bank investments?

Bernard, do you have any hard numbers (perhaps both short and long term deps) on level of Japanese investments held in NZ Banks? Would a Nihon (JP) run hurt?

i'm on holiday this week

i'm on holiday this week folks...best place to be is lying on a beach :-)

the bottom line is that all bank deposits are guaranteed, whether by legilsation or not.

the nationalisation of northern rock a year ago merely confirmed this.

it is a bedrock of society and whilst i have aso argued for formal deposit insurance, in a scenario we have now, its unnecessary.

why?

because the whole financial system is under threat.

bank deposits are actually the banks assets not yours.

slowly but surely the shroud of banking sleight of hand is being revealed and it will show that banks do not lend your deposits out but use them as margin to create loans.

the current leverage is between 12 and 15 to 1. In the case of leveraged investment banks it has been as high as 33 to 1.

over the coming weeks you will read how the US investment banks and the SEC colluded to impose voluntary capital requirements which allowed the ballooning of leverage in the system.

Where is Roger Kerr to comment on this?

the abolition of reserve asset requirements at a "normal" level (previously 15% in the UK) has unleashed wave after wave of credit creation. those waves have now turned into a tsunami.

like all tsnamis they are hard to see until they are right on top of you. some animals are finely tuned to this and run for the hills. the same for some humans who have foreseen this for many years.

the outcome?

- banks shares are not worth very much.
- your deposits will be safe.
- banks that fail will be nationalised and disappear.
- the banks that are left will be faced with capital requirements far in advance of the nonsense outlined in Basel II.
- a state monetary authority will issue intrerest free money into the economy via a basic income.
- banks will take deposits and make loans but may well be replaced by Peer to Peer lending.

a proposal is forthcoming for how the new system will look.

meanwhile i'm off for a swim.

While NZ investors seek insurance

While NZ investors seek insurance up here in Japan there is a different aspect is suddenly being reported front page.

This morning the Yomiur Shinbum /Saito headlines AIG sell off in Japan and cites the crisis is a 'once in a million opportunity for Nihon firms. Another article states 'Bad news is good news for Japan'. It was also mentioned that domestic financial institutions have been acustomed to low risk low return approaches to business. One article mentions the situation was a 'God given opportunity for Japan' (strange as 1% are Christian). As I said in a response to Danica (bnz) two weeks ago watch out for vultures.....

What I find interesting is the sudden Nihon front page reporting on financial matters, perhaps it will turn to looking at the financial situation in other countries more as opportunities are sought in sifting the financial debris. It is ironical that while NZ is looking at lost oportunity, Japan is looking at new oportunity. I just hope their industry does not falter as the US markets slow up...perhaps Japan is looking to finance as a growth industry for them as the making hard commodity industry slows. The US may need to return to a more cottage making industry as the huge financial industry is in tatters. Ironic really.
What worries me is that Nihon finance could be withdrawn from NZ and returned later to take advantage of the loss.

I have quoted before in Nihon business there is not etiquette and ethics just policy (De Mente Boye La Fayette). While you worry about 'insurance' for your deposits keep your eye on the vulture circling in the rising sun)

Anything less than 100% government

Anything less than 100% government guarantee is going to be useless, particularly since the small minority that has staid informed and cashed up early (before any finance companies went or US trouble actually manifested) would be sitting on way more than 25K or even 100K in bank accounts. Having relatives in Germany might just come in handy...

I for one, am off now to write an email to both Helen Clark and John Key to tell them what I expect. Else, I make my moves without waiting very long for their move to re-assure me, and needless to say, not even John Key will get my vote now!

Bernard I see the security

Bernard I see the security minded Winston Peters agrees with you (or vice versa).

"We will protect your investments and savings by providing a government guarantee to approved financial institutions like Kiwibank and the Taranaki Savings Bank.We're going to guarantee deposits up to $100,000 in NZ owned banks", Winston Paters campaign opening speech.

http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=10...

I think one of the

I think one of the reasons that NZ banks have not suffered so much from this global situation is that because there is no deposit insurance in New Zealand they actually have a strong incentive to be prudent in the risks they take - (that the BNZ was bailed out in 93 somewhat weakens this though)
If bank deposit insurance was introduced here all that would happen is that banks would in effect, have excessive risk taking subsidised by the surety that they would be bailed out if they buggered up.
That is not something that we want at all - bank deposit insurance is just a heads-we-win, tails-taxpayers-lose situation.
If a New Zealand bank were to fail, it should be allowed to fail.

btw..mr hickey.. ..when did you

btw..mr hickey..

..when did you issue your first warning/alert about this (upcoming) economic mess/crisis..?

..i issued/passed on my first warning..at whoar..

..on friday..the fourth of august..in 2006..

..http://whoar.co.nz/2006/the-odds-of-economic-meltdown/

phil(whoar.co.nz)

this story from back in

this story from back in march this year is also interesting reading..for 'pundits'..

http://whoar.co.nz/2008/the-credulous-finance-reporters-and-securities-a...

phil(whoar)

Phil You were well ahead

Phil

You were well ahead of me. I didn't start publishing here until late January this year and did not start talking about this stuff until February, when I predicted a 30% fall in house prices. That was enough to make me plenty unpopular...

cheers and well done for your prescience

cheers
Bernard

Can someone explain to me,

Can someone explain to me, which insurer covers for the NZ deposit insurance and which insurer covers for the insurer which covers for the NZ deposit insurance?

Frozen great! I'm going to set up a money- printing company- plus introducing a new old paper currency- fiat money.

chrs.. i would also submit

chrs..

i would also submit that doing a search on whoar under 'meltdown'..

..brings up a timeline of stories..

..and some..in hindsight take on much more signifigance..

..one is a tip from a wall st newsletter about 12 months ago..

..noting a sudden trend/surge of finance company executives 'cashing up' their company shares..

(..of course..'at the top of the market'..eh..?.

..did they 'know something..?..

..d'yareckon..?..)

..there is so much about this that smells so bad....

..and one gobsmacking thing for me..

..is that these 'experts' from our treasury..as recently as june.

..were going 'recession over!/'happy days are here again!'..

..(that one almost had me tearing my hair out..)

..i guess there is little accountability there..

..and they will still get their 'bonuses'..

..phil(whoar.co.nz)

What are they doing. Bi

What are they doing. Bi (Multi) party talks on this are essentila. And why the limit of $100,000 Bernard. it will be the movement of corporate and high wealth depositors that will do the damage and unless you give blanket coverage the damage will be done. They had better act soon. For one i am not waiting and while most funds are already overseas i will be voting by TT.

Andy ive moved. I see

Andy
ive moved. I see the Uk is increasing its insurance but 2% of depositors will miss out and they own 50% of deposits.
By the way commodities are getting hammered milk products still trending down.
http://www.telegraph.co.uk/finance/markets/3148364/Russia-and-Brazil-cru...

Bravo Bernard for bringing this

Bravo Bernard for bringing this up. What better way of reducing panic and re-assuring folk then safeguarding their savings. It would only take a rumour in todays climate to start a bank run like Northern Rock. Re-assurances from authorities have had little success of late with so many simply proven to be self serving. Come on NZ, make savings safe BEFORE things worsen.

It appears that deposits at

It appears that deposits at RaboPlus are already guaranteed. See, http://tinyurl.com/4jlwg9

Hmmmm, the option for all

Hmmmm, the option for all banks, finance institutions to gain a funds guarantee - a distinctly political move especially seeing they didn't do it on a bi-partisan basis. i can see the picture Labour is trying to paint.

Still as I mentioned Bernard it was really the only option (with regard to the banks) and having any limit would be self defeating. I do realise Bernard you may have thought this too but did not expect Cullen to go this far. I think at least they must have been talking to the Australians and any move would need to be complimentary.

BUT

Hard on the Big Banks as they will be paying for it and unlikely to be the ones that would ever need to use it - and it will provide a large competitive (anti-competitive??) leg up for finance companies.

Still , not complaining as the only two finance companies we thought OK and put mum into middle of last year were Sth Canterbury and Marac .

What I want to know though as a shareholder in our Treasury is this question. Is there any due diligence required of these Building Societies and Finance Companies and any strict oversight as to their lending going forward? We don't want to have to go through all this pain again. There is no quick fix.

Does it include the consumer finance companies?? Like the ones which have ( and still are ) promoting 24 months interest free etc etc and encouraging our population to live on credit. i wonder what their books are beginning to look like. As a taxpayer i hope not as I can see us holding all those loans as they bailout and start up new company XXX Finance Company 2009....of course after they have paid their directors huge back payments.

And under $5 billion they don't pay for it - what a joke.

Probably why Labour wanted to do this themselves. If they have widened those institutions qualifying for the guarantee too far we could end up regretting this big time. Any one want to be the next government?

Anyone keen to start up a finance company with me. Could be a great lark. Might be a boom industry.

I just hope there is some devil in the detail.

It may even show once you get into the specifics that having guarantees is not the answer as it is too hard defining where to draw the line. Only banks...and all money comes out of finance companies. Only one country (Ireland was first?) and you get capital flight. All institutions and as taxpayers we are not just ensuring against unjustified runs on the bank (more like clicks on the bank) we as taxpayers are possibly taking on all the excesses of reckless lenders and borrowers and even worse potentially perpetuating and increasing the excesses for a future crash on an even bigger country scale. Anyone heard of Iceland. I think the IMF will be kept busy. No wonder Paulson is worried.... they might not have enough left in the coffers to bail -out the USA.

Jim Rogers is right...step back, let the weak fail and let capital flow into the strong - Only 2 years pain. But his job is not as an elected politician. Kind of where Democracy falls down. So we may be looking at the the Japan scenario of the last 20 years. Ouch
I just wish it was a bad joke or dream.

So on a philosophical level I have now talked myself out of guarantees but why on a geopolitical (and electioneering) level they had no choice.

At least, please Mr Cullen tell us there are some restrictions on which institutions and what lending will qualify.