Interest.co.nz chats to RBNZ Deputy Spencer about the challenges in weighing up the IMF's call for deposit insurance or a pre-stated 'de minimis' option against the reality of having to wait to see how big a hole you're dealing with if a bank fails

By Alex Tarrant

“There are always challenges around these things.”

Reserve Bank Deputy Governor Grant Spencer, on resumption of the debate on what happens if a NZ-registered bank fails.

Ask the bloke beside you on the bus tomorrow morning what he thinks of the RBNZ’s Open Bank Resolution policy.

In the perfect Interest.co.nz world, he’ll give you an opinion on moral hazard, whether government actions during the GFC led New Zealanders to believe there’s an implicit State guarantee of the banking system, and how a deposit insurance scheme might affect bank and depositor behaviour.

In reality, he’s more likely push the stop button and get off early.

He shouldn’t. He should ask what on earth you’re talking about and then take great interest as you launch into your own opinions on how well-protected bank depositors should be in this country.

The IMF recently recommended New Zealand adopt a deposit insurance scheme. Simply, if a bank fails, the government would bail out regular term depositors up to a certain limit.

Finance Minister Steven Joyce was clear that the government doesn’t like that idea, following a long-running stance held by John Key and Bill English. But he has said that tweaks were being considered to the Reserve Bank’s playbook of what would happen in the case of a bank failure in New Zealand.

Get used to the term, “de minimis”. Not because we’re expecting any action on the bank failure front, mind – far from it. This is just a topic we should all be aware of.

De minimis is not the latest Italian rap sensation. Rather, it regards the subject of ‘minimal things’. And in the present context it relates to whether a small portion of your deposit in a bank would be ring-fenced for you to still have access to if that bank went belly up.

The RBNZ’s Open Bank Resolution system is basically what it says on the tin. It is a method to try and keep a bank open after a failure event, while the central bank tries to resolve whatever has led to that failure.

I sat down with Reserve Bank Deputy Governor Grant Spencer on Thursday to discuss the Bank’s thoughts on the IMF recommendations, and to see if he could add to Joyce’s teaser that changes were being worked through to the OBR regime.

The regime already has scope for a ‘de minimis’ to be declared, Spencer explains. At point of failure, the Finance Minister can declare that $X in every depositors’ account will remain accessible.

Now, the IMF doesn’t want people to have to wait until after the fact to know how much of their money will be accessible. It wants the government to have an already declared $10,000 'di minimis', arguing this is the next-best option to a deposit insurance scheme.

And here’s where Spencer’s quote about the difficulties comes into it. You can’t know the size of the hole that led to a bank failure before the fact. So, it’s hard to promise how much of someone’s deposit will remain accessible.

“You can’t make it too large or it may not be fundable,” Spencer says.

“And it creates a preference – it’s sort of like depositor preference, which the Aussies have. In a failure, depositors [there] are all covered first, whereas in our regime a depositor is just another senior, unsecured creditor standing in line with wholesale creditors as well.”

That’s another thing to remember. Bank depositors are one of a number of sources of bank funding. Some banks have a greater proportion of funding sourced from retail deposits, some less.

“If creditors overall are taking a haircut, but every [retail depositor is] guaranteed $10,000, that means that potentially other creditors have to take a bit more [of a haircut],” Spencer says.

“The government’s not paying this,” he reminds us. “This is not…a deposit insurance or a bail out where the government comes to the party. This is really who gets paid first and who’s front of the queue and how much you get.”

If it comes to it, a small de minimus would be much more manageable. “If it gets too large, it gets more difficult, particularly if you’ve got a bank that is very much retail funded,” Spencer warns.

“Those are the sort of challenges you get in designing such a regime.”

The IMF reckons pre-establishing a de minimis amount in legislation rather than leaving it to be addressed on a case-by-case basis could provide the same certainty to depositors as a deposit insurance scheme.

“This could mitigate against runs,” the Fund says. “It could also contribute to consumer education, as it is a simple message to communicate that deposits will be protected only up to the de minimis limit. The greatest certainty would be provided through a clear legislative framework including depositor preference for the de minimis amount.”

But again, that leaves the problem of the RBNZ and Finance Minister not knowing what kind of hole you’re going to find in a failed bank.

“Under the current OBR policy…when it’s all happening, the Minister comes out and declares what you’re going to keep [aside] to protect small depositors by saying you get $1,000 or whatever. But it would be in the context of how big a hole, the nature of the bank, the conditions of the day,” Spencer says.

“We recognise that’s not particularly satisfactory from the point of view of small depositors. Most other countries have these fantastic deposit insurance schemes with large amounts [covered by government].

“We’re saying, 'well can we enhance/make it better for depositors here [with the OBR] without going to that full-blown deposit insurance type thing?'.

"That’s the challenge.”

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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94 Comments

Elderly or older people with sizeable bank term deposits should spend their money now - get that new car, install heat pumps, buy a new iPhone 7+, order online groceries, redecorate, install a solar system, etc.
Enjoy your money while you can, don't wait.
Plus this stimulates the local economy, and reduces your personal risk, & your baby boomer kids probably don't need it.

Are you suggesting they do a run on the banks?

Not at all.
Just best to enjoy retirement now not later. Sometimes later doesn't come.

But of course it would have the same outcome.....'No point leaving your money in the bank in case the bank fails. Better get it out and spend it now and enjoy it while you can'.

That was your quote not my quote.
By all means keep some money in a NZ bank, while spending some to enjoy the present.
Some wise home improvements for example can reduce future overheads while maximising lifestyle enjoyment, which is a safe investment. A new car is often more cost-efficient.

Yes spending money (savings) right now seems to me to be a great idea. But it should be on things which will effectively earn money in the long term. Like putting in a water tank. (Council water rates always go up by more than inflation). Another factor not mentioned by anyone at the moment is that GST may be increased in future. When the increase to 15% occurred, overnight at the flick of a switch it devalued everyones savings by 2.5%. So spending now would mitigate this potential danger as well. There are not many forms of expenditure which would mitigate against this though. Think long and hard. A big holiday this year: rather than next year: maybe. But thats relatively short term thinking. Solar power? (A relatively small amount: its not economical to sell excess back). Maybe, but prices for solar may come down in future.
Up to you. Make your own decisions.

GST only applies to those that are forced to spend on services that are via businesses. There is an underground business of ex-tradies that are now in other jobs after the last boom/bust cycle and these fellas still have the skills and like cash payments. NO GST in cash jobs. You just need to know your tradie inside out!

Nothing says classy like tax evasion. Can anybody smell an audit coming? ;)

For once I actually agree with you somewhat. Spend some of your savings on reno's and maintenance and prop up the economy before everything tanks and the bank runs start.

Also poor FHB who might be saving every $ to raise a deposit...... what happens to them.

The poor FHB gets shafted on every level unfortunately. They are forced to save longer and put their money into the very banks that can go bust because of their past lending policies on easy and cheap credit. It's potentially a very bad scenario but is becoming a reality, sadly. You can mitigate some of the risk by spreading your savings equally throughout different banks and make sure that you include some of our Kiwi owned banks in your spread. Cyprus initially wanted to confisgate 40% of all savings until the people revolted revolution style. They eventually agreed to taking 40% of all savings over 100K. That is recent history, ie within the past 3-5 years.

Nothing to fund your mortgage though, mortgagebelt. Youll need to tighten

As usual, the banks taking high risks in the housing market are not properly governed, which maximises their profits, which are privatised until things go belly up and the losses get socialised.

As for the elderly: Should their deposits get a hair cut, how many will need the government's extra financial support afterwards? I can easily imagine many having to leave retirement villages, private health insurances, etc.

You are right MortgageBelt, it is time to withdraw deposits from banks and invest or spend elsewhere.

I think you would be better off buying Government short duration securities, there is no risk

Govt debt is anything but zero risk. Based on a proper accounting analysis, they are all insolvent based on future liabilities. Invest in them only if you're prepared to lose the principle.

Anglo Irish was crowned world's best bank in 2006. Surely the best advise is to have equivalent $10000 stored somewhere other than a New Zealand bank and not denominated in NZD.

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It is absolutely and totally absurd that I can buy insurance to insure a properly but cant do so to fully insure a bank deposit. It is simply not a level playing field & another reason investment is distorted towards property.

A deposit insurance scheme should be enacted. It will simply be funded by an increase in lending margins.

It is then up to the Reserve Bank to ensure the capital buffers, leverage ratios & their monitoring of the banks (& any financial institution taking interest earning deposits) are adequate and conservative to buffer the moral hazard.

Further to this there is absolutely no reason why banks could not offer different interest rates for insured and uninsured deposits.

Well really it should be our Government providing coverage to protect peoples savings as they do in other countries such as the UK.

Yes, that would be the intent.

NO. JUST NO! John Key knows exactly how a government gauranteed deposit scheme works and in the end it just gives the banks a free run to irresponsible lending practices which is what caused the GFC in the first place. Besides why should I as an "Unsecured Creditor" who lends my savings back to the bank in order for them to lend back out to all those over-leveraged investors at a ratio of 90% of my term deposit money, be given incentive to keep up the ponzi credit system? John Key introduced the OBR for a reason, so that our country doesn't become the next Cyprus, Argentina or Spain for example.

No you've got your facts completely wrong TainuiBabe. The UK Government guaranteed deposit scheme was introduced to prevent a run on the British banks and boost costumer confidence after Northern Rock got in to trouble.

Here you go: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11032772...

Quote from article: September 15 2007: Customers besiege the bank (Northern Rock) to withdraw money, ignoring official reassurance. Two days later the Government steps in to guarantee deposits in a bid to stop the run.

Sometimes a bank run is better than trying to pay for the bank losses with Tax Payers money! America should have just left the banks to fail instead of bailing them out and then we would have a very different scenario today! Do you wonder why Trump got elected?

Yes and most Americans are now very much regretting electing Trump. Plus if you allow a run on one bank the rest go down as the fear spreads.

Would you suggest that we stuff it under the mattress? Personally I'd rather spirit my savings back to the UK, glad I left my bank account open over there. At least the UK banks provide some safe guards for peoples savings.

Not at all. I would suggest you spend it and enjoy it now rather than risk it being confiscated at worst or being devaluated month by month. You can't take it with you...

Sorry but I don't find that very sound advice. I would rather head back to the UK and take my capital with me before spending my hard earned savings whuch I need for retirement.

I agree with Tainui - not sure if you've read any of Malcolm Gladwells books, but one of them is called 'Tipping Point'.

In terms of a bank run, if we go through a tipping point (an event or shift in public sentiment) it will become contagious. Much like the madness we've seen in the property market where fear of missing out and desire for greed have seen people pay far too much for houses and take on way to much debt.

I think its going to take some calm leadership and clear thinking to stop a run from happening if the housing market starts to turn significantly and rumors start spreading about any weaknesses the banks have (and people become more aware of no deposit guarantee). It could become a snowball like event that gains momentum over time.

Except it wouldn't actually have to be taxpayers money! Where do you think money comes from? It would be quite possible for the government to "print" the equivalent of all deposit-holders accounts, put them into kiwibank or wherever, and leave the bank itself to go bankrupt. Wouldn't cause inflation because no new money has actually been created.

If we stay with the OBR only then the government needs to make a range of government treasuries and bonds available to retail investors at low values (say $1000 upwards) with no additional transaction costs directly ex the debt management office. Kiwibank could have a monopoly on supplying these. These would not be risk free but close as we could get.

It comes back to the fundamental issue of insurance. In the free market I can insure just about all major assets except bank deposits. The NZ Government is standing there saying, no you cannot insure them. This is ludicrous.

You can buy Kiwi bonds, easily. They are not govt guaranteed but, as the prospectus notes (from memory), the Crown cannot be wound up so your holding can't be extinguished, unlike in a retail bank.

Insurance is a waste of time because US Hedge Fund Managers are already shorting our banks, which means they are buying futures contracts and betting against our Big 4 because they believe some of them will fail. Insurance won't even cover the amount of losses which is possible with these types of trades going on. This is what led Lehman Brothers Bank in the US to implode. They could have possibly traded their way out of it, but when all the derivatives were cashed in, it was game over. This was the first bank to hit the wall which started the GFC in the first place. There is a very real possibility of that happening to one or two of our Australian Banks because there are an awful lot of highly leveraged housing loans out there and they no longer have the mining industry to keep their country afloat.

By kiwi_overseas......One of the most intelligent comments in this thread

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I'm sure if the general public knew and understood the OBR,
you would have runs on the banks in times of world upheaval.
so the RBNZ relies on the general public unawareness to stop that happening
if the time comes it will be interesting to see how this plays out it could be quite nasty

That is actually a really good point. I don't think has been much of an education campaign on it. I think most people expect banks to have deposit guarantees on them backed by the government, as that is how many other countries do it. Even nz did have a deposit guarantee up until a few years ago.

It is always advertised with the OBR, that a bank failure is an unlikely event. But is that correct these days? How unlikely is it that a bank will actually fail this year, or next year? I pressume some are more risky than others, and that is reflected in the bAnks credit ratings. But that can changed between the state of deposit and the maturity date. So even depositing based on credit rating is a gamble imo. But I don't think people even understand what the credit ratings mean. Especially as the credit ratings on banks only seem to be dropping. Deposit guarantee are really the only solution IMO. Also people don't put their money in the bank as an investment, it is more to keep it safe and protect it from eroding from inflation. So really IMO it should be relatively risk free. If people wanted to make money from their money, then they would likely buy some houses, or shares with it.

Rob have you ever actually read your banks "Terms and Conditions" Policy? You signed an agreement without reading it when you invested your savings? Go and read it on your banks website if you need to. By law they are required to publish it so that all of their unsecured creditors have all of the information available.

My post said most people. The fact is most people don't read terms, and even if they did, they are often written in legal speak, that you need to do a law paper or two to 100 percent understand. But nevertheless a bank should be a safe place to keep savings, as it should be the lowest ever risk, reflected by the paltry returns. The fact that many OECD countries have a deposit guarantee, including Oz, which owns most of nz banks, but nz doesn't, simply shows that nz is seriously out of step

We did have a government guarantee right after the GFC banking crisis. Helen Clarke was forced to act because investors were starting to withdraw funds, so she put in a temporary guarantee to keep faith in the banks. The guarantee expired about 2-3 years later, but by that time most people had forgotton they were no longer safe.

I have tried to explain the OBR policy to many of my friends and colleagues and I have learned that as soon as I see their eyes glaze over, it is time to stop preaching to idiots who think I am a conspiracy theorist haha. I don't bother these days with trying to warn people. I think of the advantages and money to be made when the majority of the herd wake up one day because they slept through their alarm clock.

TainuBabe,

I made a brief submission last year to the RB on their 'Dashboard' proposal. I very much doubt if their proposal will do much good in raising public awareness,unless it is accompanied by a substantial and ongoing information campaign.
I have been conducting my own and very unscientific poll among people I know and very few of them know much,if anything about OBR,far less how it would work.
I understand moral hazard,but nobody has as yet satisfactorily explained to me how well over 100 other countries have managed to deal with it.

Undertakers would be real busy.

It would be a good vote winner for one of the opposition parties. "We shall require the banks to run a deposit insurance scheme that ensures that depositors will get all their money back"
That way everything is up front and the depositors can see the cost of the risk when they are making their investment decisions, not afterwards when the banks may have failed and it is too late. It would also put pressure on the banks to act more responsibly. If they are running risky policies then insurers may not want to insure them or only do so at a high premium.
I would hope that if this became an election issue, it would force the incumbents to do likewise.

Deposit insurance schemes do not normally provide unlimited cover. E.g. Australia is capped at AUD 250,000.

For all practical purposes is it unlimited in Australia. It is $250,000 per person per financial institution of which there are more than 100 included in the Australian insurance scheme. So the money could be spread and the risk of a bank failure further removed. And if you had a trustworthy partner, he or she could have a similar spread of insured bank accounts in his or her name.

Plus considering nz bankss are mainly owned by Australian banks, shows that NZ should at least be following Australia's lead. As someone posted above, you can buy insurance for most other things, but not you life savings in a bank. If everyone decided to remove their money from the bank under protest for not having a guarantee to protect people's savings, it may cause a bit of a problem for NZ.

Having a de minimus would elevate a proportion of bank depositor fund into the realms of the "covered bonds" esteemed status. Rightly so. No depositor wanted the covered bonds to be introduced. The government allowed that. So the government should state what the required de minimus is. Once that is done, depositors can make decision: do I place more than that with this institution or not? And after that happens, the institution can take whatever funds have been deposited with it and make a decision: will I play funny games and provide funds to this foreign person who provides me with this assurance that he is earning X dollars per month. OR DO I NOT!

What this suggest to me is that given RBNZ's investigations and policy/planning initiatives, nobody should write off the prospect of a trading bank failure as being impossible.

Quick question - does this also apply to funds located within revolving credit accounts of a mortgage? Would the whole balance remain available or would only the de minimis be accessible during a bank failure?

If it is a serious bank failure then yes I believe that all money is at risk not just the Term Deposit holders, but also untapped credit lines and your average savings may come into play. I researched the OBR policy on our very own RBNZ website a couple of years ago and it almost made me discharge my mortgage with my bank.

So can money be taken from an un-drawn mortgage?

The wording around an untapped credit line was very vague and I couldn't find any clear answer, which always makes me nervous. If you can get a clear answer from our RBNZ on that policy, then please share it with me.

Thanks and will do if I find out

Given a bank can call in a revolving credit facilty on demand ,there is a zero percent chance that they will be available in the event of obr. If theres a question of paying out unsecured creditors, a bank cant be a creditor itself, via the mortgage

Thanks - I appreciate the answers that both you and TainuiBabe have given. I'm trying to get my head around what would happen to people who use revolving credit as their main account for day to day living (an approach that some personal finance advisors recommend). How would they buy food, electricity etc... would freezing all revolving credit cause further damage to the credit system by freezing everything up? I understand your point that the bank can't have people using the bank's credit while creditors are losing out.

In the event of a serious bank run (like the one that just happened in Canada last week) draw down the maximum daily amount from an ATM. You'll need cash to get buy until things settle down. That should at least keep some things going.

In Cyprus about 27% was transferred from bank accounts to bank capital. There will be some money about but a lot less. There's a real risk of payments seizing up and cash flow halting until things settle down. It's tough to pay for things when you can't get paid.

In the US the whole banking system changed after the subprime crash. Those untapped floating mortgages were changed so that the available limit constantly decreases as it's paid off. If things are particularly bad credit can seize up for quite some time which would do a lot of economic damage.

How bad things turn out depends on how severe a bank collapse is.

Excellent comments. Thanks

Aren't the four major banks in NZ TBTF already ? I am sure the Government will come to bail out if any of them goes under....They have to, as happened in the US.

NO smokey the government does not bail out Australian owned banks. They will however utilise BAIL INs which is exactly what this article is about... OBR policy. Read about it on our RBNZ website. It isn't a new policy. There have been plenty of news articles about it also over the past couple of years but people only read good news headlines.

“And it creates a preference – it’s sort of like depositor preference, which the Aussies have. In a failure, depositors [there] are all covered first, whereas in our regime a depositor is just another senior, unsecured creditor standing in line with wholesale creditors as well.”

Absolute rubbish - depositors are captured by a corrupt system of bank ledger credit fabrication that central bankers fail to publicly declare. There is no money beyond ~$6.0 billion circulating notes and coins for depositors to offer banks to intermediate to deserving borrowers.

It is a case of bank liability preference.

What banks do is to simply reclassify their accounts payable items arising from the act of lending as ‘customer deposits’, and the general public, when receiving payment in the form of a transfer of bank deposits, believes that a form of money had been paid into the bank.

No balance is drawn down to make a payment to the borrower.

The bank does not actually make any money available to the borrower: No transfer of funds from anywhere to the customer or indeed the customer’s account takes place. There is no equal reduction in the balance of another account to defray the borrower. Instead, the bank simply re-classified its liabilities, changing the ‘accounts payable’ obligation arising from the bank loan contract to another liability category called ‘customer deposits’.

While the borrower is given the impression that the bank had transferred money from its capital, reserves or other accounts to the borrower’s account (as indeed major theories of banking, the financial intermediation and fractional reserve theories, erroneously claim), in reality this is not the case. Neither the bank nor the customer deposited any money, nor were any funds from anywhere outside the bank utilised to make the deposit in the borrower’s account. Indeed, there was no depositing of any funds.

The bank’s liability is simply re-named a ‘bank deposit’.

Banks create money when they grant a loan: they invent a fictitious customer deposit, which the central bank and all users of our monetary system, consider to be ‘money’, indistinguishable from ‘real’ deposits not newly invented by the banks. Thus banks do not just grant credit, they create credit, and simultaneously they create money. Read more

Is anyone paying attention to whats going on in Canada? There's a bank run in progress at Home Capital. People are afraid, they're in panic mode and have withdrawn 94 % of the banks "assets" in the last 6 weeks. I believe Canada has an OBR but they're already talking about a bail out.... a bail out not a bail in. Does anyone seriously believe that a bail in would actually happen! South canterbury finance got a 1.6 billion bail out here in New Zealand. I guess the relevant question is "who is too big to fail and who is not" Perhaps it depends on where the politicians have money invested?

Aye yes I have being paying attention and there are actually two bank runs going on now. NZ doesn't do bail outs anymore, because most of our banks are owned by their Australian counterparts and the good ole OZ government will still bail them out, which is why it is good to own shares in Australian Banks! The house always wins when they have a taxpayer funded bailout regime in place! We do NOT want to be bailing out our offshore owned banks and we won't be... John Key already said a big fat NO to that, hence the OBR policy was introduced quite some time back now.

Why would they bail out the NZ arms of the banks though, as aren't they run as seperate companies? With Oz cutting things such as university funding to kiwis, I can't see them bailing out NZ arms of Australian banks....or do they have to?

So are you saying that the NZ Government could bailout NZ owned banks, if one failed?

but would not the Australian banks not cut their subsidiaries loose if the shite hit the fan.
I still believe which ever party is in power will be forced to guarantee 10K as a minimum to stay in power especially in a MMP parliament.

This could be why the subject is current being discussed so it is disingenuous to consider a NZ Bank failure is unlikely and clearly ring fencing an amount of available cash is sensible other wise transactions between everyone is frozen unless digital transactions are allowed preventing the removal of real money ie cash from the system.The relaxing of rules to allow covered bond which gain a preference over other creditors means depositors are unaware of the risk level taken so unable to judge if the return properly reflects the risk Should a major Bank failure occur, especially in NZ or Australia things will turn very ugly and I expect my investment in undertakers to boom.

The BNZ was bailed out by the government in 1990, but only because it was the government bank at that time. We no longer have government banks. Kiwibank is probably the most likely bank to receive a tax payer bailout according to Moodys which is why they received a good credit rating.

I wouldn't vest any credibility in Moody's for starters. Second, Kiwibank's loan book has the highest percentage of residential housing loans on its books. Future interest rate increases threaten to decimate its collateral and capital base...hardly a safe bank. However, in summary, if you have large term deposits in any bank then you need your head examined.

fat pat, Zero Hedge is always ahead of the mainstream news and always on point. If you want to keep ahead of the pack....

Lets not forget that shareholders must pay up frst before unsecured creditors (inc deposit holders) if OBR is envoked

KiwiSaver Cash funds - are these protected in any way in case of a bank in trouble?

No

I think it's time to make the public more aware ,kiwi saver, deposits it not going to be pretty .if it ever happens.

At the very least there should be provision for people to be able to have their funds held in a bank account that does not pay interest and even charges a small fee but is 100% protected from an OBR event. If you are not earning interest and paying a fee for storage then it should be a 100% ring-fenced. As far as I understand even cash held in a safety deposit box in a bank can be frozen, which brings me to a question I have been wondering about, how safe is jewelry etc held in a safety deposit box. No wonder there was a run on safes in Japan, ultimately your money is safer under the mattress, who would of thought

Also your money is not safe in a lawyer's trust account as it is subject to OBR as well, how that works with any de minimis rules needs to be explored.

Time to indulge in your love for numismatics! Build up a nice collection of silver and gold coins from around the world....

We are buying gold and burying it way out in the country. I hope builders accept gold

put your deposits in KIWIBANK...it's Govt. guaranteed because they own it...

it was, not anymore that was changed when they let the superfund and acc buy in

http://www.interest.co.nz/opinion/80951/bernard-hickey-says-quiet-remova...

Yep the guarantee expired in February this year.

The tone of this article suggests that "De Minimus" is only temporary and eventually the rest of depositors funds will be returned. Is this true? Or is it actually legalised theft, where a private company is able to arbitrarily take money from its clients, leaving them with no recourse to recover it?

The entire problem here is that Governments and financial regulators are unwilling to properly regulate a private industry to protect the public from their excesses and corruptions. They have allowed the institutions to become too powerful and influential. Again the profits are privatised, while the risks are socialised.

You gave your money to the bank - they promised to repay you plus the interest you've earned. You are therefore a creditor of the bank.

OBR allows the Reserve Bank to essentially reduce the money the bank has to repay to the depositors by whatever amount is necessary to make the bank solvent. So it's not 'theft' as such - they're not physically taking your money (as it ceased to be yours when you gave it to the bank), they're just reducing the amount the bank has to pay back to you. Of course in a practical sense this is a purely technical difference.

And I don't think there's any provision for the amounts held back from depositors to be repaid at a later date - but I might be wrong about that.

That is why banks need to be forced to provide accounts that do not pay interest and purely function as a safe storage system, even charge a small fee. If we ever get to negative interest rates here, bank customers will be paying for the privilege of putting their money at risk. Disgusting.

WRONG!!!! I did NOT give my money to the bank. I placed it there for safe keeping. I know the bank would put it to work while they had it and pay me some interest for that.

The alternative would be my mattress, and the Government should consider the consequences of that being the common form of keeping money. Police and the prisons are already underfunded and over worked. Imagine the consequences?

The misconception that the average depositor "GIVES" their money to the bank is utter bullshit that must be discredited. This is pure political spin to protect the powerful and wealthy.

I think several centuries of case law and the terms and conditions of your account with the bank will outweigh however many exclamation marks you put after your assertion.

Maybe so Conrad, but the average man on the street may not appreciate that subtlety. Civilisations have fallen for lesser reasons. How many people do you know actually read all the terms and conditions that a bank gives you? The knowledge of exactly how far this extends into peoples pockets is not well understood or appreciated by the average person.

Frankly for me, and I have understood this for quite some time, this just exemplifies how self-serving, and corrupt the banks and pollies are, and how ill informed and gullible the average person on the street is. It doesn't change things for me though. Any bank who tells me that I gave them my money rather than placed it with them for safe keeping will instantly lose me as a customer. And I will ensure as many people as is possible will hear my scream of indignation. And I will be asking the politicians hard questions about it too.

One begins to wonder just what it will take to change it?

Sorry but the moment you signed up for a term deposit you became an unsecured creditor. You have lent your funds to the bank and they lend out 90% of it to customers who take out mortgages. It is called Fractional Reserve Banking. You can research it online or ask your bank to explain the terms and conditions.

Simple answer Tainui, I have not now, nor ever had money in a term deposit in a bank. I manage my own affairs and keep my cash on hand to around a max of $10K to avoid exactly what we are talking about here. And that is my point, banks sell their services as placing money with them for safe keeping. I am almost 60 and all my life i have been taught, and accepted this until I started reading on sites such as this. Fundamentally the way the law sits with this is that money in a bank is anything but safe. As many of the commenters on this article and others have stated, the returns certainly do not reflect the risk that is associated with the Banks pattern of behaviour. I do not believe the taxpayer should be providing any guarantee to ensure a banks survival. I do believe that banks need to be fully and properly regulated just as any other business is to restrain their behaviour, protect their clients property (deposits) and protect the potential impacts of their actions on the economy as a whole. As it happens the rules and regulations act only for the third item in this list. It is great to hear that the Aussie regulators are looking at this and likely to do something substantive, but I do not for one second believe that the Banks will take it lying down. And the ones who will pay is as usual, the ones who can least afford it, the ordinary man on the street, the ones who have a bank account because they have to, to survive in a modern technological world, not because they need one.

So where do I put my money to keep it safe?
across multiple banks?
NZ Banks? e.g. TSB, Kiwibank etc?
Oz Banks? if so which ones?
or just under the mattress?

By the looks of it, most people have been putting their money into houses.

haha

They recommend spreading it evenly throughout several banks so that you have 3-5 times the daily maximum limit that can be withdrawn during a banking crisis. Always keep some cash on hand too. If one bank fails, the others will be keeping a close eye on how much their customers are withdrawing too and can actually stop a panic run.

Good question and no easy answers. Property might have some degree of safety, but rates and costs will rise a lot in the coming years, increasing holding costs. Rising interest rates could also send capital gains into hyper reverse drive. Equities should be considered...no mum and dad investors in the market and therefore hardly in bubble territory. Another issue with banks is that the powers that be are scheming to eliminate cash. This will eliminate bank runs and govts and banks obviously have a vested interest in making this happen.

Power companys. Cash cows....out of favour at present....but their time is coming..

http://www.stuff.co.nz/motoring/news/92592333/petrol-cars-will-vanish-in...

Bitcoin !

Maybe labour should bring in a policy to provide a deposit guarantee to all people's money they put in the bank. If a bank fails, then surely the banks are doing something wrong now? Eg . Are they lending far too much to house buyers etc? As they are competing against one another, surely that means that they are pushing themselves to offer the best rates they can at the moment?

I'll accept the OBR, but only if it's also mandated that the executives and directors be held criminally liable, in the event that it's found that insufficiently conservative management contributed to the bank failure.

Thanks Alex Tarrant and interest.co.nz for your attention to OBR.

I am staggered at the comments by the Deputy Governor of the RBNZ that there might be ‘a big hole’ in a failing bank that the RBNZ will not find until a collapse happens. Consequently the RBNZ has refused even de minimis protection for small retail depositors. In effect, he is saying that his own organisation’s stress tests are useless.

He goes on to refer to ‘fantastic deposit insurance schemes’ in ‘most other countries’ but then laments how challenging it is to design one for New Zealand. So not only do his stress tests and all the bank data they require fail their own purpose, his organisation has evidently not got the wit to design a fair OBR for New Zealand despite the widespread ‘fantastic deposit schemes’ elsewhere.

I suggest he contemplates how challenging it will be to defend the present manifestly inequitable scheme against a horde of first home Kiwisavers should their savings be taken in an OBR.