The days of unquestioning trust in the world's banks are over

In days gone by savers could always rely on the bank to be a safe place to park money. Most took that bank safety for granted. Their first thought was which bank offered the best rate and what other options were there to increase the returns. Many bank-type investors turned to finance companies. Few questioned the safety or either banks or finance companies. Now that more than NZ$3.8 billion is tied up or lost in 34 frozen or dying finance companies, these investors are now much more risk averse. Their first port of call was the banks. The amount saved in term deposits rose NZ$13.3 billion to NZ$86.759 billion in the 12 months to June 30, data from bank disclosure statements show. Only NZ$2 billion of that was transferred from finance companies to banks. The rest has come from increased savings and from money pulled out of sharemarket funds and property sales. But the unprecedented turmoil in the banking systems of Europe and the United States in the last week is forcing savers around the world to question even the safety of their banks and to demand something most have not thought of before -- bank deposit insurance. The speed of the loss of trust and the rise of the savings sceptic has been frightening for bank executives and regulators alike. Until now almost all developed countries have had bank deposit insurance. Only Australia and New Zealand have been the odd ones out. The public theory was we didn't need it because our banks were sound and because regulators and governments didn't want to guarantee savings and create a 'moral hazard' where lenders thought they could get away with crazy lending without fear or consequence. The unspoken theory was that our banks were too big and our payments system too concentrated into the hands of just four players that any government on both sides of the Tasman could not afford to let one bank fail. But 'trust us' doesn't cut it anymore in a global investment climate driven by fear and panic. I agree with the Reserve Bank that our banks are sound, but reassurances from regulators and commentators are no protection in a bank run. I don't expect one, but a little insurance does no harm. Rightly, our savers are now asking why our banks are so much safer than ones overseas and therefore don't need deposit insurance. Events in Europe and the United States have reinforced the need for deposit insurance here because it raises the risk of a flight to protected accounts elsewhere as savers hunting for some protection move their money to other countries with insurance or guarantees. Australia's new Labor government announced in June a plan for a "Financial Claims Scheme" which would protect the first A$20,000 in any bank account deposit in any failure. This changes the landscape for New Zealand's regulators and the government. Many savers here have Australian bank accounts from their days working in Australia. Almost all savers are with the New Zealand arms of Australian banks so it becomes much less of a drama to move money from one account to another. New Zealand must act now in a bi-partisan way to announce a government-backed protection for bank deposits of up to NZ$100,000. The experience in the Northern Hemisphere shows that more is better in any government's attempts to ensure trust in banks. The bank deposit insurance smorgasbord