RBNZ sets out to ensure shareholders and creditors absorb cost of any bank failure not taxpayers

RBNZ sets out to ensure shareholders and creditors absorb cost of any bank failure not taxpayers

By Gareth Vaughan

The country's smallest trading banks TSB Bank and SBS Bank, plus Building Society Holdings and PSIS should they achieve their ambition of becoming banks, will have to meet the costs of implementing the Reserve Bank's blueprint for dealing with bank failures, alongside the big banks.

The central bank's consultation paper on Pre-positioning for Open Bank Resolution (OBR) suggests all locally incorporated banks with retail funding of more than NZ$1 billion be required to pre-position. That includes what the Reserve Bank defines as systemically important banks which are those whose New Zealand liabilities - net of amounts due to related parties - exceed NZ$15 billion such as ANZ, ASB, BNZ and Westpac, plus state owned Kiwibank, TSB and SBS given all three have retail funding of more than NZ$1 billion each.

And should Building Society Holdings - the combined Marac Finance, CBS Canterbury and Southern Cross Building Society and co-operative PSIS secure their sought after banking licences from the Reserve Bank, they too would be required to partake in OBR pre-positioning given they both also have retail deposits of more than NZ$1 billion.

Other financial institutions that don't have retail funding of more than NZ$1 billion can decide to be OBR-capable despite the absence of a regulatory requirement to be, the Reserve Bank says. Open bank resolution plans are often called 'living wills' overseas.

An open bank resolution is an option whereby the bank is open for business on the next business day after its temporary closure following an insolvency event or an event that triggered putting it under statutory management, and is able to provide customers with full or partial access to their accounts and other bank services.

The key feature of the OBR is that creditors are able to access a portion of their funds immediately after the bank fails and is placed in statutory management. The bank can then quickly reopen with the unfrozen or accessible portion of funds guaranteed by government to avert a further run by creditors. Additional funds can be unfrozen at later dates as the final losses are determined.

The Reserve Bank says the OBR policy is intended to act as a resolution tool that dumps the cost of bank failure primarily onto a bank's shareholders and creditors rather than taxpayers, thus minimising moral hazard and providing a continuity of core banking services. The policy, previously known as Bank Creditor Recapitalisation, was developed after a review of the central bank's crisis management policies and instruments following the 1997 Asian financial crisis.

The Reserve Bank says its outsourcing, local incorporation and governance policies were all designed to facilitate the implementation of OBR. Now, the pre-positioning of banks' internal systems represents the next stage in the process.

"While OBR is simple in concept, it is not trivial to execute in a technical sense," the central bank's consultation paper says. "The Reserve Bank is conscious of the cost of installing and maintaining the necessary systems and procedures that would make the choice of OBR in a crisis situation a practical option. Thus, the Bank focuses on a core set of outcomes as a minimum requirement."

What the banks need to 'pre-position'

It says pre-positioning is necessary for OBR to be a practical option. Its broad expectations from OBR pre-positioning are for banks to have systems and processes in place, that in the event of failure, would enable the following to be carried out:

• freeze accounts and process pending payments;

• prevent customers’ access to their accounts;

• determine customers’ account balances, on a per account basis, according to specified rules and as of a cut-off time;

• apply haircut as directed by the statutory manager, with the de minimis option (see more on this below) if required, within a time frame of 24 hours or less;

• apply guarantees as directed by the Statutory Manager;

• resume customers’ access to their transaction and other accounts (including debit and credit cards, and accounts in overdraft) the day following closure; and

• reinstate access by the customer to part or all of their frozen balance, as directed.

The Reserve Bank says it expects banks to be fully pre-positioned by late 2012. It has set a deadline of June 30 for responses to its consultation paper and will then expect detailed implementation plans from banks by September 30.

Moody's warning & haircuts for creditors and depositors

International credit rating agency Moody's Investors Service warned last week the Reserve Bank's pre-positioning push could heap more pressure on the all ready under review Aa2 long-term bank deposit ratings it has on ANZ New Zealand, ASB Bank, Bank of New Zealand (BNZ), and Westpac New Zealand.

Meanwhile, the central bank says the key to the OBR policy is to impose a haircut on all unsecured liabilities but pre-positioning is needed for only the most time critical liabilities - such as transaction, savings and other retail accounts like term deposits and small business accounts - to allow the bank to be re-opened quickly.

Setting the size of the haircut would mean a quick assessment was made of the current value of a bank's assets, plus setting an allowance for prospective losses and other expenses. A substantial buffer would be added, the Reserve Bank says, due to uncertainty about the value of the failed bank's assets.

The haircut could be based on what the central bank refers to as the de minimis threshold, which would be a set value of retail depositors' funds. Only deposits above this value would be subject to the haircut. Any threshold value would be established by the government. The haircut could also be expressed as a percentage of each account in positive balance at the failed bank, rather than as an absolute amount. Creditors would potentially bear full loss up to the haircut value.

The central bank's consultation on pre-positioning for OBR comes after Finance Minister Bill English said on March 11 the government was considering options for maintaining confidence in the financial system when the extended Crown retail deposit guarantee scheme expires at the end of 2011. Protecting just NZ$2 billion of the NZ$210 billion New Zealanders have on deposit, the extended guarantee scheme won't be pushed out further. The only companies party to it are Building Society Holdings, Fisher & Paykel Finance, the Wairarapa Building Society, and PGG Wrightson Finance.

The Government is considering a number of permanent options to manage any future financial market difficulties, English added. These options include OBR.

“This option has been available to the Reserve Bank for a number of years," said English. "This next stage is about engaging with the banks to ensure it could be implemented effectively if required."

Treasury is working on the appropriate form for any government guarantees required to support the on-going operations or any institution subject to the OBR policy.

Lesson from the GFC

Meanwhile, the Reserve Bank points out one of the key lessons from the global financial crisis is the potentially enormous costs associated with supporting troubled banks.

"Some governments that chose to guarantee their banking system's liabilities are now faced with a sizeable public debt burden. The alternative is to make bank shareholders and creditors shoulder the losses of a failing bank whilst ensuring that the payments system continues to function."

"A solution is sought that solves the urgent liquidity problems associated with a bank failure, but does not force all of the losses to be borne by the government."

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Great so instead of losing 100% of my deposit in a bank failure, I only lose the 90%. Is that supposed to make us feel better?

The Reserve Bank says the OBR policy is intended to act as a resolution tool that dumps the cost of bank failure primarily onto a bank's shareholders and creditors rather than taxpayers.

As someone pointed out last time this was discussed, anyone with a deposit is a creditor.

Meanwhile, the central bank says the key to the OBR policy is to impose a haircut on all unsecured liabilities

Perhaps a naive question Gareth, but what liabilities does a bank have that are secured? That will let us retail depositors know how far down the food chain we are. 

It looks to me like this is heading toward allowing everyone to lose their savings, but allow the banks to continue for transactions. This I guess will allow people to continue to get wages or salary paid, and for their mortgage payments still to be honoured.

 

It gets even better when banks can dump their mortgages as "mortgage backed securities" so the banks don't get burdened with the problem when the housing market goes fut...

Wow scarfie you really know how to call it...  I think just about everyone would prefer to get 90% if 100% is unavailable...  maybe you bank and the bank of mattress perhaps?

Yes, all depositors are unsecured creditors unless the depositors have specific secured rights...

The purpose of the policy is to allow a bank to continue to trade, which will give it a much better chance of surviving as opposed to calling in the receivers and in effect shutting it down.

A bank failure is a terrible thing; but at least this policy is a step in trying to ensure that depositors are protected as much as possible.

 

 

Maybe I didn't make my point very well. I wasn't talking about keeping 90%, but losing 90% instead of 100%. Fractional reserve banking is the issue with every dollar deposted loaned out 9 times. 

If it was gold backed the banks wouldn't have a problem would they, so why carry on playing this silly games and get back to it.

Do not fear! The 90% that goes "missing" (more like stolen) can easily be replaced by the taxes deducted from your wages! Otherwise know as the retail deposit guarantee scheme! Scroll down to 2.13 for all the info!!

Check out the Postbank website, they guarantee all their deposits which in effect means your money is backed by the assets of the New Zealand Post Office. For now at least anyway, I would imagine they could change that policy very quickly should the circumstances arise.

Iain

A friendly reminder to keep your comments short. Happy for you to post links back to your favourite pieces. Others do that too. But then to repost the whole things is a bit over the top.

Again - shortish and snappy

 

cheers

Bernard

A suggestion for Bernard

Australia and NZ are the only two OECD countries without a long term retail bank deposit protection scheme. NZ depositors' money is largely with Australian owned banks here. There are changes coming - welcome or not e.g. OBR, covered bond funding - in Australia too. All retail depositors will need a more informed view of the safety of their deposits. This site has comparison tables for retail savers which is great for comparing % returns.  However the "letter" agency ratings do not provide a comparison of banks strengths and weaknesses. In NZ, quarterly bank information statements are mandatory and from time to time there is comment on them here.  Perhaps Bernard will consider publishing a layman's quarterly comparison review here? Failing that maybe someone can suggest links to where such comparisons might be had?

Yes....hmmmm....well maybe the banks will face a harder time getting local deposits once the unwashed discover their savings have utterly no friggin protection from bank failure at all....my money is nowhere near a bank. Too risky. The banks are only protected by the property bubble and the bubble needs protection from the likes of "Humbug Heatley" and mob.

Is this why Bolly is moving with startling pace to get his OBR up and running....what has he spotted coming down the road.....!

 

Wolly, I think this is more a classic regulatory response to the last crisis, and what we saw at Northern Rock and the like, rather than anything Bollard & Co see coming. I certainly hope that's the case...

Actually - its the classic regulatory response to the Asian Crisis - it just takes them so long to do anything that we have had at  least two other crises since.

Like all regulatory responses, it is too slow, to late, and attempts to solve the wrong problem.

 

It will not solve systemic failure - which is what we now face

Northern Rock....thanks for the reminder....lost a lot of what I had with them....then they took management fees out and it was greater!

:/

"see coming" uh no....the worst is yet to come IMHO....that was the kick off.....round two looks like its going to be 2011....kind of thought later.....2012 or 2013....mostly it depends on sorting the oil problem out ie libya so the price drops back to under $100....if it stays close to $120 then we will face plant IMHO....I guess 4 months or so

regards

 

Nice thought Gareth but time will show that Bollard is keeping bank finance risk secrets from us all.

The banks are so stuffed with bubble dependent assets that Bollard and Key are %^$##%^$ themselves in an effort to protect the bubbles.

I expect post November we will see what I predicted way back at the start of this farce about rebalancing the economy and all the 6 part strategy blather.....the govt will modify it's own immigration policy and move to double and then double again the number of immigrants in an effort to pork some fake growth on a property boom. Olly certainly expects this. It is a standard NZ govt approach to take this route. It will come with an orchestrated load of polished hand crafted BS as to why it is such a good idea.

 

BANK FINANCIALS
Here are some links if you decide you have the horsepower to look at your bank in detail yourself. I haven't found a ready made current comparison yet.
____________________________________________________
List of registered banks in New Zealand, regdate and credit rating
- http://www.rbnz.govt.nz/nzbanks/0091622.html
____________________________________________________
About general disclosure statements
http://www.rbnz.govt.nz/nzbanks/3359149.html - Reserve Bank of New Zealand, explanation of the financial disclosure requirements.
____________________________________________________
Web links to bank sites with general disclosure statements for some of the registered banks. There are generally 3 pieces of information accessible on each site
1. brief Key Information Summary;
2. General Disclosure Statement;

3. Supplemental Disclosure Statement.
______________________________________
ANZ - http://www.anz.co.nz/about-us/our-company/media-centre/investor-informat...
______________________________________
ASB - https://www.asb.co.nz/section176.aspx#from-banner=asb-reports-footer
Latest - 31/12/2010
______________________________________

BNZ - http://www.bnz.co.nz/about-us/governance/financials#GDS
Latest - 31/12/2010
______________________________________

Kiwibank - http://www.kiwibank.co.nz/about-us/legal-disclosure-docs.asp
______________________________________

National bank http://nationalbank.co.nz/about/
______________________________________

Rabobank - http://www.rabodirect.co.nz/legals/legal.aspx
______________________________________

SBS bank - http://www.sbs.net.nz/reports-and-documentation/ArchivedGDS.aspx

______________________________________
TSB bank http://www.tsbbank.co.nz/AboutUs/Financial.aspx

______________________________________
Westpac - http://www.westpac.co.nz/olcontent/olcontent.nsf/content/key+information...

Good luck indeed.....personally I dont see anything safer than a bank account....if for no other reason its fairly easy to figure out the risk....So to that end keeping money with the big four still seems more risky than TSB or Kiwibank....

regards

You repeat that frequently steven....why....when the evidence overseas makes it clear a bank is not that safe when the foundation of the banks 'assets'...the mortgages...depend on the survival of a bubble! Did you not see the Simpsons episode where they had a run on the bank...funny as.

Granted for the average Joe with a few bucks saved, a bank is ok sort of...but when you get past that stage and into the big numbers...like way above the Govt guarantee point...then it's time to think again.

Wolly, where do you have your loot? Is it all invested in copper or do you have some under the mattress?

Nah, I sold me copper a while ago for a small gain...few hundred grand...now I'm just waiting for the market to spit the dummy and then it'll be equities time again..in the meantime using Gov G to maximum with loot split between entities on ultra short term so I can benefit from the lift in rates.

Expecting the higher rates to lead to yet higher rates and to drive down stocks to fair prices...pe ratios about 8....

Reading above its interesting that though Kiwibank and TSB agency risk ratings are lower than the big Australian owned NZ banks they are judged less risky by some. 'Average Joe' retail depositor - i.e. the majority, has no current guarantee in place covering NZ retail bank deposits because none of the main banks signed up to it. Since the risk to their funds is going to be without a future government safety net and may be reduced by ring fenced covered bond assets the requirement for a clear bank risk comparison for retail deposits remains.