By Alex Tarrant
Finance Minister Bill English says he has made sure credit ratings agencies know about the Reserve Bank’s ‘living wills’ policy for retail banks, which when introduced next year will make the New Zealand government “pretty unique” in the developed world for having no formal guarantee of the country’s financial institutions.
English met with ratings agency representatives in New York over the last week while on a trip to get a better gauge on the thinking of global economic policy makers in the face of the European debt crisis and faltering US economic recovery. Credit rating agencies had pretty negative views about what was happening in the European Union and US and were putting the microscope on small, indebted countries, English said.
New Zealand’s AA+ sovereign credit rating was put on negative watch in November last year by rating agency Standard & Poor’s, which S&P said was due to the tendency of governments around the world to bail out failed financial institutions, therefore effectively being liable for their debts.
The Reserve Bank is currently consulting with the banks on its proposals for them to pre-position for its Open Bank Resolution (OBR) Policy. The deadline for submissions on the central bank's proposals is September 30 with the Reserve Bank then wanting banks to provide a detailed implementation plan for pre-positioning for the policy by January 16, 2012 with an ultimate deadline for full implementation set for late 2012. The Reserve Bank says the final pre-positioning requirements will be reflected in banks’ Conditions of Registration.
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. All the country's major retail banks - including ANZ, ASB, BNZ and Westpac which are the four systemically important banks given their New Zealand liabilities, net of amounts due to related parties, exceed NZ$15 billion, are being asked to pre-position.
The key feature of the policy 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.
'Unique position for NZ with no formal bank guarantee'
The Reserve Bank says the policy is intended to act as a resolution tool that places 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. See more on the policy here.
Speaking to interest.co.nz on his return from New York, English said New Zealand would be "in a pretty unique position in the first half of next year of having no formal guarantee of our banks".
Although the OBR could be able to be used “pretty roughly” now, it would take into the middle of next year before it was a "finely tuned system," he said.
New Zealand’s external liabilities, although having fallen recently, are still high at 70% of Gross Domestic Product, something the government says it wants to reduce further by controlling its own borrowing requirements and by pushing banks to fund themselves more from domestic sources.
New Zealand followed Australia by introducing a retail deposit guarantee scheme following the collapse of US investment bank Lehman Brothers in late 2008, which led to a global funding squeeze and financial crisis.
The guarantee resulted in the government paying out depositors from a number of failed finance companies, the most prominent being South Canterbury Finance in August last year which may cost the government more than a billion dollars.
But the deposit guarantee, since watered down and only covering a handful of finance companies now, will end on December 31 and not be extended. New Zealand banks have chosen not to be covered by the guarantee, although in Australia authorities do cover Australian bank deposits up to A$250,000, which will continue indefinitely. See more on the Australian scheme here.
Rather than go down the same route as Australia, policy makers in New Zealand are moving away from a formal government guarantee of financial institutions.
Instead, the Reserve Bank’s OBR policy will create ‘living wills’ for failed banks which would allow a statutory manager to freeze a proportion of a bank’s unsecured liabilities to allow the bank enough capital to stay ‘alive’ into the next day when depositors and other creditors with funds due would be allowed to withdraw the unfrozen portion of their funds.
An example would be a statutory manager announcing a 20% haircut on a bank’s unsecured liabilities when a bank failed. The next day, depositors with call accounts would be allowed to withdraw the remaining 80% of their funds, and other creditors would receive that 80% back as it came due.
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