Finance Minister Bill English touts Reserve Bank's 'living wills' policy to ratings agencies, says OBR will be properly ready middle of 2012

Finance Minister Bill English touts Reserve Bank's 'living wills' policy to ratings agencies, says OBR will be properly ready middle of 2012

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 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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The Australian banks cover their depositors money for up to A$1mio, each person, until Feb next year; A$250k there after, and as those banks concider their NZ subsidiaries as a Division of their Group, there may be grounds to see our local depositors funds covered in a defacto sort of way. Regardless. I shall be having a good look at moving funds to a Foreign Currency Account ( NZ$) domiciled in Australia as they mature, as in the absence of any form of Government Guarantee, implied or otherwise, why would I leave my funds here? How will that square with local banks trying to increase their funding from on-shore depositors if we all sod off to Aussie with our term deposits?

You can get a government guarantee with Kiwibonds or the Public Trust. And I see OBR as a positive reason to leave your funds here (after being very careful about which institution to hold your money in). It means the government isn't going to bail out failed banks. Imagine how much Ireland's currency would be worth now if it wasn't in the Euro.

So let's say, James, the BNZ goes broke, again, as it did the last of several times, 20 years ago, and is sold through the OBR process for the same concideration as then, NZ$1, by being cut loose by the NAB and left to local legislation ( highly improbable, but who knows these days!). Creditors, depositors, will be wiped out. Why leave it to that chance if by moving funds to the NAB in Aussie, still denominated in NZ$ to remove the exchange risk, with a guarantee of a minimum $250k that uncertainty is removed? Makes no sense .

I wouldn't suggest putting your money in the BNZ, or in any other bank that has been inflating a property bubble recently (and I did make a couple of suggestions). My point is that this move is reassuring for the NZ economy as a whole.

By the way, have you checked the small print of the Aus guarantee? Will this definitely cover NZD-denominated assets?

How does it reassure the economy as a whole? If people, you for instance, don't and won't trust the subsidiaries of the Big 4, any other 'bank' left is a larger default risk than they. None of the locally owned operations come anywhere remotely near the Aussie banks, and NZ Government Bonds etc. are just as risky as any other in those circumstances - ask those who hold Greek Bonds, and they have a huge economic area, the EU and the Euro, to back them. What does a miniscule New Zealnd have, other than an implied support from Aussie? Nothing. Oh, and CFC accounts in Aussie are Aussie denominated and attract their NRWT ( 10% from memory) with a catch-up RWT here. So they are offshore denominated but NZ controlled.

The reassuring bit is that we can avoid the Ireland scenario. If I've understood it correctly, Ireland's housing bubble collapsing wasn't the main problem, it was when the government guaranteed the failed banks, that was when Ireland's big problems started. So avoiding this fate is reassuring for the economy as a whole, it means that the worst possible outcome won't happen.

Greek bonds are of course not worth a whole lot, but I'm assuming that NZ's government continues to behave better than Greece's did, which seems a reasonable assumption. And tax collection is a lot more effective over here...

Now I don't know what a CFC account is, and I'm not familiar with the details of the Aus scheme, but it doesn’t look good. The document: FAQs for Authorised Deposit-taking Financial Claims Schemes from the Financial Claims Scheme page on the APRA website states “The FCS applies to deposits denominated in Australian dollars. Foreign currency deposits will no longer be covered from 12 October 2011. "

Have you been in Ireland recently or spoken to Irish friends there? If you have, I think you'll find they may be anything but reassured, especially if they are one of the lucky ones in the Public Service that have had a pay cut of 12.5%. And what are you suggesting? More SCF on a grander scale? That's what OBR amounts to in the short term until, or if, another buyer for the remnants of the bank are found.  SCF is being picked apart, and guess which bits will be left? The bad bits, the bits no one wants. And under an OBR the bits no one will want will be a depositor book at 100 cents in the dollar. Why would they, if they can get it by taking the whole, or a part, for less?

I don't quite follow you here - as I understand it, OBR is anything but SCF. OBR means there is no government guarantee. 

Oh dear. A disaster waiting to happen.

 "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."

Oh yeah that's sound planning...exactly what we can expect from your portion will be what they decide and hard bloody luck if you need the lot to settle on property or any other matter...."unfrozen at a latter date"....hahahaaaaaaha..

My money is heading across the ditch.

Anyone care to point out why this nightmare is better than copying aus....anyone....hello...somebody....bugger.

If a bank becomes insolvent then the basic guts of the business is still intact.  Loan assets and interest constantly repaying = liabilities constantly outstanding.

Depositor liabilities will be taken over by the new owners.

The banks are supposedly regulated to have adequate capital buffer.

Fundamentally the idea of 100% government guaranteed deposits for larger amounts is a bit nuts         

We are not on a gold standard so you cannot take capital out of the country by moving paper money overseas.  Whatever shortage of borrowable money that results from NZD being held in overseas mattresses will be made up by new money issuance in NZ supplied in unlimited quantities by the RBNZ at the cash rate in exchange for RBNZ specified eligible collateral.  

Bank failure has to go back to being an ordinary event rather than something too difficult to contemplate.   Everybody should recognise that if certain things happen then a bank will fail and then as far as possible seamlessly continue in public ownership.

Sounds good. But what if no one wants whoever-it-is-that's-OBR'd? Let's say there isn't a secondary buyer and it's a contemporary Bearings? Now whilst in calmer times, the depositor book got  purchased by ING, what if in these times, that doesn't happen? An OBR, a living will, is exactly that...a predetermined process of haircutting. Does it make sense in a morally bankrupt financial world? Absolutely! But practically, those with depsosits will take all care necessary to protect their assets; and for me, if than means 'packing the loot in a suitcase and taking it elswhere" ( a la Greeks to Germany) then so be it. I can't see significant deposits sticking around in NZ if we do this on our own.

Banks will just operate the way they always have.  The only difference will be that when capital reaches a certain low limit the bank is owned by the people of NZ.   The people of NZ and bank owners will still have an interest in ensuring the bank is well managed.

Your morally bankrupted world equates to savers getting haircuts via inflation so that overly inflated asset prices are supported till we get thru this disaster after which interest rates will rise.   Obviously that is government policy. 

Iain, thanks for all your posts today, its great to see you have the most thumbs up and reader choice for today, GBH came close for calling the PGG Wrighton CEO something I thought we couldn't a but then living in the Phillipines does give you some protection. 

 Careful behind that wheel, we need more people like you.



Gummy suspects that Agria will give the man a brown envelope containing more money than his Wrightsons package did , as thanks , for so crushing the company into the dust , and so destroying shareholder value ...... that they ( Agria ) were able to buy a controlling stake in the company , dirt cheap .

by Gummy Bear Hero | 29 Sep 11, 12:45pm

Absolutely the highest probity , no question about that . I am merely accusing the man of being incompetent at his job .... but being superbly competent when it comes to negotiating  his renumeration and golden handshake .

...... Agria , no doubt ,  wish to thank him too .

Finally , this government is showing some sense . No more freaking bail-outs , by the tax-payer , of twits who get greedy and plonk their life-savings in some dubious financial companies . Banks or otherwise , let the investor take responsibility for their personal decisions .

And no more moral hazard neither , the directors of these firms cannot afford to screw up , anymore . No safety net . No one is " too-big-to-fail " .

... ye gods , it took us 3 years , but we finally see a glimmer of brain-wave activity from the Nats ... Hallelujah !

I don't have a problem with that, Roger. But if you had a choice between leaving your hard-earned gummybears here, with no Government guarantee or taking them to Aussie, with a gurantee for the first $250k of them or to the States for whatever the FDIC provides or the UK with whatever they have etc, would you leave them here during times of real uncertainty?

No Nick...

St. Nick : It may well cause a capital flight out of NZ , initially , at least . And all that selling of the $NZ would drive it down .... not such a bad outcome .

.. but in the long run , let's pound it into investors skulls to do their homework , and to take personal  responsibility for their actions .

Is that such a bad thing ?

Precisely Nicholas. All well and good introducing the concept of moral hazard (its a bit fecking late!!!) but if its not a level playing field - and its not with what the Aussies are offering then this proposal makes it MORE not less likely there would be a run on a NZ bank. I join you and Wolly (the latter is a strange bedfellow for me) in saying I wont be hanging around as things deteriorate with my cash here in NZ exposed to these sort of potential losses.

Surely they must have realised this!!!!

If things deteriorate here then the main problem will be deflation.   Your money is not needed here because the RBNZ already creates whatever amount of money is needed to maintain the cash rate

Oh sweet baby geesus GBH wer'e gonna be the dummy run....!..just like always...people get yourself a fat matress.....dig a hole...don't just stand there...Billy Bob's stupid enough to follow through on any instructions the big Honcho's stateside tell him too....n don't fergit he still hates all of you ..with a vengance..for having him deposed...hates you I tell you.

My Gummy pot of dosh is already in Australia , Count !

.... but hey , there never should have been a " moral hazard " , nor a " too-big-to-fail " ideology built into the system .

And those well intended " public credit " folk ( such as Iain , bless him ) , overlook the human factor . The very self-same propensity to incompetence , that caused the pollies to let the banks out on a long-leash in the first instance .

I agree on "to big to fail" policy being the downfall of the taxpayer.

With hindsight regulatory measures to ensure Banks have the wherewithall to cover depositors along with regulatory checks to ensure lending is reduced from ridiculously leveraged levels.

When we say Govt. interferance we must sometimes replace the word Govt with taxpayer and there is no harm with taxpayers wanting to protect their own interests or at least demand of those elected to act in those interests.

I can always understand your point on the human factor ...and personal responsibility for investments made good or bad...root cause greed probably..but when your average Joe places money with the banks on T.D's and otherwise he/she is not aware of the risk..there are no attempts by the institution to apprise him/her of the risk of that institution leveraging out that deposit manifold.

Are they Stupid...? I do not believe so as economics education has really only begun in ernest in recent years...

Are they ill informed ...yes I believe so...but then you need look at the source...most people are educated in money matters by the very people they entrust to caretake /grow/administer their ill gotten...hard earned....lucky bastard.....squirelled away funds...and so their likely hood of them remaining ignorant in these matters is a priority for the institution holding the funds.

So it's never cut n dry...plenty o grey need of a tidy up on more fronts than just not underwriting banks  and less respectable institutions.

Next  topic for the Big B.......The Ugly side of your Bank...

"The very self-same propensity to incompetence , that caused the pollies to let the banks out on a long-leash in the first instance "

So why do govts spend so much money on consultants, select committee's, research papers blah blah? They have access to endless amounts of information, and full spectrum at that, yet continually they make seemingly the poorest decsions, It's called continuity of agenda mate. Yes of course there is some incompetance sure, I agree with you on that, however to blow it off as only incempetence and then make what reads like a half handed poke at "well meaning folk like Iain P", just illustrates my earlier post.

What do you do GBH? Have you put in as much time into research as Iain to help educate the public? I don't see any evidence of that if you have...yet you are happy to poke fun at someone who has!

"In the beginning of a change the patriot is a scarce man, and brave, and hated and scorned. When his cause succeeds, the timid join him, for then it costs nothing to be a patriot."

Does your blog site have a contact address somewhere on it?

Iain , Iain , Iain ....... I hadn't been drinking then , but I have a skin full now ( the bamboo hut on mainstreet , with ice cold San Miguel Pale Pilsen ..... and a guy at the front BBQ'ing amazingingly succilicious kebabs over coals .. .. that cute pie-bald puppy that was here yesterday , anyone seen it , wanna share the kebabs ... .. why aren't you guys eating , not hungry ?  ) .....

...... Iain , Iain , Iain ..... you who lead a long and lonely path , copping all the crap .... life sounds so sad for you , friend ,  so very feckingly sad .

And that is because you're a " world improver " . Much alike Gareth Morgan , you have a grand plan to lead the populous to a better land . Moses did too ... and then the dopey prat led the Israelites into the wildeness for 40 years .

.. Gummy hasn't got a spare 40 years to risk on your dream . Good dream . But yours . I don't want a bar of it . Neither do I want to throw my lot in with Morgan and his slavish followers . Nor too do I want to jump onto the Hickey-Marx bandwagon , of great central planning and massive governmental bureaucracies ..... GBH found Orwell's books  to be too depressing , let alone setting them to reality .

.. the Gummster just wants some commonsense and some accountability to be applied to the current economic system which we inhabit . No rocket science . No Rogernomics , or Parkernomics , or Morganomics . Just a tweak and a fine tune with some commonsense and some accountability . ..... that's not too much to ask for , is it ?

Your bumper-sticker-boy , Gummy .

" big fella " , I'm not even tall enough to qualify as a midget ..

Okey diddily dokily , as munted as am I ... here goes :

Either ban credit default swaps out-right , or create a central conduit where they're traded in full view of the regulators . 100 % transparency , and on a mark-to-market model . Absolute regulation of all derivatives .

.. yup , that'll screw with those Wall Street fat-cats , that'll take a huge chunk out of their fees business .

Like the input GBH..munted or no...what form would the admin for the conduit take.......?

It's a start at least when the common ground is to recognize there is a something inherently wrong and in need of addressing......suture and patch  wont do it...I think it's gonna need some surgery to seal that vein that gets to hemorrhaging when the pressure gets up there.

Hullo Count : All bright eyed and bushy tailed ... I hope at least one of us is ... my money's on you !

I was thinking of a central clearing house for all derivatives , such as a stockmarket is for common stock . And that all derivatives must - emphasise the " must " - go through this channel . No more secrecy , and banks playing little swapsies with one another . All out in the open .

...  For the private investor , or for firms seeking some hedging protection this will be a boon , to see real quotes , and to not get hung out to dry by some smart aleck wide boy using an arbitrage position against them .

[..Now , if you can grasp that concept ..... kindly explain it back to me , 'cos I drowned myself there in a pool of commonsense .... there just isn't enough of it about .. ..hic ! ...]

"the Gummster just wants some commonsense and some accountability to be applied to the current economic system which we inhabit . No rocket science . No Rogernomics , or Parkernomics , or Morganomics . Just a tweak and a fine tune with some commonsense and some accountability . ..... that's not too much to ask for , is it ?"

I agree with this sentiment - The question is how to get  the commonsense & accountability , it is certainly not an easy one.

Everyone is entitled to chose their path and their dream, as you say to run their own life how they see fit. The biggest problem with that is most people will hand over responsibility to elected others and trust they will do right, well its not worked out too well has it!

Some will try to do what they can for the good of their country, as they perceive it to be, and if those types have genuine integrity then this is something that should be encouraged right? Or maybe we all just move to the beach, blog, and pay lip service to the our country!

S.M Pale Pilsen, is a top drop BTW

Argh, good old NZ, we were the original experiment, and will be used yet again. This is going to go very badly for many people, how can it not?

Perhaps the govt are going to wait til banks go belly up, nationalise them, then cover the depositers using money issued by  the RBNZ after the funds have been taken. This could work right?

Oh forgot, we don't own the rights to issue our own currency anymore....

PS - Iain Parker, keep the fantastic work up.

LLoyd: We absolutely can issue our own currency, anytime the Treasury gives the word. 


Raf - yes ok, literally, but if this is the case then explain how we have a national debt with interest attached to it?

Ask Abraham Lincoln :-) 

Ultimately we have that because the private bankers want it that way. I could quote you chapter and verse on the history of it but that's the simple answer.

It's also very simple to reverse that process. I call it Monetary Dialysis.


I know the reasons and the history Raf, my point was in answer to your question stating treasury can issue sovereign currency any time they deem it necessary. This is clearly not the case in reality though it is! The Office of Debt Management is in control, and so , no next to zero or zero interest currency issuence for the benefit of NZ!

Read your article, good job - We are on the same page, getting the corruption out of the system to allow this to happen is the tricky part.

Our dog keeps running onto the road. 

We've got loads of ways to get it back though, all quite ingenious, and we keep thinking of new ways too, need to try them though.

Someone suggested that maybe a gate would prevent it happening in the first place....

Thanks Iain.

As Lloyd notes there may be some technical issues around the process of issuance. I don't believe that will be a problem. 

We need to coalesce behind a simple, explainable proposal. With the downgrade today, now is the time to support this. We can leave the longer term changes to one side for the moment. 

The most pressing and the most straightforward action to to simply issue our own money. 


Now thats great.  Investors are starting to put a price on risk, and thinking about risk, instead of assuming tax payers should guarantee and take all losses while they take all the profits.

@skudiv : 'Investors are starting to put a price on risk' - hardly  

Investors have no choice - the RBNZ has checked rates below the rate of growth and or inflation.

As I noted on this site last week, June 2010 to June 2011 GDP grew @ a nominal 5.67%.

Negative real interest rates don't and cannot factor credit risk in the return.

It's time depositors demanded collateral against their deposits just as covered bond holders do and transparent accounts detailing all the derivative positions  - not just nebulous one line net losses and profits statements. 

Depositors are about to be fleeced, more then we already are, by our own incompetent, self-serving bank overseers.  

"As I noted on this site last week, June 2010 to June 2011 GDP grew @ a nominal 5.67%."

Where do you get this from?  CPI is 5.67%, however the GST hike comes out soon (next month?) plus commodities are nose diving in cost......all the while core inflation is 2%...


about 1.5%

Depositors are just about the closest thing you can get to risk free return and highly always has risk....If you dont like the deposit  "risk" move on....


"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." how does this stop a bank run?   it sort of maybe lets the Govn and tax payer off the hook in terms of un-limited liabilities which is a really good thing.....but there is no way this will stop a ban run by depositors unless there is a Govn guarantee....ppl will just transfer the $ or walk out with it....



I didn't read the goal being to stop the bank run.

If the bank is bankrupt is seems to provide for a timely and orderly dissolution.  The people take their 80% across the road (or home to their mattress) and considering the circumstances under which such an event takes place that seems pretty good/

@ Steven -

"Where do you get this from?  CPI is 5.67%, however the GST hike comes out soon (next month?) plus commodities are nose diving in cost......all the while core inflation is 2%" 

Check Stats NZ table 6.1 column D and add up the 4 quarterly entries for the year ending June 2011 and compare with the same for the year ending June 2010.

 Who defines core inflation - show me the statistics - I suspect it is an excuse for certain actions - nominal GDP increases are the real dollars spent - not some engineered reference point..  


You said GDP not CPI.....which do you mean? those same stats say GDP is 1.5% ish....hence I query.

Table 1.1 shows June to June as 1.7% GDP....

Core inflation, just look it up its on the NET. 

Here is a start,

"Core inflation is thus intended to be an indicator and predictor of underlying long-term inflation."

"The concept of core inflation as aggregate price growth excluding food and energy was introduced in a 1975 paper by Robert J. Gordon.[1] This is the definition of "core inflation" most used for political purposes. Core inflation was also developed and advocated by Otto Eckstein, in (Eckstein 1981)."

So CPI will drop back to 3.3% once the GST is removed and that was compensated for with tax changes....

CPI on the other hand is a basket of typical produce and is seasonal for one thing....its also dependant on things like commodities or the oil price being fairly stable, in the last 1 to 2 years these have been widely speculated and boosted but are now dropping back....

The thing about relying on CPI as a measure is there is the assumption that wages are elastic, so if food rises 10% your wages should also ride to meet that dollar value increase ie inflation.....right now that is not the with static wages the price of other things has to drop to make a sale....a classic is clothing and whiteware.....that is being hammered on cost.

If you only want to look at your food basket per week/month and ignore anything else you buy and the effects of too low an inflation rate on employment ie others, well OK.....



The just released RBNZ Bulletin has a useful article on the proposed Open Bank Resolution Policy -

Thanks  Gareth...some weekend reading that  may come in very handy.

The interests of the banking industry are not our interests; the two are, in the present instance, incompatible. There are situations possible where this is not the case, but our present situation is not one of them. Indeed, our interests are today diametrically opposed to those of the banking system because that system is drawing its last breath, choking on an overkill of debt, and trying hard, aided and abetted by our political leadership, to drag us down with it.

(from The Automatic Earth)