By Bernard Hickey
Prime Minister John Key has defended the Open Bank Resolution policy being introduced by the Reserve Bank of New Zealand and the government, arguing it would improve confidence in banks and would not necessarily trigger bank runs if it was used.
Speaking at his weekly post-cabinet news conference, Key also rejected suggestions that depositors would move their funds to Australia, which has retained a deposit guarantee for deposits up to A$250,000.
He also said a deposit guarantee scheme would prove too costly for consumers because banks would pass on the cost of any deposit insurance levy to consumers.
The Opposition Green and Labour Parties have called for the the OBR policy to be dropped and replaced with a deposit guarantee because term depositors may have their funds frozen if a major bank was shut using an OBR process.
Key rejected the suggestion the OBR policy was similar to the haircut imposed on Cypriot depositors.
He said there were three options. The first was a deposit insurance scheme, which he said would hurt consumers because the banks would pass on the cost of any levy.
"They're not going to cut their margins so they're going to pass that on to consumers," Key said.
The second was no protection where depositors had no idea whether the government would act or not act, he said.
The third option is where yes you could get a haircut, "but you can immediately get access to the balance of your funds and a new bank starts up that is government guaranteed."
"That puts New Zealand depositors in the strongest possible position at the lowest cost because we are talking about something that would be very extreme."
Asked if New Zealand depositors would move their money to Australia, given it will guarantee deposits with less than A$250,000, he said depositors may not be able to get their money out without OBR.
Asked if an OBR process would spark runs on the other three banks, he said:
"They could do. But that's the confidence you get from OBR, knowing that you don't have to spend 5 years in court battling it out. But at the end of the day you're talking about very extreme positions. You're not talking about run of the mill, normal activity. You're talking about the collapse of a major financial institution and if that day ever comes to New Zealand then the government of the day would have to think about how it handles it. OBR gives it one tool in the tool box. It's not the only way. The government could choose to step in and choose to recapitalise the institution."
Exchange rate policy
Elsewhere, Key said he agreed with the International Monetary Fund's (IMF) views that changing exchange rate policy in a 'knee jerk reaction' would not produce benefits. The Reserve Bank and Treasury are holding a behind closed doors conference on exchange rate policy tomorrow.
"We've always said, if there are better ways of doing things then present them to us. Over the years they've been a number of studies and none of them have come up with anything terribly dramatic," Key said.
Key also downplayed fears that Japan's move to join the Trans Pacific Partnership might delay or water down the agreement, given the previous reluctance of Japan to include agriculture in any agreement. Key said New Zealand would not participate in a TPP that did not include agriculture.
Key was also asked about recent high profile job losses, including expectations for up to 2,500 job losses at Telecom and talk the Department of Conservation will announce significant job losses tomorrow.
Key said employment was often a lagging indicator in any recovery and the government's figures on benefit claimants showed an improvement.
"You've got to give it a bit of time," he said, pointing to projections of a fall in unemployment towards 6% by the end of the year and towards 5% in 2014.
(Updated with more details/quotes)