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PM John Key defends Open Bank Resolution policy, denies potential for bank runs after using it; Says deposit insurance too costly for consumers

PM John Key defends Open Bank Resolution policy, denies potential for bank runs after using it; Says deposit insurance too costly for consumers

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)

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Nationalise them, best solution for everyone but bankers.

John Key says  "a deposit guarantee scheme would prove too costly for consumers because banks would pass on the cost of any deposit insurance levy to consumers.
1) Are there any statistics from Australia indicating the cost to depositors of their A$250,000 protection per depositor per bank?   These are the same banks that make billions per year from NZers at the moment - so reliable figures should be readily available (and some small portion of those profits could should be retained in NZ to protect NZ depositors).
2) The OBR is likely to be the biggest moral hazzard facing NZers.   Banks can now make  risky loans with impunity - their computer systems are being modified to be able to take money from depositors when there is a financial crash - with the depositors blamed by government for not evaluating the risk that the banks are taking.    Incredible.
3) Why are NZ banks being allowed to loan 95% and more on housing loans - when that is not the standard practice in Australia.  The persons taking out loans there (for more than 80%) can be required to take out mortgage insurance to pay in the case that the loan goes into default.

Thank you John Key for making a decision without consulting thsoe affected and without advising what the cost of deposit insurance is, if the risk is as low as implied then the cost should reflect this and would probably be acceptable. The issuing of covered bonds effectively pushes further down the position of depositors in the event of a failure so depositors now have even less information to assess the risk and if the interest rate offered is in line with the risk which now means no realistic valuation of risk can be made and uncertainty which cannot be assessed or valued has entered into the equation. Do not be surprised if the more savvy take appropraite action and expose their funds to assets were the risk can be assessed and valued - the law of unintedned consequences!

Definately a strange policy.   The other banks will be ahead of depositors in the event of failure via covered bonds.   If the banks are so safe what harm can there be in having a small amount of deposit insurance?
Additionally since deposit insurance is so common elsewhere why would you keep your money in an NZ bank?
Makes you wonder what the government knows that we do not know.

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.
Another slice of rock solid advice

Giving creditors access to depositors money may well reduce the cost of borrowing for Banks. But is comes at the expense of depositors security.. Deposit insurance gives a depositor a direct comparision of the risk of a bank by comparing the cost of deposit insurance.
If banks are being forced to pay higher interest rates to borrow it is because the lender see the bank as a higher risk, the government promising up private individuals deposits as security for bank borrowing is only highligting the risk built into NZ/Aussie banks, if lenders want more security or higher interest, depsitors should be demanding the same, except it is impossible due to depositors being a drop in the bucket individually.
This is another example of a government stamping over owneship rights by legislating access by banks creditors to the property of a depositor. This property belong to private individuals  and the government has no mandate to give this away, except that politicians see anybodies money as open slather.
I am sure that the governments has been warned that the risk of a bank in NZ getting into trouble is raising. The housing bubble on both sides of the Tasman is certain to cause a problem. Aussie banks market values are at ludicrous levels, the CBA has a market value greater than the entire financial industry of Germany!!!
Key and his halfwit side kick English are doing no one in NZ any good with this policy, makes you wonder why he is pursuing it? Am sure Key is aware of the risks but English probably has no clue.
I will be moving my deposits out of NZ banks, probably to Australia, as I see a banking crises in NZ and Australia and I fancy my chances better in Australia.
For me this whole thing proves that TBTF banks are bad for the economy. Some thing I think most people have known for a long time but politicians are unwilling to move against a powerful bank lobby.

The Cyprus banks have deposit insurance, and look where it got them (I posted on this a couple of days ago).  Additionally, involving an insurance company is always going to be expensive - you're funding their entire business from TV advertising to plush offices.
I'm wondering what would be wrong with the following:
- A government bank that pays zero interest, but is backed by the government (ie. the people) in case of financial collapse.  The bank undertakes very conservative investments.
- All other banks are certainly NOT too big to fail and will NOT get bailed out by the government (ie. the people)
- Reintroduction of the Glass-Steagall Act or something similar that splits up the high risk and low risk parts of the banks.  To prevent your term deposit being used to gamble/speculate on oil futures for example.  That way you have a better idea of exactly how risky your deposit is.
- More penalties for bankers who stuff up - or rather INTRODUCE penalties for bankers who stuff up.  I heard that in Germany as a politician if you're grossly negligent you go to jail.  Something other countries could think about following?

If my business gets into trouble the bank manager rocks up, takes my farm, takes my house, takes my boat and anything else he can get his hands on.
The banks gets into trouble and the rest of us get to pay for it. Stuff that. 
 We need to nationalise banks that get into trouble, sieze assets, lay of those responsible.
 Banks should to be held to account, just like the rest of us.
 We need  depositors protection, we need a lobby group who represents depositors and can give advice, like stay short, bail BNZ, no lets bail National, next month back to BNZ, could you imagine the enthusiastic response from bankers. Oh no, that would never be allowed, lets remember who owns the sandpit.
I sometimes wonder if John Key wasn't a deliberate placement by the banking industry.
 Any form of depositor hair cut  creates massive moral hazard, lets not go there.

Thats where there are two wrongs. However we have willingly signed on the dotted line for that it a TV or a house or a car....
We have also failed to ask the hard Qs of our pollies....and in fact have made it a point of voting in the yes men who promise us candy.....
I'd suggest the banks behaviour is nothing more than a symptom or a looking glass at the rest of us.
So lets look at depositors, just how have they by and large got their $? Oh by using up one time resources and excessively so, which means in 2 generations they have used 50% or more of the world's resources making it hard for the next two. On topof that these 2 generations now want to saddle the next two with the debt they have caused AND to protect their ioll gotten protfits...
Sorry does not compute.

So Steven do you practice what you preach?
I take it you have used no resources in your lifetime, never had a mortgage, never had savings, never had investments etc. Where do you get your food from?
What sort of furniture do you own? You shouldn't have a car should you....but do you own one? Do you have children? You feed and cloth them right!
Ever had a holiday Steven? If your living Steven you are using resources!
If your posting on are using resources.
Accusing people who have saved or invested as being the recipients of ill-gotten gains/profits is defamatory.

Yep Stevo, I think you have your strengths as a commenter in certain fields definitely, but in this little" what if "scenario, I have to say by that comment there your way off.
 Your thinking on it is flawed in that your conclusions required collective intent to burden the future, to plunder rescource wittingly, to knowingly show no care for those that come after us( our children and so forth).
As a case that may help you understand, we will just start with Mom n Pop in the late seventies who had seen a depression,seen at least one WW, survived to learn the value of saving even if it meant scrimping, ticking away at interest on interest until ....Holy cow interests rates went hog wild...17.5% to 18% on your term dep. and in  a coupla short years modestly wealthy (though hard earnt) had become measurabley increased.
Now it was not their intention for those periods to take place , nor could they have influenced the times that were upon them, but as a natural response to capitalise of course advantage was it is in the animal's called opportunism which is very hard to distinguish from greed for the most part, but I'll allow you to decide that next time your being opportunistic. 
There is however a case for intent to be found in smaller collectives of institutionalised thinking as in so called Free Market Forces, Banking and Financial Institutions to Corporations ,as money, the product........ in it's various forms and instruments for procuring it.
For that reason they,( these institutions) can detach (moraly / emotionaly ) without the bat of an eye when the rescource supplying one livelyhood dwindles and turn their attentions and affections to a new venture connected to a new resource to plunder.
They historially in my opinion are the rapists who never laid hand to the rescource (in the bigger sense) but maximised it's potential to fullfil human desire....self interest..advancement..
All that said Stevo, if there were only half as many of us at a constant, we'd only have about 3/4th the problem....I'll let you correct me there.
Have a happy one .

Andrewj - I agree that depositors need to group together.  I'm thinking about banking disclosure rules at this point.
Rabobanks parent bank guarantees deposits in NZ.
Looking after cash/savings is entering a new game for many NZ'ers.  The RBNZ seems to be making a lot more media statements than normal. I'm wondering if they're edgy.

Rabobanks parent bank guarantees deposits in NZ.
Really, under OBR rules?
That life boat would be full already if it was the case.

SH - They have not removed the Guarantee Statement as yet from their website and advertising.
If they leave the Guarantee in place even with the OBR policy, would the Guarantee be over-ridden by the OBR in the event of its failure? Or would the Guarantee by the parent bank still stand?
As yet I have not had confirmation from them whether they will withdraw the Rabobank parent bank guarantee.

Lets take a look at bank behaviour over the ditch, we really want to let these guys divi up deposits? 
Hat tip, Henry Tull
"It doesn't matter if you are a big or small or good or bad farmer, it's hard to make that up quickly and the banks just have become so greedy, charging us 12 per cent when they borrow at 2 per cent and make record profits.
"The banks say they aren't forcing anyone off their farms or foreclosing on them; they are being more shrewd this time around. But when you cop these sort of interest payments it's almost the same thing, just done in a quieter, backroom way."
Babakin farmer Brian Reed, 58, sold one of his farms last year and is reluctantly trying to sell two more this month, in a last-ditch bid to keep the banks' hands off his family's 1000ha home farm, Hillview, where his ageing parents still live. But he knows it is going to be a desperate battle. His bank has imposed a 12 per cent interest rate on his overdraft, including an extra 2-3 per cent "risk" component, and is not willing to lend him more money this season to plant much of a crop.
Mr Redman declined to comment on the attitudes of individual banks to farm debts, although it is widely acknowledged in the wheatbelt that the ANZ is being particularly harsh on graingrowers who banked with Landmark, whose loan book it recently acquired.

Also they often won't be able to lend every cent of the 1 billion
What? Have you ever worked in a bank dealing room?
Our banks have been warned by Moody's about lending 140% of deposits.
Mist don't turn yourself into a bank apologist - it's not a good time to do so.

Yep...this piece and others form my basis for saying depositors protection is wrong.
Then of course much else is wrong....

The interesting thing is how pedantic the companies are in not paying out...hello you were $2.50 short on the actual air fare cost? 
Would taht stand up here in NZ? would the CGA apply? I'd hope so.
Otherwise if Chch is any indictaion we may well find that claims are rejected....we pay for no cover.  AMI could have been a case in point.

Yes, the leverage or the xx:1 bit is really the insurance premium.  Who really expects a payout when the risk is systemic?  Is that actually what the OBR is for? to cover for all 4 big banks going under at once?  Given they all have the same risk, market and leverage and the same clients just why would only one fall over?
Interesting thing on AE's comments on spikes on the steering wheel....having competed in rallies and races in my 20s I know 2 things on crashes, a) Its probably going to hurt.  b) Its definately going to cost me a lot. Same thing with insurable crashes really, you wont get back the $s and the loss of functionality (bus instead of car)  is a pain in the butt.
The last 4 years has been an eye opener for me...the financial owrld seems to be filled with useless ppl who wouldnt get a productive job, yet the biggest theives have personal jets and yaughts while ppl like famrers ie the producers dont....thats just weird.

It's almost as if insurance really isn't so much insurance any more but is more like a tax.  Eg. bank refusing to lend on a property unless it's fully insured, yet the insurance may well not (and it seems increasingly so) pay out on a claim.

Today we hear the South Canterbury Finance bail-out cost taxpayers $805m. That's about $400 per capita, or about $2000 for my family and that ignores the cost to the govt of funding the increase in debt.
Banks and finance companies may choose to run risks. If I don't like that I put my money elsewhere but I don't expect to have to bail out those who took the punt on going for higher deposit rates or failed to take note of information about the banks exposures. I can't believe people in Cyprus were unaware of developments in their financial sector.
So if people want deposit insurance, it has to be provided by someone other than the government. I don't see how we achieve that.

The rationale for the government extending the deposit guarantee scheme to SCF has yet to investigated to the satisfaction of the many obligated to pay the tab, as you note with borrowed money.
I wrote to my MP asking why SCF was able to attract deposits with an 8.0%+ sticker under extended government guarantee supervision when the publicly traded govrernment stock rate for a similar term was a few percent lower.
Needlees, to say the answer was unsatisfactory and involved recommending I seek the advice of a market professional - those are hard to find at any time. 

Do you believe there will ever be a satisfactory investigation?

Sadly, no - but would love to be proved wrong.

Perhaps more a job for the Auditor-General than Parliament per se  I don't think she's yet looked in to any of these matters, has she?

I dont think OBR means that depositors funds are used to ensure bankers still get their bonuses and shareholders still get their dividends.
I think it means bank is broke, shareholders wiped out, new bank starts next day with Government Guaranteed deposits and it takes over the assets of the old bank and adjusts the liabilities to the level required. A government might recapitalise it , which is what happened to the BNZ and then sell it off once it has stabilised. It might also mean that the new bank reemploys old bank staff but may not necessarily take on any liability for holiday pay, redundancy etc.
It wont be a free ride for anyone. The only good news is that it is not likely to happen and it will be less likely to happen in the absence of deposit insurance as taking the risk out of deposits regardless of interest rate offered creates bad behaviour among depositors and banks.
OBR creates certainty instead of what would be complete chaos and systemic risk to the economy. Imagine the hit to GDP if the NZ banks were closed for even a week.
Most of what has been said about this is ridiculous and mixing up the issue of deposit guarantees with OBR is nonsense. It is not as if one has much if anything to do with the other.

Most of what has been said about this is ridiculous and mixing up the issue of deposit guarantees with OBR is nonsense.
Best you step out from behind your alias so we can gauge your credentials to make such sweeping accusations.

Grateful you explain how deposit insurance or a guarantee is a substitute for the OBR process.
One is a method of giving depositors confidence their money is safe in the bank subject to limits and conditions. The other is a set of rules that recognises the concentration of banking in this country and allows the authorities to deal decisively with an emergency in a way that wont paralyse the economy. It seems to me to be a good thing that everyone will know what would happen and who will pay. We seem to be losing sight of the very exposed position of depositors as unsecured creditors that applies now.
Deposit insurance may be a good thing too but it is not free, which is the point John Key is making. I think we can assume there wont be an open ended no cost Government guarantee of the banks. That way went Ireland. We could have a deposit insurance scheme such as they have in the US where institutions pay a levy to the FDIC and a fund is built up to keep depositors in a failed bank whole. It is a bit  different there though as they have, or used to have about 8000 banks plus the savings and Loans I think. Insurance works best when you have a large pool of insureds. I dont know what sort of premiums an actuary would think was prudent when you only have about a dozen or so major entities in the pool. I suspect it would be a chunky percentage, especially in the early years while the fund built up. How do you think depositors would react when their interest statement says soemthing like .
Interest earned 3.5%
les deposit insurance 0.75%
net payable 2.75%.
( In case anyone is wondering that is just a wild guess, not based on any knowledge, but the principal is valid ) Is it worth paying a premium or levy to insure against something that is very unlikely? Is that not a tax on savers as much as the Cyprus haircut?

How do you think depositors would react when their interest statement says soemthing like .
Interest earned 3.5%
les deposit insurance 0.75%
net payable 2.75%.

Simple buy government/LGFA debt - OBR post Cyprus is an untenable risk as it remains undefined.

There's no need to guess what the cost of the insurance would  be.   ANZ, BNZ, Westpac (for example) all have deposits in Australia insured for A$250,000 per person per bank.    It surely isn't that difficult to get them to provide John Key or the RBNZ basic information on the cost these same banks attribute to deposit insurance in Australia.
The other aspect is that these same banks are required to have more prudent lending practice in Australia - for loans >80% of valuation.   RBNZ could require this in NZ much reducing risk of bank failures.
Can those speaking against deposit insurance explain why Australia and Australian banks can provide sensible insulation against banking failures - and it is somehow impossible to do the same in New Zealand?
Using OBR alone is a moral hazzard to be sure - insulationg the banks from responsible and prudent lending requirements.

The Australian system is the same as the one we had here until recently where the Government  provides the guarantee and charges the institutions. It leaves the Government on the hook. It was bought in here to deal with an emergency. The cost the Government charged the banks will have no relationship to what would be required to fully cost the risk as both the Aussie Government at the time and ours were just trying to prevent a rout.

billsay asks "Can anyone explain why the Big4 Australian Banks can provide sensible insulation against banking failures in Australia but not in New Zealand"
Read this following article and draw your own conclusions. The answer is there.
Written by Michael West, intrepid investigative reporter for the SMH
It's about the banks you are referring to, who's in charge, who makes the decisions

Mr Stevens: I hate to be a party pooper, here, Mr Buchholz, but I am afraid that banking customers—here we are talking about borrowers—have to pay the cost of funding both equity and debt that the banks face.
But little else when it comes to insolvency.
Those same equity and debt providers (creditors) have to forfeit their capital in the event too many borrowers default, according to OBR.
The question becomes are the banks able to bring the appropriate level of debtor scrutiny into play other than exposing the borrowers to higher costs to reward the extra risks undertaken by the capital providers.

The problem is that the reserve bank needs to get out and tell us exactly how it is going to work. They haven't been on TV to talk about it.
If bank depositors are going to take a haircut, then they should also become shareholders, so they get that haircut paid back overtime. I don't think the current scheme allows for that. This is just going to push more money into property, which is pretty safe and tax free in many cases.

every one interested in this topic should listen to the Rod Oram analysis on National Radio yesterday..   (from about 5:00 to 19:25  on the recording in the link below).
the OBR is a very theoretical exercise - approaching nonsense.
John Key's analysis is glib in extreme.  The RBNZ explanations and implementation are not much better.
NZ banking is being put at further risk by the RBNZ.  We deserve better.