By Bernard Hickey
Finance Minister Bill English has reminded term deposit savers that there is no Government guarantee for their deposits and has reiterated his confidence in the system of Open Bank Resolution (OBR) available to the Reserve Bank if a bank were to fail.
English was speaking in Parliament after New Zealand First Leader Winston Peters asked about the risks of capital flight to Australia's guaranteed banks in a crisis and after a Financial Markets Authority (FMA) survey showing 52% of depositors believed there was a Government Guarantee.
New Zealand is the only country in the OECD without a deposit insurance scheme and instead relies on Reserve Bank regulation of a capital levels to keep banks stable and protect depositors. The regulator also operates the OBR system, which would allow the Reserve Bank to shut down a bank and reopen it the next day after the potential for hair cuts on term deposits on existing depositors. Those remaining deposits and then future deposits in that bank would then be Government guaranteed, raising the risks say critics that savers would then rush to shift their money into that guaranteed bank, creating financial instability.
New Zealand had a deposit guarantee scheme from 2008 to 2011, but it was allowed to lapse, while Australia still has a scheme.
Asked about the FMA survey, English said depositors should know their deposits were not guaranteed.
"They are not guaranteed and it's important they understand that. But I think they are relying rightly on the government and the bank's prudential supervisor to ensure the banks are safe. The New Zealand view is that the Open Bank Resolution gives the banks strong incentives to ensure that they are safe institutions," English said.
Asked if the banks and depositors were effectively getting a guarantee for free given the Government remained a last resort for a bailout, which is not ruled out under the OBR system, he said: "That's at the core of the argument and at this point we have taken the view that the OBR reduces the moral hazard and that the regulatory regime makes the possibility of bank failure very small."
'Still being discussed with Australia'
Unusually, English said in response to Peters' parliamentary question that he was raising valid questions about the mis-match between the Australian and New Zealand situations, which was regularly raised in discussions in the Trans-Tasman Council on Banking Supervision.
Peters then asked why the Government did not put an insurance scheme in place before another crisis.
"Again, the member is raising reasonable points," English said.
"One of the arguments for depositor insurance is that it effectively means that depositors prepay any bailout funds. Of course, that is not costless. That imposes costs on the whole economy, because, effectively, interest rates would have to be a bit higher to achieve that," he said.
'Still monitoring regime'
"As I have indicated, the Government has been monitoring both the current regime that is in place—open bank resolution, which does include Government guarantees of depositor funds—and the differences between our regime and, for instance, the Australian one, which is a pretty real-time issue: to have two different regimes applied to the same banks."
Peters then asked about the risks of depositors moving their funds to Australia in a crisis.
English responded that Standard and Poor's had assessed New Zealand's banks as sound and that the OBR system was sound. The risks of capital flight were there in 2008/09, but Australia may act differently in future, he added.
"Again, it is not clear in the future that an Australian Government would tolerate that kind of behaviour either. I am not criticising the member for raising the issues; they are all legitimate issues," he said.
English later said there were continued discussions between Australia and New Zealand about the differing systems.
He said New Zealand's banks had higher capital requirements than international norms, strong core funding ratios and fast growing deposit bases.
"Any argument to change it would have to be pretty strong," he said.
Green call for deposit insurance
Green Party Co-Leader Russel Norman called for a deposit insurance scheme in New Zealand, arguing banks should pay an insurance premium.
“Our banks profit in the good times; they should set aside some money now to pay if things go wrong,” Norman said.
“Every other country in the OECD protects savers’ deposits with deposit insurance. It’s time savers in New Zealand were given the same protections savers in Australia have banking with the same banks," he said.
“Banks do fail. The BNZ failed the late 1980s and then again in the 1990s. National is leaving the taxpayer on the hook for another bailout as banks like the BNZ are too big to fail. Deposit insurance is a smarter alternative to a taxpayer bailout."
Norman said deposits up to NZ$100,000 each should be guaranteed.
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