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English reminds term deposit savers there is no Government Guarantee and fends off Winston Peters' call for deposit insurance

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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I dont see that private insurance is un-reasonable but I dont believe the Govn needs to be in the insurance business in this context.  Of course even with prvate insurance that too can be unable to pay, AMI springs to mind. The issue really comes back tot he scale of an OBR event and being assured that the insurance really is up to it, who would supervise that one? ho hum.

Let the OCR float to the tune of market forces - the sources of bank funding - the continual repression of interest rates by easily captured government regulatory bodies encourages leveraged risk taking in non-productive assets, thus exposing the nation to systemic financial risk.

Your absolutely right here the current situation is crazy and we are being setup for a massive failure.

Precisely SH, but the RB, post Brash, has been determined to NOT allow risk to influence the OCR but to rig the rate to secure a massive subsidy for the likes of Real Estate agents and fontera (via the resultant debased currency). The ensuing risks to NZ inc. of ponzi banks& house prices and bailing out fontera (which any govt would do in a heartbeat), are far more profound than higher risk-higher OCR and currency ever would be.

Well if the banks aren't guaranteed then what should we be doing with our hard earned money?

Where does this idea come from that there should be a get-out-of-jail-free card for depositors because they placed their funds with a private sector company?
The option of buying Government bonds or buying Kiwi bonds has always existed if you believe the Government is risk free.
Why should the taxpayer guarantee you for a private choice?
Remember, there is no private insurer in the world that will take the risk of deposit insurance. Zero. Only taxpayer-owned entities do that. But if its such a bad/losing business, why should they?


There is a better way, and it contrasts sharply with the systematic fraud of QE. That alternative is called the free market, and at the heart of the latter is interest rates which are “discovered” by the market, not pegged and administered by the central bank. Stated differently, the free market requires that all debt and other forms of investment be funded out of society’s pool of honest savings—-that is, income that is retained out of production already made.

Where does this idea come from that there should be a get-out-of-jail-free card for depositors because they placed their funds with a private sector company?
David, your exasperation fails to resonate.
It arises because of the unstated understanding that cartels/monopolies can operate within this small community based upon the expectation the locals do not lose their shirts in the process of being scalped.
Only today you duly noted the ease of excess return attributable to IAG's dominant market share. The same goes for the Aussie banks - the depositors shouldn't be standing behind these monopolistic behemoths given their unchallenged right to earn outsize earnings that are perpetually repatriated to the home country - there are trade-offs, but OBR is not an equitable one.

Keeping it under your bed.

A very good question indeed Winston , this should be at the top of this governments agenga , the finiancial crisis is real , the major banks across the world are insolvent and he has a point , standard & poors !!! cmon Bill  Lehmans springs to mind their ratings were top notch until the day after , if the Australian banks are so healthy and that goes for all NZ owned banks then why not make them guarentee deposits ?? or is that too simplistick in todays world or fractional reserve banking and derivative trades ? May as well put your cash under the bed or buy some gold ?

Since most guarantees, warrantees are designed so those that offer it are never expecting everyone to have to call on it, for obvious reasons, what does it say about the Governments expectations when they withdraw it?
As it will be a property failure that will trigger bank insolvency, is it a coincedience that the Govt. are cashing in their housing stocks while the prices are right?

If term deposits did get a haircut, how many people who previously relied on their savings' interest would then have to rely on a benefit to get by?
If the haircuts are big enough and wide spread - for example after a property crash - the haircuts could well tear down what's left of the remaining economy.
It seems the government's message is 'borrowing is safer than saving'. Hmmm.

How about the many ppl who have no benefits but rely totally on the OAP?  so their tax goes up to compensate ppl who still have more then them? how is that fair?
No borrowing isnt safer than saving, the former sends you bankrupt if you cannot pay.

I wasn't at all suggesting to raise the lower tax bracket rates.
Instead, I am curious whether the figures have been worked out how a major haircut affects government accounts with affected people moving from paying RWT tax to becoming beneficiaries? Could it endanger the governments ability to pay the OAP?
Still think saving is not really encouraged.

My understanding is you cannot become a beneficiary (above the OAP payout) unless you can prove you have no savings and have a need.
"lower tax brackets" would simply go up for all, catching everyone except the top few %,  who pay little tax already hence the bottom ppl will be caught.
The event will endanger the Govn paying the OAP not the haircut. Also there are a number of banks, unless they all fail which is possible as the debt structure is similar  for each bank its monolithic in effect.  In such an event the Govn will have to borrow overseas, if it cannot then all payouts stop.
Anyway why should someone else, ie myself as a tax payer and my children and grandchildren as future tax payers pay you out?

Only the bosses will be bailed out, not the masses..

Here is a dumb ass scenario.
If i had a 10k term deposit but also owed them 10k on a personal loan who would have more clout when it came to getting the money should the bank fail?

Indeed. We are just about equal between the remainder of our floating mortgage, and cash in our online saver account at ANZ. When they absorbed National bank, they changed from us being able to instantly transfer cash onto the floating mortgage and the new balance would be reflected immediately, to now having to 'apply' to pay a lump sum off the floating mortgage which is processed overnight. Makes me nervous that in worst case scenario, our cash would vanish and we're still left with the mortgage debt we owe them.

Have a look at the contract you signed when you took out the loan. It'll contain some detail of what happens if the bank goes into receivership, and how your various debit and credit accounts are to be treated.

As a general rule, the accounts that belong to one customer are netted off against each other.

Someone buys the debt, though by now your loan will already be owned by someone I would think.

neither you would lose your 10k and still owe 10k.

If Mr English thinks that a lack of government guarantee here has no effect on where people put their money he must truly have lost the plot. How much capital remains overseas which could be better used here?
I for one, have  a significant proportion of my cash assets overseas where they are guaranteed. I cannot understand the emphasis on the losses in a default to government and tax payers. The enormous profits of the bank gives them a large leeway to pay insurance premiums against their next defaults. If I am right I understand that in some countries guarantee funds are notional , thus requring the banks to only come to the party were the need arises.

Why should I as a tax payer guarantee your money?

Actually, it looks like English is right. Today we learned that household deposits (in NZ banks) were up strikingly, up +$2.2 bln in a month to $130.9 bln. NZers have about NZ$2.6 bln in foreign currency deposits and these are much higher as well in September. 
If most people were worried about the lack of a guarantee, they aren't moving their funds based on those concerns.
Perhaps they think our economic performance and prospects underpin the banking system here. Or perhaps they don't. More likely, its not an issue for most people.
What is most important however is not to be drawn into the moral hazard trap. I wish I could believe the OBR system would apply to all banks (but I don't). Taxpayer-backed deposit guarantees are a fast way into that trap. Once they are 'in' they are very hard to get out of - so kudos to NZ for actually pulling that one off. We also need to not back ANZ/ASB/BNZ/Westpac with an implied guarantee.
Remember, if you have concerns you can always invest in NZ Govt Kiwi Bonds. These the NZ Govt do guarantee. The price for safety is a lower return. The cost of a higher return is less safety. But it's your choice.

However I think they are worried, and rightly so but see no where better.  If things are getting worse are they bailing out of other investments that are seen as even bigger risks?
"NZ Govt Kiwi Bonds" however if we see an OBR event are these also not at risk as foreign investors decline to lend to us? 
and who actually guarantees them btw? us as tax payers, BE etc guarantees nothing except signing on our behalf.
I agree on the return v safety, btw. Some wnat their cake and eat it.  I think while Japan for instance has had decades of virtually no interest here in NZ and indeed other places we have got used to interest rates that are un-sustainably high. That I's suggst has been bad for us, reducing company growth by passing too much profit to the banks in interest payments.

I would like to suggest to David and Steven that no citizen payouts are required. The banks will provide their own guarantee. You can take the hit of low-interest guaranteed govt funds here or invest in overseas funds at the rate going there. The alternative is investment in gold, silver or platinum.
I am reminded many years ago of the German economist who tried to persuade me to invest in gold. I told him crazy... that gold was $35 an ounce. The rest was eternal regret.
We must take heed that it seems that our reserve bank seems to be the only one without any gold reserves. As we look at deposit insurance we can clearly say in the old joke that "everyone is out of step in the army parade except jimmy".

This talk by English will convince more people to cash up term deposits and buy another investment property.