Opinion: The Govt and RBNZ may be uninterested in introducing a deposit insurance scheme, but there's nothing stopping banks from offering secured deposits

By Gareth Vaughan

The haircuts of up to 60% on Cypriot bank deposits as part of a bailout of that country's failed banking system and the subsequent spotlight placed on the Reserve Bank of New Zealand's Open Bank Resolution policy, have confirmed for New Zealand depositors that their savings won't be getting guaranteed, or insured, any time soon. That said, there's nothing stopping the banks from offering to secure their depositors' deposits.

The latest Reserve Bank figures show a record high NZ$110.284 billion worth of New Zealand dollar term deposits. Deposits provide a major and important chunk of banks' funding, which they on-lend to customers.

Since 2010 New Zealand's big banks have been borrowing money from institutional (or professional) investors, mainly European ones, through issuing covered bonds. These covered bondholders get a specific chunk of the bank issuer's assets, some of its residential mortgages, ring fenced for their security should the bank default on its covered bonds. Kiwibank recently became the fifth New Zealand bank to issue covered bonds. (See more on covered bonds, and the security granted to covered bondholders, here in what covered bonds mean for ma and pa.)

Banks could provide the same security for the depositors they borrow off as they do for their covered bondholders by ring fencing some of their home loans as security for deposits.

This doesn't, however, appear to be on the agenda. New Zealand Bankers' Association CEO Kirk Hope told interest.co.nz he didn't think the concept of secured deposits in general was something the banks had really looked at.

"Mainly because banks all have high quality credit ratings and are generally in pretty sound shape," said Hope.

The big four banks - ANZ, ASB, BNZ and Westpac - have AA- credit ratings from both Standard & Poor's and Fitch Ratings, and Aa3 ratings from Moody's. Kiwibank has an AA rating from Fitch, A+ from S&P and Aa3 from Moody's. Rabobank NZ has an AA- rating from S&P, TSB has BBB+ from S&P, SBS has BBB from Fitch, the Co-operate Bank and Heartland Bank both have BBB- ratings from S&P. All are investment grade ratings. See credit ratings explained here.

A secured deposit offered by a bank would presumably pay depositors a lower interest rate than unsecured deposits. And if one bank was to take the plunge and introduce a secured deposit product, would its competitors feel compelled to follow, or be forced to do so by their own depositors? See all advertised bank deposit rates here.

Not common overseas, IMF prefers deposit insurance

Secured bank deposits aren't common overseas. Asked whether the International Monetary Fund was aware of them being offered anywhere, an IMF spokesperson responded, after consulting colleagues, saying the IMF isn't aware of countries where secured deposits are widely offered.

However, as demonstrated by the Reserve Bank of Australia sourced chart below, many countries have deposit guarantee, or insurance, schemes.

The IMF spokesperson added that secured bank deposits probably couldn't serve as a substitute for deposit insurance.

"In general, small depositors are not able to negotiate the setting aside of collateral against their investment. Large depositors may be better able to secure assets against their deposits - but this will not reproduce the benefits of a broad-based deposit insurance scheme and in fact work against the interests of small depositors in the absence of deposit insurance."

But that's not to say that if retail depositors were offered the option of a secured deposit, alongside unsecured deposits, there wouldn't be takers for them.

Local depositors wanting their New Zealand bank deposits to be covered by deposit insurance would be advised not to hold their breath whilst waiting for this to happen. In fact it appears they'll need a change of government.

Prime Minister 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. And the Reserve Bank says New Zealand authorities put more weight on the moral hazard argument than their overseas counterparts, with our government having "looked hard" at deposit insurance schemes and concluded they blunt the incentives for investors and banks to properly manage risks, and may even increase the chance of bank failure.

Things may change if Labour and the Greens get into power. Green Party co-leader Russel Norman wants an Australian style deposit guarantee scheme and Labour's finance spokesman David Parker says a Labour-led government would ensure the first NZ$30,000 of all bank deposits were protected and not subject to a haircut in the event of a bank failure.

Aussie depositors' preferred status

In Australia bank deposits are protected up to A$250,000 per person per institution. The Aussie scheme evolved out of the country's retail deposit guarantee scheme, which was introduced at the height of the global financial crisis in October 2008.

Aussie depositors also benefit from the preferred status granted to Australian depositors over other unsecured creditors in the event of the insolvency of an Australian authorised deposit taking institution. This legislative provision is referred to as depositor preference.

New Zealand's own Crown retail deposit guarantee scheme ran for 38 months from October 2008 until the end of 2011, when the Government chose to end it. Despite hundreds of millions of dollars in fees collected from the participating financial institutions such as banks and finance companies, it cost taxpayers the thick end of NZ$1 billion largely due to the demise of South Canterbury Finance.

My wish is that New Zealand's never again in the position of having to deal with the collapse of a major bank, or banks. But it's worth remembering that as as recently as 1990 the Government used NZ$620 million of taxpayers' money to rescue BNZ. And it's worth noting that if a major bank, or banks, went belly up, we'd probably have bigger things to worry about than deposit haircuts.

That said, I don't believe the Government would simply stand back and allow a bank to fail and this is where banks can be seen to have an implicit guarantee. That means institutional investors, or indeed depositors, may lend money to a bank because they believe if the proverbial hit the fan, the Government wouldn't let it fail.

So in the absence of a deposit insurance scheme putting depositors on something resembling a level playing field with covered bondholders, perhaps the opportunity to invest in secured deposits could be offered.

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25 Comments

Brilliant idea.

There is one way to get a 'secured deposit' in a New Zealand bank - take out a TD in UDC.
 
UDC is 100% owned by ANZ. These TDs are "secured as First Ranking Security Stock under the Trust Deed" and appear in ANZ-NZ's accounts as "Secured debenture stock" along with "Residential mortgages pledged as security for covered bonds". See Note 11 in the Dec-12 accounts.
 
What you are getting is priority over the unsecured (normal) depositors, in a somewhat similar way covered bond holders get their priority.

What's the security?

Finance companies such as UDC using terms like "First Ranking Security Stock" and "Secured Debenture stock" seem to have fallen out of favour recently.
I wonder why that might be?
 
I remember now!  There were all these tinpot organisations using the same lingo, but when push came to shove, it was revealed the term "Secured Debenture Stock" didn't actually provide much security at all.

It must be noted our banks interact with the RBNZ on the basis of submitting collateral in the form of an acceptable security or foreign currency in return for a NZD loan.
 
Open marlket operations as depicted here and fx swaps as depicted here in section 10 constitute the public release of collective secured lending undertaken by the RBNZ to the local NZ banks.
 
Hence, I guess the following only applies to the uninformed and trusting. .
 
 New Zealand Bankers' Association CEO Kirk Hope told interest.co.nz he didn't think the concept of secured deposits in general was something the banks had really looked at.
"Mainly because banks all have high quality credit ratings and are generally in pretty sound shape," said Hope.

Q for Kirk:
Given this:
"Mainly because banks all have high quality credit ratings and are generally in pretty sound shape," said Hope.
how does abstract thought get applied to that:
http://www.rbnz.govt.nz/speeches/4487002.html
Nevertheless, one point needs to be made clearly. When the crisis did hit, the banks did require public sector support. The Government implemented both retail and wholesale funding guarantees to preserve confidence in the banking system, while the Reserve Bank expanded its liquidity facilities in order to ensure that banks remained liquid and well-funded. The financial crisis revealed a major limitation in the banks’ business model that lay behind the rapid expansion in credit during the lead-up to the financial crisis – a tendency to fuel much of that lending primarily through short-term wholesale funding from offshore. However, unlike banks in the Northern Hemisphere, the banks’ own capital buffers proved sufficient to absorb the rise in non-performing loans and accompanying decline in profitability that followed from the economic slowdown.
(the well funding of the banks came from the govt.)
 
Or: can both statements (this and that) be true.

The discussion is being obscured by obsfucation in extreme by the Government, the RBNZ and the Australian banks operating in NZ.
 
Retail deposits by the same banks in Australia are insured and guaranteed up to A$250,000 per depositor per bank at a cost which appears to be about 0.05% less interest rate for (say) five year term deposits.
 
Why isn't the same deposit guarantee offered to NZ depositors?   The RBNZ and the Government are failing to protect the NZ public - again.   
 
 

UDC is not a Bank.
It is a Finance company,  if you don't know the difference then feel free to take comfort in thier "Debenture Stock".
And if you think it being owned by ANZ is really cool, then go and talk to some of the people who put cash with the old ING/ANZ setup, which screwed up so bad they had to change the name to Onepath to remove the stigma of the resulting ComCom investigation.

" which they on-lend to customers." ...but  first they multiply it by 10 and then they sell this 'created credit' to keep the property and farming bubbles going.
Maybe Bob Jones is right....saving is for idiots....instead we should do as we are encouraged...buy property with 5% down ( or less) and ride the bubble...and when it all turns to shite as it will...we only lose our 5% or less...if none of us have any savings for the swine to steal...as they will....!

That is certainly an option Wolly, the upside is that it will expedite the demise of the credit system. Downside is of course your 5%, which is quite a substantial amount given the bubble territory we are in.

Who determines how big the haircut is going to be? When you go in for a haircut you expect  to lose just a little bit of you hair.
If a bank lends out more than it receives in deposits then it seems to me that it would be quite possible for depositors to lose all their money. 
They probably wouldn't do that though as the depositors/peasant's might rise up.
The reasoning given behind the Open Bank Resolution seems to be that they will take only a little bit of your money, just enough to keep the Bank going. 
Is this reasoning valid?

If a bank lends out more than it receives in deposits then it seems to me that it would be quite possible for depositors to lose all their money.
 
Kiwi, so true - I highlighted this point earlier today, on another thread, and with my comment attached to an article posted by Gareth not so long ago.
 
The New Zealand banking system has a significantly higher loan-to-deposit ratio than any other country in the Asia-Pacific, credit rating agency Moody's Investors Service says.
 
A chart in Moody's Asia Pacific Banking Outlook 2013 report shows the loan-to-deposit ratio for New Zealand above 140%, well ahead of second placed Australia's, which is just above 120%. Of the 14 countries surveyed Hong Kong comes lowest at about 70%. (See chart below).

Give definition/proof to your assertions.
 
I lived outside NZ for 20 years and never thought the exchange rate risk was low enough  to consider depositing a single dollar in NZ during that time.

All interest is taxed - but 'non-residents' are taxed in NZ at a lower fixed rate - mostly 10% depending on the country you are resident of.   How that country considers the income is another matter.

Secured deposits are better than unsecured but the depositor will still take a haircut and the question is would the haircut be worse than with a deposit guarantee scheme via the government. 
 
If a bank fails it is because their liabilities are significantly greater then their assets and they can't make ends meet.  The bank is then sold at a discount or liquidated or put into administration and in these events secured creditors are paid first but as mentioned above liabilities are significantly greater then their assets so not all creditors (secured or not) get back everything.  The order in which the various secured creditors are paid back is also another matter and I would wager that institutional investors are paid back more and earlier than your average Joe. 
 
A deposit guarantee scheme enacted by law, run/managed by the regulators and funded by a levy on the industry would guarantee 100% of retail deposits but only up to a point.  The UK for example guarantees up to 50,000 GBP last time I was there.  So for small retails depositors this is the preferred example and it encourages deposit takers to behave themselves.  But provides little guarantee to large depositors.

And the Australian banks operating in NZ have guarantees up to A$250,000 per depositor per bank - in Australia.  Hence a couple can spread their savings across four or more banks - each - to easily protect up to a couple of million.  Hardly just protecting small retail depositors.    Likewise in the US - there are upwards of 8000 insured institutions are covered by the FDIC.  Again to the sum of $250,000 per depositor per bank.     Yes - depositors are thus encouraged to behave themselves - in most other comparable countries....  but not NZ.

Couldn't the RBNZ force the banks to give individual depositors the highest security?

The Bankers CEO comment smacks of complacency of the mirrror, mirror on the wall .... kind. these guys are too busy admiring their own ratings to see the train truckin' towards them. When it hits, our Governement, having succumbed to their BS, will ensure that it is us ordinary depositors who will pay the price, not the bankers for their incompetence! This needs to change.
Bankers should have to hold depositor insurance, they should be made to pay for it out of their exorbitant profits and not pass it on to their depositors. And finally there should be no expectation that a Government should bail them out of their mistakes with taxpayer funds, they are private institutions in the business for profit!!!

Canada designs bail-in mechanism designed to prevent deposits or taxpayer money from being used to stabilize a bank.
 
Globe says Big Six banks hear "bail-in" explained
2013-04-08 06:01 ET - In the News
The Globe and Mail reports in its Saturday, April 6, edition that Ottawa's plan to create a safety net, or "bail-in" mechanism, for Canada's banks involves a new kind of investment similar to bonds that will be sold to large institutional investors. The Globe's Grant Robertson writes the plan will give banks access to emergency capital to keep themselves solvent in the event of a major crisis. Unnamed sources say the concept is designed to prevent deposits or taxpayer money from being used to stabilize a bank. In its latest budget Ottawa said it would enact a bail-in regime in which a failing bank would use certain "liabilities" in order to stabilize itself. Since deposits are one form of bank liability, that wording prompted immediate comparisons to the banking crisis in Cyprus, where the government ordered banks to draw upon the accounts of large depositors for emergency funds. While the term "bail-in" has been used in both cases, Canadian officials want to distance their plan from any that would use consumer deposits for capital. Amid questions about the plan, a Finance Minister spokesman said no consumer bank deposits would be drawn upon in the Canadian bail-in scenario.
http://www.stockwatch.com/News/Item.aspx?bid=Z-C:CM-2056965&symbol=CM&region=C
Edit: Globe and Mail link
Sources familiar with the plans say the Canadian bail-in scenario will rely on a specific class of new investments: subordinate bonds and deposit notes. The latter acts similar to bonds, where a large depositor such as an institutional investor or corporate customer with several hundred thousand dollars or more to deposit, buys a deposit note in order to get a slightly better return. It is similar to a contractual arrangement.
http://www.theglobeandmail.com/report-on-business/ottawas-bail-in-plan-protects-deposits/article10823685/
Maybe we should follow what the Canadian's are trying to do  rather than the OBR/IMF/Cyprus template

Sources familiar with the plans say the Canadian bail-in scenario will rely on a specific class of new investments: subordinate bonds and deposit notes. The latter acts similar to bonds, where a large depositor such as an institutional investor or corporate customer with several hundred thousand dollars or more to deposit, buys a deposit note in order to get a slightly better return. It is similar to a contractual arrangement.
 
This is a practical ideology free concept with great merit - where did our RBNZ technocrats leave their brains when they came up with OBR? - a NZ one size fits all regime patently courts the risk of regulatory officials forewarning the bigger players and hence guaranteed collapse - certainly NZD 700,000 is not that large a sum for a corporate or even certain retail customers today - especially when it is estimated 85% of deposits are accounted for by 10-15% of the non-bank lending population.

Sounds like CDSs and like them, backed by fresh air.
regards

Exactly, a CDS is an unfunded liability, but unlike a deposit, which is - I wish you would just fold your tent or comment about things you actually know about rather than what you think you know. 

"This doesn't, however, appear to be on the agenda. New Zealand Bankers' Association CEO Kirk Hope told interest.co.nz he didn't think the concept of secured deposits in general was something the banks had really looked at."
Yet if the headless chickens are anything to go by their cusotmers want this....so offer it to them.
Of course that means the un-secured depositors will take a bigger haircut, and only works if only a % jump into secured.....ie there has to be a big enough pool left of un-secured depositors willing and able to be wiped out to the last dime first before the secured start to take losses.....
Get over it ppl, you cant support all this "money/wealth" with real things....and thats the issue.
regards

Why should they?  People are still depositing money in banks without security.  A bit like if bank offers a loan to you without asking for any security would you be stupid enough to offer security to the bank?

People, SP....are somewhat bereft of options there.
 Depositing to service other accounts.
 Depositing  through reasond fear of Stock, Gold, other  Investment.
Depositing for lack of financial acumen.
Depositing in hope of achieving financial security without complication.
 A captured Audience handing over their captured monies....in ..."trust" for meager returns.
Give them a better option , and let us see the xodus of depositors.
 Of course people  who choose to " trust" still need to understand the on call deposit mechanism, you take a little less interest, but you have not consented to the institution leveraging your money as they see fit........in effect your paying an insurance policy.