Geof Mortlock explains why higher bank capital ratios are not a substitute for deposit insurance

Geof Mortlock explains why higher bank capital ratios are not a substitute for deposit insurance

By Geof Mortlock*

Recently, I wrote two articles on banking related matters. One was on the Reserve Bank’s proposal to increase bank capital requirements to levels that are much higher than in other countries.  The other was on a completely different topic – the need for New Zealand to establish a deposit insurance scheme to protect bank depositors if a bank fails.

Some readers have asked the question: Is bank capital a substitute for deposit insurance? In other words, if the Reserve Bank’s proposal to increase bank capital requirements to very high levels is implemented, will this obviate the need for deposit insurance? The short answer is ‘no’. And this article explains why the answer is no – i.e. higher bank capital ratios are not a substitute for deposit insurance.

What does bank capital achieve?

Capital in a bank provides a buffer to absorb losses.  If it takes the form of equity (e.g. ordinary shares and retained earnings) or a debt instrument that converts to equity upon defined events (such as a bank’s capital ratio falling below a defined level), then this provides a means of absorbing losses while still enabling the bank to continue trading – it is known as ‘going concern’ capital.  All else being equal, the higher the level of capital relative to a bank’s assets, the greater the amount of losses that a bank can absorb while still keeping its doors open.  Put another way, the higher a bank’s capital ratio is, the lower is the probability of the bank defaulting on its financial obligations – i.e. failing.  However, unless the capital ratio is 100% (i.e. there are no deposits or other liabilities, which would be an absurd outcome), then the probability of failure will never be zero.  Capital can reduce the probability of a bank failing, but it can never eliminate the possibility of bank failure.

Of course, other factors come into play when determining the probability of a bank failing.  Crucially, the quality of a bank’s governance and risk management will play a major role in determining the probability of bank failure.  A bank with poor governance, high risk appetite and deficient risk management systems will have a much higher probability of failing than a bank with good governance, conservative risk appetite and high-quality risk management, if their capital ratios are the same.  Indeed, when one looks at the history of bank failures around the world, and in New Zealand, the key factors causing banks to fail were poor governance, a high appetite for risk (e.g. risky lending and high concentrations of loans to one sector or counterparty) and poor-quality risk management systems and controls.  Even banks with relatively high capital ratios have failed because of these causes.  It would have taken extraordinarily high capital ratios to have avoided the majority of bank failures over the decades - globally and in New Zealand.

This is why bank supervision authorities in most countries place so much emphasis on bank governance, risk appetite and risk management, as well as on capital, liquidity and other factors.  They have prudential standards focused on these matters.  They have comprehensive monitoring of these matters.  They conduct regular on-site bank assessments on these matters.  And they have staff with in-depth expertise in bank governance and risk management.

In contrast, the Reserve Bank has very little of any of this.  They prefer a ‘light touch’ approach to supervision.  What does this mean?  In essence, it means the Reserve Bank has adopted a relatively lazy way of supervising banks; it prefers to place reliance on ‘market discipline’ through disclosure, limited-scope off-site monitoring and, now, a huge increase in capital ratios.  For years, the Reserve Bank has eschewed a meaningful approach to bank supervision – they are almost theologically allergic to it.  Their preference now is to place most of the financial stability eggs in the capital basket – to seek to reduce the probability of bank failure through very high capital ratios, rather than roll up their sleeves and actually do a professional job at bank supervision through a more balanced set of tools.

What is the consequence of the Reserve Bank’s approach?

The Reserve Bank’s lopsided approach to bank regulation – so much weight placed on capital and so little on anything else – is that it will have a significantly adverse impact on the efficiency of the financial system to the detriment of the economy and bank customers.  Very high capital ratios will, in all probability, increase interest rates, reduce the appetite of banks to lend and reduce the availability of credit to the economy.  It is also likely to reduce the contestability of the banking system by discouraging foreign banks from entering New Zealand.  This will reduce competition to the detriment of bank customers (depositors and borrowers) and the wider community.  High capital ratios will also create a risk of what is called ‘disintermediation’- i.e. a process whereby lending and other capital-using bank business moves from the regulated sector (the registered banks) to the lighter regulated sector (the non-bank deposit-takers) or even to the non-regulated lending sector.  Again, this is detrimental to the efficiency of the financial system and could pose additional risks to borrowers if they come to rely on non-regulated lenders for access to credit.

A more balanced approach to regulation would reduce these adverse outcomes.  It would achieve financial stability outcomes at lower costs in terms of adverse effects on financial system efficiency, access to credit and resource allocation in the economy.  What would a more balanced approach look like?  It would involve:

  • A more modest increase in capital requirements – considerably less than the Reserve Bank is proposing, and more aligned to international benchmarks.  Any increase in capital ratios would be informed by rigorous bank stress testing.
  • A more risk-based approach to bank supervision, where banks of higher risk are subject to more intense supervision and higher prudential requirements (e.g. on capital and liquidity) than lower-risk banks.
  • Greater emphasis on bank governance, risk appetite, risk culture and risk management systems and controls – where banks with high standards in these areas would, on average, have need of a lower capital ratio than would banks that score less well in these areas.
  • A requirement for banks to have recovery plans to enable them to restore themselves to financial soundness following a severe loss.
  • A supervision authority with the culture, professionalism, skills and capacity to do the job properly.  Sadly, the Reserve Bank fails badly on most counts.  It lacks a genuine commitment to prudential regulation and supervision – its cultural DNA has always been dismissive of the need for prudential regulation and supervision.  It lacks a senior leadership team with any expertise in financial stability and prudential supervision – not one of the senior leadership team has anything like the professional knowledge or experience needed to do the job.  And it lacks the staff with the knowledge, experience and the tools to be effective supervisors, with a few exceptions.

What is needed is a fundamental re-balancing to address all of the above deficiencies.  This would achieve the desired financial stability outcomes at lower costs to financial system efficiency and to the economy than the Reserve Bank is proposing.  But that will not happen in the Reserve Bank as it currently exists.  It will only happen if either the Reserve Bank is dragged (against its will) to a 21st century approach to prudential supervision, subject to robust accountability and much greater external oversight, or if the entire prudential function is moved to another organisation – a newly established Prudential Regulation Authority.

And where does this leave deposit insurance?

The level of capital ratio required of banks has no impact on the need for deposit insurance.  As noted above, all else being equal, the higher the capital ratio is, the lower will be the probability of failure.  However, the probability of failure will never be zero.  Even in a highly capitalised banking system, bank failures can and do occur.  Indeed, a banking system which had a zero rate of failure over the long haul would most likely be a moribund banking system; it would be one in which banks are unwilling to take risks and have no or very limited appetite to innovate.  That is hardly the recipe for a healthy and vibrant financial system.  And is not a financial system that is well placed to meet the needs of the economy and community.  Indeed, a healthy, balanced banking system is one in which there will occasionally be a bank failure – hopefully rare and non-contagious.  When it happens, we need a structure that provides an efficient way of resolving the bank – including giving depositors prompt access to their funds, protecting small depositors from loss, maintaining the continuity of systemically important functions and preventing one failure from triggering runs on other banks.

Deposit insurance is a key part of this structure.  It provides the means for protecting small depositors – i.e. those who cannot, in all reality, protect their own interests through bank disclosures and the like.  It provides a mechanism for prompt access to insured deposits, while still enabling other resolution processes to give prompt access to a proportion of larger depositors’ funds.  It reduces the risk of inter-bank contagion by reducing the risk of depositor runs on multiple banks.  If well designed, it makes higher-risk banks pay a higher level into a deposit insurance fund than lower-risk banks.  And it takes the political sting out of bank failures, enabling governments to avoid the pressure to react in ad hoc and ill-considered ways, such as through blanket guarantees.

Higher capital ratios for banks do nothing to reduce the need for deposit insurance.  At most, higher capital ratios might justify a lower target size for a deposit insurance fund, given that the probability of bank failure may be lower.  In turn, a lower target size for the deposit insurance fund could justify a smaller deposit insurance levy than in a higher-risk banking system.  But the need for deposit insurance remains.  A good parallel is house insurance.  The risk of damage to a house in any kind of disaster can be reduced through high standards of construction and building maintenance.  But we still need house insurance.  Why?  Because we know that, even with the best standards for house construction, there is always a risk of damage due to fire, earthquake, flooding and the like.  And it is the same principle in banking.  We need deposit insurance for the times when, despite capital and everything else, a bank fails.


*Geof Mortlock, of Mortlock Consultants Limited, is an international financial consultant who undertakes extensive assignments for the International Monetary Fund, World Bank and other organisations globally, dealing with a wide range of financial sector policy issues. He formerly worked at senior levels in the Australian Prudential Regulation Authority and Reserve Bank of New Zealand.

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52 Comments

Do we trust bank stability. No. Do we trust depositor schemes. Only if they are government funded, which means taxpayers get shafted when the bad thing happens. And we are those taxpayers.
Overall I advocate Banks be required to carry massive reserves and capital.

bank /baŋk/ noun a financial establishment that uses money deposited by customers for investment, pays it out when required, makes loans at interest, and exchanges currency.

  • a stock of something available for use when required.
  • In gambling, the bank is money that belongs to the owner and can be won by the players.

Pick the definition that suits your "bank".

A good read. Much to support and much to question. But the easy answer, in the short term is:

"Let New Zealand taxpayers conduct a savings account at the RBNZ if they so wish."

There's your deposit insurance without any need to compromise. An instant Government Guarantee of unlimited size. A bit like the OCR in reverse!
Savings are, arguably, a means of paying future tax liabilities to the Government. In it's a most simple form that's why we have an independent currency - the NZ$, to collect tax from citizens. So allow 'us' to have just a savings account with our Central Bank if we so wish. ( I'm sure such arrangements are already in place for larger organisation, the banks; SOE's etc?). If we want more risk, and so a higher rate of return on our savings, then stick with a bank that's not the RBNZ. Invest with a Finance Co if you want! etc.
All other day to day banking operations ( from cheque accounts to credit cars to to home loans) will still be done by the retail banks, and if they want to access 'our' money at the RBNZ, then let them bid for it!

The RBNZ does not want to be a commercial bank. They don't have the software, systems or support personnel required to take retail deposits and deal with customers changing addresses, dying and wanting to do all sorts of crazy things with their money.

They can get the software and the other arms of government can provide the information, I.e IRD, Birth Deaths and marriages, electoral role, citizenship, immigration. An easy one stop shop for banking. One account one person. Simple.

bw,

I hate to burst your bubble,but it is already perfectly possible for an NZ taxpayer to have an account with the government.Indeed,I have such an account,called Kiwibonds. It pays me a lower rate of interest than I could obtain from a commercial bank,so why do I have it? Simply because it comes with the backing of the state. I already have several TDs with different commercial banks,but without a Deposit Insurance scheme,they come with a greater risk.
I would love to see your case for stating that savings are arguably a means of paying future tax liabilities-in my case they most certainly are not. i have been gradually taking some profits from my share portfolio and intend reinvesting much of it in due course.
Your thinking on currency is terribly muddled. Our currency and the collection of tax are entirely separate. The countries in the EU which are part of the Eurozone don't have their own currency,but have no difficulty in collecting tax from their citizens.

An implicit part of deposit rates is a risk premium to compensate for the failure risk of the respective Bank.

If you want a risk free proxy then buy Government Bonds.

If you're a customer wanting deposit insurance then pay a premium for that insurance - effectively turning it into a call option.

I'm sick of all this distortion of risk and return.
Banks are not without risk.
No free lunches.

Is that really true though - would you say a bank is more likely to fail now than in say any point in the past? And yet the risk premium is very small at present when the actual risk (if a recession or housing market failure) occurs is perhaps the highest its been given the debt expansion? So shouldn't we be receving a higher risk premium at present for deposit rates to cover the risk of loss of funds - not a record low rate because that would indicate the risk of loss is about the lowest its ever been?

The solution is simple.

Don't put your money in the Bank if you think the premium is not enough to compensate you for the risk of failure.
Put it in the Government Bond instead.

That's how supply and demand works.
If you are unwilling to supply a good or service at a particular price. Then don't.

Maybe. But not everyone has a stockbroker or advisor to get NZ Govt Bonds from. Most people want to be able to 'go online' and move money about with their mouse. That's why a RBNZ savings account could be better?

"Newly issued debt securities can be bought through investment advisers or sharebrokers, and through the NZDX Market. The NZDX Market also provides a secondary market where investors can buy and sell debt securities, including corporate and Government bonds, through NZX advisers."

Everyone has the *option* to talk to a broker or adviser.

If you're that concerned you have 4 options:
- Put it under your mattress;
- Assume the bank risk and accept the rates;
- Pay the insurance premium if you're that worried and suck up the rubbish yield;
- Pay an adviser who will suggest other positions on the risk/return frontier that may be a better fit for you

That's too hard for most people - from "what if I get robbed' ( the mattress scenario) to "I don't want tp pay for an advisor just to put my hard earned money somewhere safe" ( broker option), so Option 2 is the default, ( Leave it with a retail bank) and if this article is about minimising consumer risk, then an RBNZ savings account is by far the easiest to install, manage and use.

(NB: It wouldn't have been in the days when a shopfront would have been required or cheques had t be mailed in etc. But today's on-line world? Piece of cake!)

Don't complain then.

Ignorance is no excuse.
"Fool and his money..."

cmat,

Would you care to quantify your "implicit premium" built into deposit rates? You are correct that banks are not risk-free,nothing is. What you miss is that you are asking the impossible in expecting the mass of depositors to grasp that and that is why a funded deposit scheme is necessary to prevent a run on a bank in the event of failure,followed by contagion as other banks' depositors take fright.

Easy "linklater01". It's Finance 101.

The implicit premium, is the difference between Government Bond yield (i.e. the risk free proxy) and deposit rates over the same term.

Government bond yields can be found here:
https://www.rbnz.govt.nz/statistics/b2

Deposit rates are summarised here:
https://www.interest.co.nz/saving/term-deposits-1-to-5-years

e.g.:
2 year Government Bond yield is currently 1.71%
2 year deposit rate as ASB is 2.00%
The implicit premium (add punctuation for effect if you must) is 0.29%.

Depositors may not grasp that, but it is the simple truth.
Are you saying that we should just let the depositers have that additional yield for no extra risk simply because they are too stupid to understand the difference?

I'm sure they would be incentivised to remedy their ignorance if they were charged a premium for the benefit of deposit insurance.
If they want to assume the risk then don't buy the insurance, simple as that.

I'm a big fan of making the Banks hold more capital.
I hate the idea of too big to fail... which leads to all these rubbish arguments like basically placing moral hazard over Bank deposits for fear of a run, and the Central Bank underwriting risk in the housing market for fear it will fall.

All fundamentally to protect people who, we are led to believe, leave their cognitive capacity at the door whenever they walk into or correspond with a Bank.

I think that the idea that govt bonds are risk free is delusional. Most govt debt globally is highly unlikely to be paid back in real terms. There will be major defaults and significant haircuts. So, if you feel that you’re not paying your “fair share” of tax, then investing in govt bonds is a sure fire way of giving more money to them to help you with your guilt complex.

"I think that the idea that govt bonds are risk free is delusional"

https://en.wikipedia.org/wiki/List_of_sovereign_debt_crises

That's why I said risk free *proxy* - i.e. as close to risk free as you can get.

Of course it's not entirely risk free otherwise the yield would be zero.

FYI

Swiss10 year government bond yields - currently negative 0.29% per annum.

https://tradingeconomics.com/switzerland/government-bond-yield

Just who funds this? and even more importantly who is the insurer? As a tax payer I most strongly object to being the insurer for the saved. Now if its a private insurance scheme yes go for it.

Just because some considerable number of ppl are financially in-competent is not excuse. Lets be serious here, what this really covers is the highly competent who will know when to move out of risk assets and into deposits, ie pay no premium for protection until the payout is highly likely. What is also does is take away $s from those who have no wise to act as insurers of last resort.

Exactly.
Why should I be paying for someone else's moral hazard???

100% agree. I think there is an education issue at fault here. There seems to be this idea that banks are 100% safe. In fact that idea used to extend to finance companies.
If the population were a bit more financially educated the banks might have to compete on their failure risk to get deposits. But if everyone assumes all banks are safe, then it is really a race to the bottom where the highest margin is.

The Banks are complicit in perpetuating this myth. I dont remember my mate Kashin from ASB telling me he might eat all my 20 cent coins if he gets too hungry/needs a bigger bonus etc...

The problem you're highlighting around Risk Premium, is that any risk faced by the banks these days is largely driven by their own behaviour and practices. Additionally they always understate that risk. thus the risk premium paid out to depositors as a component of the interest paid on deposits is always substantially less than the actual risk to that money. The situation is so bad, that in the face of bank intransigence to address their own behavioural and practice issues, the ordinary public are looking to the Government to protect their interests, as they are lected to do. The problem here is what they are actually doing to address those concerns equates to sweet FA.

Hmmm, "risk faced by the banks these days is largely driven by their own behaviour and practices." actually this is more global in aspect. Its certainly the case that the global financial industry (incl share markets) is treating itself as too big to fail and gambling that Govn(s) will in effect bail them out free of charge.

Personally I think a private entity would be mad to offer insurance to cover a dead certainty, hence that leaves "me" the tax payer as the fall guy.

I agree Steven, the practices has largely become universal for banks. Any variations are only to get around local laws. I too cannot see any insurance company offering to cover them without some kind of oversight of their business. So we get back to the current situation. The Government fiddling on the verges but not really protecting the ordinary man on the street, depositor. It still seems really simple to me to change the law to make any deposited funds the property of the depositor and that the bank is liable for them. in otherwords the depositor is no longer an unsecured creditor but rather at the top of the list of creditors. Yes this will make sourcing funds harder for the banks as they will have to ensure the risks of their business are better balanced, and their liabilities will have to be addressed properly rather than just being someone to fleece.

Don't put your money with them if you think they understate the risk.

That's kinda how this whole thing is meant to work.

I am sorry but that is a really stupid response. What is the alternative to using a bank? Mattress? Trying getting your wages paid in cash these days? Simply put the banks have manipulated the system to the degree that is is now virtually impossible for priviate individuals to live without them. You can minimise that involvement by dealing with cash, but there are difficulties there too. To the man on the street there is virtually no competition as they all look the same or very similar.

You can direct your wages to a broker or adviser the day they hit your account if you're that worried.
We're not talking petty coffee cash here - we're talking savings accounts and Term Deposits.

Or, as per my original suggestion, if there is to be deposit insurance then make it an opt-in user-pays premium.
What's so controversial about that.

If you don't want to pay the premium you don't have to.
If you don't want the risk then pay the premium.

As a taxpayer I'm not willing to take on depositors' risk.
You put the money with the Bank that's your problem, not the Government's.

User pays being the banks? After all as a small depositor I expect the bank to be acountable for how it manages my money. More to the point I very seriously object to the fact that because I deposited in a bank account that it now belongs to the bank. If I take my car to the local garage, while it is there that car is not the property of the garage, and indeed there is an expectation that that garage will take all reasonable measure to ensure my car is protected. Why can't this be true for a bank too?

Sorry but you are taking rubbish now. You didnt lend the car to the garage from them and you to profit by, You put it in for repair, there is a pretty clear contract in place only for repair. If they use it for profit without your permission I believe there are substantial penalties for doing so and they are totally liable.

agree, but really its "your problem, not the tax payers" would be more correct.

While I see your point, no it isnt a stupid response. Its simple, while yes you have to put money ie wages into a bank account you do not have to leave it there. For the "saved" its a different issue.

Wage earner, Lets examine a possible scenario. Banks fails and goes into OBR. Your wages went in the day before, most of its frozen. You live off your CC until the next pay day and meanwhile transfer your wages to another bank.

Saved, you lose access to your capital, way more severe. However you dont have to leave your capital in the bank you can place it in Govn bonds (say) which is (hopefully) immune to an OBR event.

NB Just because the man on the street is incompetent does not absolve them from being an adult and taking responsibility for their own business. On top of that you can of course pay for professional advice on how to make your capital effectively as immune as possible to an OBR event, but no, most ppl are too "tight" to do this.

Yeah come on everyone stop being incompetent!!!! Every cleaner, labourer and factory worker working 60 hour weeks must become financial gurus overnight otherwise they deserve to have their savings wiped out by an OBR.

I see your point Steven, and to a degree agree with you, but that is why I say banks should be more liable to their depositors. i agree that we don't want the Government to be bailing out the banks. I think that was one of the greatest failures of the GFC, while ordinary savers lost their shirts. A regulatory framework is required to protect the depositors interests. At the moment the only interests that are being protected is the banks, in effect a continuation of the GFC failure. They continue on with their practices with impunity. This needs to change. The problem is that the regulatory authorities either don't understand (which i doubt), don't want to (more likely), or just don't care (just as likely). How do we change that?

steven,

What an arrogant view of those lacking your financial expertise. "The man in the street is incompetent". I agree that the level of financial knowledge could be higher,the man in the street has no way of judging the financial state of our banks. Very few know of the existence of the RB's Dashboard and even if they did, would be unable to use in any meaningful way.
This country should have a deposit insurance scheme.

Deposit insurance regimes cannot be trusted to be there when a bank system fails. They will inevitably need to be bailed out. Depositors obtain no value from deposit insurance, it is a costly pretence. Depositors will pay for insurance, and bank executives and reckless borrowers will obtain the benefit.

“However, unless the capital ratio is 100% (i.e. there are no deposits or other liabilities, which would be an absurd outcome), then the probability of failure will never be zero.“
Well that sounds good. It will also drastically reduce speculation on houses and inflation which robs savers and unfairly give more wealth to the already wealthy reducing unearned inequality. What an “absurd” outcome.

My takeaway - higher bank capital ratios reduce the likelihood of bank failure.

off course it does. Increasing the capital requirement to 100% reduces the likelihood of losing deposits zero.

Oh no it doesn't.

We are depositing numbers, expecting to trade them later for processed parts of the planet. But there are less parts of the planet, a daily reduction. In a global meltdown/freeze-up, you mught get your digital numbers back, but you won't be able to swap them for parts of the planet.

How most people miss this, beats me.

At the end of the day this not about banks but rather the customers' acceptable level of risk and either capital requirements or insurance is going to be at a cost to the customer.
While we have a reasonable degree of RBNZ supervision - and possibly the Australian fiasco not mirrored as much in NZ suggests that RBNZ is not in a deep sleep - the reality is that the most significant risks to our banks and banking system will not be internal but rather external factors which the RBNZ will have little influence over.

'The probability of bank failure will never be 0'

And the probability rises significantly beyond zero following several years of 'Northern Rock type' loans to domestic buyers attempting to compete with the fastest private credit expansion in history (China).

Northern Rock is a poor example, it's issues were liquidity and loss of market confidence rather than non-performing residential mortgages. In fact, it's RMBS (Granite) repaid in full without a cent lost by investors. The issue with the Big 4 is out-sized rent extraction from the NZ economy rather than safety.

We'll see. The lending practices by the Big 4 have been equally reckless. Liquidity issues happen at the margin and Northern Rock was very profitable up until 6 months before it wasn't.

The rate of interest only lending by the Aussie 4. Westpac for example had 50% of their Aussie loans on IO by October 2017 and the high levels of debt to income... NZ banks wrote 25% of loans in 2018 at multiples beyond 6 times household which makes the UK banks of old appear miserly!

Your unwavering gloominess clouds your judgement. In contrast to the sub-prime crisis, the big-4 only write prime mortgages which are full recourse. In the event of any liquidity issues (they are are already far more liquid now than pre-GFC), they can self securitise mortgages and repo them with the RBA/RBNZ. From recollection you redicted one would fail this year, it's just not going to happen. They may be less profitable of course.

Keep your eyes on Westpac.

Simply not going to happen, and they're still one of only a handful of banks that are AA-. Look at Deutsche Bank as an example of a bank that can hang around despite huge and toxic IB exposures.

Ah yes, because rating agency ratings proved to be reality based in the GFC..

You can always find the courage to back your conviction on Westpac. Sign up with an CFD provider like IG Markets where you can short Westpac stock. They will provide leverage of around 50 to 1. WBC are around 1.5 * book at present. Step up to the plate.... Even if they only trade back to book (like most European banks), you would make out like a bandit.

Why can we not say to a bank..here is my cash, i want no interest..it is NOT to be lent out, but kept ring fenced under my name. Or should one demand cash and place it in one of their safety deposit boxes?. If it disappeared from here, there would be hell to pay. Why can one not have a bank account set up in the same manner?

Geoff - While never a replacement for deposit insurance - increased capital places much more discipline on bank management from shareholders who are obviously more concerned if the quantum of loss is to be greater. Thus market discipline - something I know you fundamentally believe in - will be significantly strengthened.

It is that increase in market discipline, together with regulatory oversight that will reduce the probability of failure - but perhaps not its impact - however OBR does that - and let us not forget - that already comes with deposit insurance through the guarantee required after haircut..

Pure deposit insurance - whether private or government ceterus paribus does the exact opposite - reducing market discipline - shareholders have less to lose, and reduced discipline on bank management due to moral hazard takeover - and lets be honest - no regulator is going to be as effective in disciplining a bank as a shareholder.

So probability of failure goes up - with no reduction in the impact of that failure - because with OBR in place that impact is minimal already, as deposit insurance is already in place with OBR after the haircut.

So what you have done is increased probability of failure, and explicitly socialised the losses. Increased capital privatises at least some of the losses, and because of that reduces the probability of failure and the impact thereof.

Deposit insurance is a solution looking for a problem in NZ - Increased capital (and lost of it) is what banks need.