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Labour's David Parker says if it's good enough for big investors to have security for covered bonds, then ordinary depositors also deserve a guarantee

Labour's David Parker says if it's good enough for big investors to have security for covered bonds, then ordinary depositors also deserve a guarantee

By Gareth Vaughan

If "the big end of town" has protection for money it lends to banks through covered bonds, then ordinary depositors also ought to have some protection, Labour Party Finance spokesman David Parker says.

Parker yesterday said a Labour-led Government would ensure the first NZ$30,000 of all bank deposits would be protected, and not subject to a haircut in the event of a bank failure.

According to Reserve Bank figures, there was a little under NZ$110 billion sitting in term deposits as of January. And as of the end of 2012, New Zealanders had total deposits with banks of just under NZ$115.2 billion.

Asked by how Labour came up with the NZ$30,000 figure, Parker acknowledged it was arbitrary, as any figure would be.

"You want to be protecting your most vulnerable who are your least wealthy people and the higher the figure the less the case for complete protection," Parker said.

He also said that with Parliament now legislating for covered bonds via the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill, institutional investors holding covered bonds issued by banks would have their rights to carve off a section of a bank issuer's assets, in the event of a default, enshrined in law.

The Bill just has a third reading in Parliament to go and Parker confirmed Labour would support it, albeit reluctantly.

"We would rather there be no covered bonds but we think that would be a brave call at the moment to say they should be banned," said Parker. "So we reluctantly say 'well, we think we are right to better regulate covered bonds than they are currently'."

Banks have been borrowing money via covered bonds for almost three years already, with the Reserve Bank's approval. New Zealand's big four banks, led by BNZ, have already borrowed more than NZ$11 billion through covered bonds since 2010 and Kiwibank is now poised to join them. The Reserve Bank says banks may each use up to 10% of their total assets as collateral for covered bonds.

"What that does show is if it's good enough for the big end of town to have some level of protection accessible to them through covered bonds giving you cover from a pool of securities, why is it in principle wrong to guarantee a level of protection to ordinary depositors?"

"And we think the covered bond argument makes the case for some level of guaranteed level of deposit for depositors necessary," added Parker.

'Copy the Aussies'

In terms of a deposit guarantee scheme, Parker said Labour liked the Australian model.

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 them 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 and, although banks and other financial institutions coughed up hundreds of millions of dollars in fees, it cost taxpayers' around NZ$1 billion largely due to the demise of South Canterbury Finance.

"We are attracted to how the Australians are doing it," said Parker. "Which is if after you deplete all of the bank capital, the depositors are going to take a haircut then you effectively make that good at the cost of the rest of the banking system."

A new scheme should be funded via "a cost on the banking system," Parker said.

"I would rather the Reserve Bank has responsibility for minimising the risk there will even be a bank failure, which they do through their prudential obligations. And in respect to the small residual risk that arises in respect of a bank failure, I think given you've now got covered bonds, I think you can make a case for a limited form of assurance that the small depositor's not going to get trimmed in the event of that small risk of a bank failure."

Asked whether he wanted to place New Zealand depositors in New Zealand banks at the front of the queue to be paid back in the event of a failure, mimicking the Australian system further, Parker said he didn't yet have a position on that.

What are covered bonds?

Covered bonds are dual-recourse securities, issued for anywhere from three to 10 years, through which bondholders have both an unsecured claim on the issuing bank (should it default on the bonds) and hold a secured interest over a specific pool of assets - generally residential mortgages - called the cover pool. Covered bonds are different to senior unsecured debt instruments issued by banks, where the bondholder is simply an unsecured creditor of the bank, and also from mortgage-backed securities, where the bondholder has a secured interest in the cover pool but has no claim on the issuing bank.

Due to their dual recourse security, covered bonds generally attract the highest possible AAA credit rating (which is generally higher than the bank issuer's own ratings, Kiwibank's is AA) and are therefore a cheaper form of funding for banks than standard bank bonds.

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What's the point?  I mean, the people of Cyprus were told their money would be safe by their newly elected president.  They even had a government deposit guarantee scheme and look how that worked out for them!
References below,
"After Cyprus’ forked tongue newly-elected President Nicos Anastiades rolled over and reneged on his ink-still-wet campaign promise not to seize money from Cypriots – including people with a single euro in the bank – so that he could protect rich Russians and mobsters using his country’s banks like a money-laundering slot machines, it was up to the Cypriot people to stop him and the Troika."
"Cypriot mangling of the government guarantee deposit insurance scheme demonstrates the hollowness of this protection. It should send a warning to account holders across Europe that their savings are no longer safe from government sanctioned theft."

The OBR should be an explicit warning...your money is in risk of a haircut, take good care of it.
Protecting a small amount makes a little sense, if you wipe out an OAPs savings they can go to WINZ and claim benefits.

No they won't - if the savings of others are wiped out by OBR, there will be little spare goodwill or capacity to pay the necessary taxes .- it will be a matter of Mad Max re-visited.

A miserly approach to protecting depositors.    
Not only do Australian bank depositors have A$250,000 cover each for each separate institution but also banks loans for housing exceeding 80% must have separate insurance to protect the bank against a mortgage not being repaid.  So an Australian bank (in Australia) is much less likely to get into the problems that NZ banks are susceptible to.
The NZ Reserve Bank, and The NZ Treasury (and Key & English) are asleep at the wheel - with the unintended consequence of making NZ banks much more vulnerable in future by  insistance on deeming depositors as somehow being the villains.  
It's time for a sensible approach to protecting depositors.  

Unfortunately money is just bits of paper once it is physically out of the bank - it is meaningless in terms of a representative of past efforts if a technocrat is deemed to have the power to say so - same for gold and electronic digits on a balance sheet - the problem is there are too few functioning assets/physical reserves on our doostep to support the amount of money/debt set aside against them - land in this respect will give a subsistence living at best without inherent resources/wealth to keep them mechanised. I do not see inflation as an issue, if it was gold would have long gone to USD 5000.00 - currently we record inflation at less than 1%. There is rapidly falling demand in NZ being served up as growth that isn't -witness the bogus GDP #s on Thursday. Current A/C Deficit meets GDP post government borrowing proved as much.

Yes, why the powers that be cannot get their heads around the need to plan for contraction never ceases to amaze me.

"We would rather there be no covered bonds but we think that would be a brave call at the moment to say they should be banned," said Parker.
Well Mr Parker, Labour would gain a whole lot of respect in light of the Cyprus situation and the OBR set up to protect these self same covered bond holds if the party had the courage of its convictions and voted against these measures.
Shareholders and bond holders should be pinged first - after all they are the sharks sharing the feast of the mega-profits. Account holders get the crumbs, so why should they be first in the gun due to bank cockups?

Depositors make a profit, hence must understand that there is risk. If you think its too small you are free to move it into say bank shares, be my guest.
Covered bonds are useful in a volitile and fragile market. IF a bank cant get funding then they shut thier doors, this helps them get and hold funding and not have to see depositors lose anything.
Certainly one thing is for sure, labour wouldnt look an better in my eyes, they in the form of HC's Govn is majorily responsible for the current mess.

Depositors make a profit,
You are a financial hayseed and I am being kind.

SH - I rather think you are being too kind.

Well enunciated way that individuals rationalise/legitimise spending beyond their capacity to produce. How many years before your production repays the debt without factoring in sale of the accumulated assets?

"Never" - that's what I thought and my point exactly.

Let's never confuse profit and income - unexpected outcomes occur - income has to do with the time preference associated with spending money and the credit risk thereon - the other is for clever people to make and yet savings should in a sane society represent past profits.

Its always hilarious when politicians don’t realise the majority holders of covered bonds in NZ are the govts own entities. Then they come out with comments, why is the 'big end of town' is getting protection and not the little guy, priceless.

Chaves' like... O'bahmmer..? Populists, Propagandists, ...ists!
Polly-tickers @ large!

Come on David you can do better than that.  The reality is these investors from "the big end of town" are effectively paying insurance on these covered bonds.  Just look at the coupon rates they sold for 1.375%!  If your average tom, dick or harry wants a govt guarantee buy some govt. bonds...its not exactly as if they are in short supply and they pay 2.5% too.  If you want 5% then gee, you may have to go without the guarantee...If you put the guarantee on everything money will go to the highest return, the govts exposure increase dramatically and we end up with an even weaker financial industry than we have today. We may sleep well untill the govt. gets into trouble as well, we all end up paying the price we always do maybe we could fix the cause and not need the ambulance at the bottom of the cliff. 

Canada has a deposit guarantee scheme, and 5 yr term deposits are paying 1.45%!
I don't think it follows that rates will be higher, more risk, or that the banking system will be weaker with such a scheme.
Canada has as strong a system if not stronger than NZ. 

Just look at the coupon rates they sold for 1.375%!
Which hemisphere and currency ?
If you wish to compare rates please make more of an effort.
Best estimates suggest :
“The transaction is another first for BNZ and New Zealand”, said BNZ Treasurer Tim Main. “It is the first covered bond issued in Australia by a New Zealand and indeed Australasian bank, and follows BNZ’s first offshore covered bond issue, the EUR1b 7 year issue completed in November 2010”.
The issue was priced at a spread of 0.88% p.a. over Australian mid-swap, which equates to around 65% of comparable senior unsecured bonds for the same tenor.
NZ issue:
Asked by for details on who the investors were and what rate over swap the bonds were priced at, BNZ Treasurer Tim Main declined to comment. It's BNZ's second covered bond private placement and closely follows a NZ$300 million one by rival ASB to the Accident Compensation Corporation (ACC) just before Christmas.

When Parker and Shearer speak of "ordinary depositors"..they mean potential Labour voters.
Any guarantee from any NZ govt is meaningless drivel and utterly worthless...only fools and idiots believe them. 
Bank cash deposit security must be raised above 20% to bring any real safety for depositors and the economy...the chances of that being allowed to happen by the banks, is a big fat zero.
The roost is ruled by the bank bosses overseas....the determine NZ economic policy...end of discussion.

Is that why Shearer has over $50,000 in an offshore account?

Wise choice - the time has come to vacate lending to New Zealanders.
The RBNZ's  Mr Spencer has made plans based upon the assumption that failure by debtors to repay is greater than neglible and yet rates are held below the inherent risk levels.

I agree, so the Q is, if there is such greater than negligable risk (and I think there is) why is money in the banks at all.  Could it be that the two choices left are money(cash) or gold under the bed?  So we watch OAPs badly burned by their Finance company debacle panic as there is no where to go that gives them an income and "magically" protects their capital.
I think Dr Bollard said that in 2008 lots of 100Dollar bills went out and never came back so some ppl at least have considerable $s under the bed...or maybe a deposit box.
If its truely that bad and not far off then maybe it is time to buy gold or silver, or lead.

 Yet the general consensus is that when banks get in trouble which Gareth Morgan hinted at being systemic, only depositors will lose.  
 Like the USA in 1931, which like much or Europe saw its GDP drop by %50.  Those with debts got destroyed. Currencies collapsed.
 If we get an OBR event isn't that proof of total failure by the NZRB and our political elites?
 Yes it is probably time for depositors to leave the country. I have.

Would be no surprise to have interest rates below real-annual inflation!
No-risk withstanding!

Have the powers that be decided yet where derivatives are going to be in the money pleading queue if a bank falls over?
All the noise and focus on depositors taking a haircut means that if the worst comes to the worst and a bank goes belly up then its more likely that depositors will lose money rather than those other counter parties (eg other banks)holding derivatives.
Of course its hard to know what goes on in the opaque world of derivatives as they tend to hide off balance sheet and stay out of sight as much as possible. 

Very good point - if depositors are to be subject to indiscriminate haircuts they or their advisers need to be in explicit possession of each bank's nominal derivative exposure - none of the unintelligible derivatives in loss or profit notes to the accounts nonsense - even the limited capabilities of those in charge must realise the true risk of a bank can never be ascertained without such transparency  - the veil of commercial sensitivity has to be pulled aside in the name of due diligence in pursuit of much needed price discovery calculations.

But then you would know how much they are gouging us, and I dont think they want that to be public, thats why they need their man at the top, keep the plebs in the dark.

This is the kind of members bill which an opposition party needs to submit to the ballot.  Doesn't matter whether it gets picked - the point is to have the conversation about what needs to be done to take back our sovereignty and self-detemrination - and it needs to be put out there in the MSM.
Requiring this kind of transparancy from a mechanical/regulatory point of view could be done overnight, I suspect. All that is needed is the political will.

"Due to their dual recourse security, covered bonds generally attract the highest possible AAA credit rating (which is generally higher than the bank issuer's own ratings, Kiwibank's is AA) and are therefore a cheaper form of funding for banks than standard bank bonds."
The fact that the bonds' rating is higher than the issuer's rating, concerns me.
Most of a banks' assets are loans backed by mortgages. And most banks' assets are duration matched to liabilities. If the asset pool fails--the one that backs the bond issue, and the rating of the bank is less than the bond's, how can the bond be safe?
Are banks not rated on their capital (i.e. shareholders equity)?

Look closer to home.....  I checked one Australian bank today (one of those who are in NZ as well) and their 5 year term deposit rate was 4.65%.    0.05% less than their NZ companions.  The real difference is that the deposit in Australian is insured up to A$250,000.
I'd happily take a 0.05% lesser deposit rate than to be in the RBNZ OBR situation where the depositor is deemed to be the one at fault and be the one to bail out the NZ bank.
Can anyone provide practical advice on setting up accounts in Australia?  And any pitfalls?
Remember it was Cullen (with support of National) who introduced a deposit guarantee scheme a few years ago - to prevent money from fleeing from NZ banks to Australia.

Divvying up the loot when a bank fails.
On a risk/reward basis I think shareholders should be the first to take losses, then bond-holders, then other counter parties holding derivatives/other creditors  and last of all depositors.
As was discovered in the panic of 2008, supposedly safe derivatives were actually a very risky product. 

Mist, do you think of all assets being the same (all equally fundable).

You are on the money. We had a chap come a long and say, well your business is just like a bond, a cpi or inflation adjusted bond, so you should be happy to get 3 to 4 % with where the world is yield wise.
We thought not, its not linear or about averages, as we think of the whole being made up of several different asset layers, or profiles divided into asset and income. So each layer has its own asset charateristic. put together production/income-wise there is a trading view. The core 85% to 95% of volume where we say that will be done yr in yr out and we try and increase that by improving systems etc, The other 5% to 10% is the marginal bit, so last couple of years go hell for leather with either a 1 in 10 yr payout or a 1 in 10 yr growing season, or a lease block comes up, or a line of stock - thats the bit that is taking a punt (Like Donker saying get set now for a bigger payout 2014 - he meaning swap a 2013 kg for a 2014 kg - we are not so sure that will happen, as the pick up in auction price is because there was less sold by F, not that buyers suddenly needed more).
Two things.
Round by us we see people that put in feeder systems, and expending "=$200, $500 plus per cow on grainlike bought ins (don't ask what extra feed bills are since end of Jan....), getting 20% plus more production, now truning round expecting all that production should be worth the sell rate of $25 to $30 a kg. We are going, well, that production need be divided into what the land can do with no inputs and (normalised to exclude great growing years), then extra 20% claimed from the bag is much shorter term, i.e. of very little capital value esp looking at shares.....
F shares. at round $7 is a real drag. We think supplier shares are worth $1 to $2 dollars tops, look at the other co-ops. Even F think less rather than more, look at the shares gifted (thing is with the drought, now wasn't needed so much in global sense). We are hearing people would like to swap or lend/borrow supplier rights year to year... Its like the $7 has become a sort of quota effect - a block.... Anyways we think it a brave soul to borrow 100% lvr on a share at near $7 now. You saw last week we were trying to think through where the F barnds earnings will come from, and came away :( thinking about the supermarkets not stocking the product/let alone reducing the margin.

Like what they say (clips from th NZX):
The dairy sector may weather the drought better than beef and sheep farmers but Fonterra's recently launched shareholder fund units could take a hit in value.
The units, which began trading on the stock exchange at $6.85 in late November, peaked at $7.49 in mid-January and were yesterday trading at around $6.90.
March 22 (BusinessDesk) - It seems like only yesterday that the rise and rise of the Fonterra Shareholders' Fund didn't show any sign of abating and the golden weather was never going to end.
Little did we know that that's a problem when it comes to dairying, because grey clouds are actually silver linings.
With the North Island in the throes of its worst drought in nigh on 70 years and farmers looking at sending livestock to the meatworks to stem their losses, things aren't looking very rosy ahead of Fonterra's first earnings result since launching the fund.
That's not to say the investment has soured beyond repair.
The units closed as high as $7.49 apiece in mid-January, having jumped a mighty 26 percent on debut from the offer price of $5.50. Today the units are trading at a respectable $6.95, though they've dipped 2.1 percent this week and are down 2.7 percent since the start of the year.
Analysts seem to be unsure where to price them, two picking them to 'outperform', two saying 'hold', two recommending 'underperform' and one saying 'sell'. Needless to say, the target price range is a broad $6.10 to $8.
How can these be sound financial or asset investments, when no one knows what they are worth. This $6 to $8 range is just craziness (not a sign of wellness).

How can these be sound financial or asset investments, when no one knows what they are worth. This $6 to $8 range is just craziness (not a sign of wellness).
This whole fiasco was a forced debt for equity swap disguised as something else.
One needs to tear the balance sheet open to ascertain the net tangible asset value (NTA) of these units excluding increasingly worthless intangibles post bonus shares dilution. 
Do I hear bids @ $2.00 anyone? - are banks 100% financing these units? - some claim they are. 
Am I expected to endure an RBNZ technocrat lecturing me about my lack of realism towards the safety of my deposits?
“If their bank fails, depositors have always needed to understand that deposits are not guaranteed. What OBR does is facilitate a rapid and orderly resolution of a bank failure – it does not change the fact that depositors and other creditor funds are at risk.
When will my bank not fail?
The time is past when we need to instruct our parliamentarians to drag the regulatory bureaucrats out from their sinecures and sanction those banks that are unable to self impose the necessary lending disciplines.

So it was all a swap..... ('course it was)....
Meaning the $500m odd raised by F in setting up the units, was always to be taken by F and paid directly to their bankers...?
if it was a swap, then the $500m raise can/could be do you think that re the units
To be used as F plan B/C, hit a problem (ask supplier shareholders for loot, they say no we have no cash except what we can borrow against your name), issue emergency shares to the unit trust, collect equitylike money, supplier shareholders are locked in as one share = one kg (they are not selling so price doesn't matter, on farm debt structure not F problem...)
happy days...
industry-wise thinking debt for equity swap, how do you see it happening at the farm level, or are ppl stuffed with proportuionally low income as banks hold the value bar asset wise.
Q: where would equity come from to recapitalise the 20% to 30% of debt stressed properties (given its not coming from income or retained profits).

Mist, thats it. its the volme not the price...
As F buys more, processes more, sells more, so to does it increase the number of shares on issue. Therefore individual share price or unit value can not go up much ....
So only by selling more branded product and/or at higher margin would share price go up (the farmgate price cal sees commodity movement back to supplier pmts and even some processing efficiencies). However people like Coles have other ideas..
They must have really needed the $500m. SH mentioned debt for equity swap..

They are also hemorrhaging in Australia and I don't believe their deals with Nestle in Sth America are working out like they would like. Hard to see where they are raking in the $ actually.  I do agree with you that TAF was also a 'requirement' from govt. Hence them taking  a less than 75% vote acceptance. Wednesday will be an interesting day.


We say 3s and 4s. these guys say 6%  lease income...
Folks, this farm has the best water in the area with 9 Pivots with the potential of 3 plus bale Cotton and 4 - 5K Peanuts. This farm averaged 28 tons of Corn & Sorghum Sileage last summer that is currently selling for $85/ton on the farm. There's 1,800 head of yearlings on wheat for the winter. This is a year-round farm and it sits smack-dab in the middle of some of the best markets in Texas. She is a money maker, folks.
This is currently a successful, Cattle Feed and Growing Operation with a Lease Value of $207,000 per year - a 6% CAP rate with a Solid Investment.
Lots of Water and New Equipment.
We could always send our agri-bankers there instead...