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Any new retail deposit guarantee would incorporate lessons learnt from the previous scheme and be tougher, Treasury says

Any new retail deposit guarantee would incorporate lessons learnt from the previous scheme and be tougher, Treasury says

By Gareth Vaughan

Treasury says if troubled times meant it had to reintroduce a retail deposit guarantee scheme it would be tougher than the one the Government put in place in 2008.

It also says that New Zealand being the only OECD country without deposit insurance increases the risk of a retail bank run should there be a significant loss in depositor confidence.

Treasury makes these comments in a report released as part of a big information dump on deposit insurance and the Reserve Bank's incoming bank failure tool, the Open Bank Resolution policy, by both Treasury and the Reserve Bank..

"If a loss of depositor confidence did lead to retail guarantees being required, lessons learned from the (Crown) Retail Deposit Guarantee Scheme about how to best safeguard the Crown's interests would be picked up in design," Treasury says.

'These would include tighter eligibility criteria, more control mechanisms for the Crown and full risk-based pricing. We would also consider the option of introducing a retail guarantee through legislation in order to further strengthen the controls that could be achieved."

The comments come in a report dated June last year addressing in what circumstances guarantees to the banking sector might be considered.

The South Canterbury Finance effect

New Zealand had deposit insurance through the Crown Retail Deposit Guarantee Scheme, which ran for 38 months from October 2008 until the end of 2011 and will cost taxpayers' the thick end of NZ$1 billion largely due to the demise of South Canterbury Finance. The company's receiver, McGrathNicol, said in its final South Canterbury Finance receiver's report it had recovered NZ$774.6 million, leaving taxpayers with a shortfall of about NZ$805 million.

New Zealand's now the only OECD country without explicit deposit insurance, something both the Labour and Green parties want to introduce but the National Party-led government doesn't.

Treasury's oversight of the Crown retail deposit guarantee scheme, which was hastily introduced at the height of the global financial crisis, came under criticism from the Auditor General.

Last June's Treasury report goes on to outline how any new retail guarantee would be tougher than the previous one.

"We would look to strengthen the nature of the government's controls over entities within the scheme," it says. "If we did need to introduce the scheme quickly we would look to take greater advantage of the announcement effect and take more time to determine the detail."

Treasury says that although it took days or months for financial institutions to enter the deposit guarantee scheme in 2008, the announcement of the scheme's introduction had the effect of calming markets in a much shorter time scale.

"This announcement effect would also provide the option to introduce additional measures to strengthen the effectiveness of the guarantee via legislation. Governance of any future retail deposit guarantee scheme would be carefully considered from the outset," says Treasury.

New Zealand 'an outlier' on deposit insurance

The report also notes New Zealand being an "outlier" in not having deposit insurance increases the risk of a retail bank run should there be a significant loss in depositor confidence, a risk it deemed "remote" at the date of the report.

"We believe, however, that domestic confidence, and not the presence of (deposit insurance) schemes in other countries, should be the main factor when considering any re-introduction of a retail deposit guarantee. It is more complicated for New Zealand deposits to run than it is for (for example) Spanish deposits to mitigate to Germany."

"For example, Australia has now reduced the limit of its deposit insurance scheme from A$1 million to A$250,000 and does not cover foreign currency accounts, which were covered in 2008. New Zealand depositors would face a higher hurdle if trying to benefit from the Australian scheme, as they would be exposed to full exchange rate risks and transaction costs of opening and operating a foreign account."

Two key arguments used by the Reserve Bank and Prime Minister John Key against the introduction of deposit insurance are that it would increase moral hazard thus making banks more susceptible to failure, and prove too costly for consumers because banks would pass on the cost of any deposit insurance levy to consumers. These are disputed by international deposit insurance expert and University of Auckland Professor David Mayes.

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I think it is mandatory for readers who wish to draw their own conclusions concerning  Treasury's evaluation of the past and any future Retail Deposit Guarantee Schemes to study Geoff Bertrams July 2011 presentation entitled,
Some thoughts on exchange rate overvaluation and bank regulation
The tenor, size and apparent necessity of outstanding Wholesale Guarantee Scheme liabilities are surprising given professed Treasury abhorrence of moral hazard in respect of state assistance in this matter.

Do I understand this correctly - there is no government backing on any of my bank savings, that I take a haircut if the bank turns out to have gambled it away on international ponzi schemes and management 'bonuses' like what happened in Cyprus?

Yes and there is no obligation in law directing banks to furnish explanations of extraordinary balance sheet positions so the NZ bank deposit funding base can undertake due diligence of the capital cancellation risks they are exposed to.
Read my recent comments and those of others here.
Pay particular attention to the magnitude of notional derivative positions noted in this comment:
These have been momentous times for ANZ New Zealand and our people have repeatedly risen to the challenge and achieved so much as we progress on our journey to be No. 1 in customer service and establish ANZ as New Zealand's best bank.”
In view of the pending introduction of OBR could ANZ enlighten the depositor funding backbone of the curious but as yet unexplained risks associated with the derivative positions set out in Note 11 document pages 25 -26 in the the last annual disclose statement.
Netting and other so called acceptable means of diminishing the catastrophic impact these instruments would exert on unsecured depositors funds in times of systemic turmoil demand explanation immediately and made transparent to all parties - not just to the borrowers of the nation's savings, as it stands now.

This stuff should be on the front pages until it does become transparently obvious to the general public.
Of course at that point there would be massive bank runs - I'm sure ANZ isn't the only bank up to its balls in this.
There's nowhere for us to hide anyway - stuff cash in your mattress? Fiat currency is being debased. Buy gold bricks? There's hardly any physical gold left on the market after the US Fed attempt to sabotage gold prices blew up in their faces.
And just like in Cyprus when the day of reckoning arrives, the rogue Banksters and the captured Politicians will have shifted their ill gotten wealth out of harms way.

The RBNZ has gone beyond extraordinary acts of omission to stave off any public warnings in respect of the potential impact of OBR.
One would expect advertisements in all the national news organs forewarning depositors, particularly the frail and elderly, of the risks they run beyond June this year.

Basically our bank savings are now unsecured loans to the bank with interest below inflation, that the Banksters use to gamble in the casino called  Global Finance.
The Banksters are making themselves very rich with the winnings while the bank depositors get nothing but carry all the risk.
So when the ponzi scheme inevitably blows up, bank depositors including the frail and elderly have to eat it, while the Banksters buy another $150 000 000 Picasso or two at Sotheby's.
Thats how I would advertise it.
Someone needs to start writing the history tiltled "The Decline And Fall Of Western Civilisation".

Your bank deposits have always been at risk, the difference is with the OBR you have a small amount of extra impact, the Q is is the risk bigger or less? and by how much?

Stephen Hulme: help me out here please
I like your stuff.
You have something to say that I need to understand
You have an immense knowledge about that which you talk.
Most of it is heavy going. A fair bit of it I struggle with
Much of the time my head hurts when I read it.
Your posts are getting heavier and heavier
Once upon a time I worked for a major daily newspaper
In fact I worked for both the AKL major dailies
The Editor-in-Chief would regale with his admonishments
To get an item published, regardless of length, a reporter had the first paragraph in which to capture the attention of the reader and convey the essence of what the rest of the full article was about ...

extraordinary acts of omission
forewarning depositors
there is no obligation in law directing banks to furnish explanations of extraordinary balance sheet positions so the NZ bank deposit funding base can undertake due diligence of the capital cancellation risks they are exposed to 

notional derivative positions
most plebian readers would stop reading at about the 5th word
did I get your attention?

iconoclast - point noted - I have none of the skills that a sub editor commands and a very highly technical education - I am doing my best to pass on my knowledge and understanding to others- but I am addressing my comments to the "chattering classes" as I expect little response/reaction from your so called plebian readers.

Yesterday you did a post with a link to an article by geoff bertram suggesting it was "mandatory reading" .. well I read the article .. a long article .. lot of charts and waffle .. was wondering what it was all about .. wondering what the point was you considered mandatory learning .. what just about to give up .. and there they were .. right down the bottom .. excellent points .. he has seen the light .. he has got it .. but I almost didnt get there .. your intro should have pointed me to them with a brief "grab-my-attention" overview

The banksters and their collaborators are counting on little response or reaction from the plebs, until its too late.
But most people are too busy getting by day to day survivng life's dramas to educate themselves on things like LIBOR, Interest Rate Swaps, Front Running or my latest find "Backwardisation".

backwardisation - doan-cha luv it
You know .. once upon a time .. insurance was the only product or service that was complicated .. you needed an insurance broker to get you through .. you explained what you wanted and he/she would use their skills to find the best solution that met your needs .. a little later you received an insurance policy (contract) in the mail with an invoice to pay the premium .. but you got peace of mind .. the insurance business was a mine-field .. you needed an expert to guide you .. then one day the banks saw these insurance companies as "golden geese" that laid golden eggs and took them over .. and did those stuffy staid old bankers learn a thing or two .. obfuscation works well .. complicate it .. use long legal words .. 50 page contracts of legalese .. every coupla months get a revised set of legalese from your favourite credit card company .. and now the power companies are onto it too .. 60 page contracts ..

I thought the term was backwardation and it's closely related but opposite condition is contango. Read more

contango .. my head's hurting already

Gee - you wouldn't want to acquaint yourself with my hobby drone microprocessor code.

you must have missed it  .. in jan this year I said ..  a lifetime in IT, systems development, robotics, technical programming etc etc

The rest is a breeze - right?

Put aside re programming elec market, how hard is our robotic milker at cap cost of $50k.

Yeah you are probably right, it was a video interview with the crazy Max Keiser, not a written text so I might have misheard the exact neologism.
The context was the shorting of paper gold by US Fed and co to spook gold investors back to fiat currency which only created a massive demand for the hold in your hand physical stuff while paper prices go down.
Saw a funny article about how the German govt recently asked the NY Fed Reserve bank for their physical gold to be sent back to Germany - they are repatriating ALL their gold holdings. The Yanks told them they couldn't organise that until 2020.
So the Germans asked to see the gold in the vaults and got told there was not enough room for vistors. The German reps turned up in NY anyway and got usherd into a room and shown a few bars laid out on the table. Still not happy the Germans were allowed to peep into only one of the multiple vaults at a pile of gold bricks but not allowed to touch or pick them up.

I dont even want to know what backwardation means
once upon a time .. retail banking was simple .. I dealt with them on the basis of they could help me with .. an overdraft .. a cheque account .. a promissory-note .. a bill-of-lading .. foreign exchange .. and that was it .. want a savings account - go to a savings bank

Well backwardation is something I have got my head around, but I am with Iconoclast on this one Stephen. has been part of my self eduction in economics and it is guys like you that are really and asset to this site. I have even linked others that don't frequent here to your comments. However your worthwhile contributions could take on an even greater presence if you were to dumb down your posts so that a non technical person can get their head around it. I see educating others that read here as the most important aspect of my contributions and while not always the most eloquent I do get away on myself sometimes with academic speak. We will only get change with greater awareness from the masses. Forget about the property spruikers, they are too stupid and stubborn to get it anyway, but write like you want my ex wife to read and understand your work :-P
I will go even further to say that the terminology used in finance seems to intended to obfuscate. They have to hide the processes because they are fundamentally dishonest. You would do us a great service if you broke down those barriers for us. 
You know one of the best things that happens on zerohedge from time to time is when someone pipes up and says, what does that mean? Then gets an answer.
Think of it this way. It is highly likely that you are an INTJ in MBTI Typology and as such you (and I as an INTP) are a minority in the population that have an analytical or, rational, thinking ability. We get the big picture and we are over represented as contributors on these forums but think about those that read without posting. 

So what you are saying is you have abdicated your life savings and its well being to others with little thought.
and then when it goes wrong except an innocent 3rd party ie me the tax payer and from teh size of this my children to cover your losses.

of course.  Just about everything you do in life has a risk .
Whats so hard to understand you have handed over your capital to someone else in return for interest, which in turn means there is a risk of loss?

Guys, I fail to understand the issue. I have never thought of any of my banks as guaranteed, indeed I would never think that they should be i.e. why should the taxpayer give me comfort for my poor decision in selecting the wrong bank ? If I put my money in a bank its surely like any investment/saving, I carry credit risk on that bank. If I'm worried about banks then I spread my risk across several, or if I don't like NZ ones, I spread my risk to some european/Cyprus ones. And I fail to understand South Paw's comment that "if the general public knew about this there would be a run on the banks" ? Having done that, if you arent then prepared to invest it into an asset instead, where do you put it, under the bed ?  Risks to that too. Should you take a hair cut in the case of a bank failure, damn right, you just hope its not a big one/lesson
Banks are a very low risk investment, but not a no risk investment, and we live with the decisons we make. If a Govt in panic bails out a bank e.g. the BNZ on the 80's, or  suddenly produces a guarantee in the 2000's, thats a bonus to the individual, not a right surely ?

Read this article - confirm what you think the loan to deposit ratios of the major NZ banks are and repeat your statement: Banks are a very low risk investment....

Grant, there are a lot of people who use NZ banks for day to day use, you can't expect them to consider the credit risk or wade through disclosure statements and annual reports.
Banking today is a utility, like water, electricity etc.
Seperate out transactional banking from the investment side, then yes, Caveat emptor applies.

But Moa man they have your money - I see it as no different to me pre-paying some travel to a travel agency, or a contractor for some work to be done - inevitably that's more than a week or two's salary generally and I always give consideration to the quality of the firm that I'm dealing with based upon my best assessment and understanding - I get that  wrong about the quality, but that's the risk youre taking there and my loss, so why consider its different with a bank or anyone else who wants your money ? youre just abdicating responsibility otherwise.
In fact they deserve more consideration than to a bank, but both are the same, you have a credit risk. And if you do consider it in a similar manner I'm sure you would have been wary of the BNZ and the building society (name escapes me) in the 1980's, because youre actually accepting responsibility for your own money

Ok, so im selling cattle in November, 700 head at $1400 each,  Nearly 1 million dollars worth and there will be Gst in there as well, which I will need to pay back end of Jan.
 If ANZ goes belly up Im ruined, and then I still get to sell the farm to settle my gst with IRD.
  Tell me which bank you would trust and why?

It is not really like you have a choice to not use a bank, for pay, for social security, tax refunds etc.  Doesn't that make a nonsense of the we are investors argument being used to justify a banking system without some level of deposit insurance and a open banking resolution system that could fleeze innocent depositors?

This a sterile argument
Try getting your salary paid in cash
Try getting your welfare payments in cash
Many larger businesses offer prompt payment discounts provided you pay by direct debit .. try doing that without a bank and a bank account .. and so it goes on
Don't have much choice do you?
Your leaders .. your government, has condoned that situation
Your leaders .. your government, has allowed that to happen
Your leaders .. your government, are complicit
If it was up to me I would charge every bank an annual licence fee of $½ billion to hang out their shingle and practice

That money would be placed into a sinking fund and used to provide deposit insurance for the lemmings up to $250,000

Sorry Stephen,I was talking NZ banks, and I was talking in comparison to other investments.  But  I don't doubt that if we saw a US style 35% fall in house prices NZ banks would have their share of major problems as well - in that event I'd be reassessing where I had my money or how it was spread. But should the tax payer be sheltering me from my investment risk/decisions ? I've had this debate with others before and in general people who are "investors"  generally seem to accept that because they are used to assessing risk (some better than others), but where I have experienced the opposite are generally from people who at best could be described as "savers" i.e. not used to assessing risk and just take it that its not their responsibility to do so - they expect someone, such as you the taxpayer, to protect them from themselves.
Its an interesting debate because a bank run in itself does no good for  anyone, and in many cases the good players are thrown into the same bucket with the poor performers - you could argue that was the case with the NZ banks during the 2008/09 part of the GFC.

Grant A, NZ banks are the subject of discussion in this comment posted here :

by billsay | 12 Apr 13, 5:09pm

"In January Moody's highlighted that, at more than 140%, the New Zealand banking sector has the highest loan-to-deposit ratio out of 13 Asia-Pacific countries. 
S&P figures as of December 31, put 
Kiwibank's at 109.9%
ANZ's at 135.9%, 
ASB's at 136.6%, 
Westpac's at 147.4% 
BNZ's at 162%, "
Since it is the responsibility of the depositor to evaluate the risk of depositing with each bank (rather than depending on the RBNZ) - is it a good assumption to use the loan-to-deposit  ratio to judge the risk for each bank?
Or is there a better measure?
Can you reaffirm your contention as I asked above?


"The modern banks do not rely on local depositors. They can draw on the bond markets or issue bonds themselves or receive cash directly from foreign depositors."
You sem to be missing the point. The banks are highly leveraged, having poured all that debt into a property bubble.
"New Zealand banks operate in a global context."
Yes the banks are free to gamble away savers deposits in the casino of Global Finance, they collect any winnings and savers will take the losses when it turns ugly.
"A balance sheet is double entry, where there is a debit entry there must always be a credit entry. You can't create property lending out of thin air."
According to Steve Keen, one of the few to call the GFC, creating debt out of thin air is exactly what they did on Wall Street.

Therefore as we all know, assets are the good guys and liabilities are the bad guys.
Derivatives is a fancy term for a promissory note with a trigger ie the liability would not occur unless some event takes place 
Yeah Right - get a life

It is not a zero sum game as all the property is matched by interest bearing loans, the interest needs to be paid. Where do you think the interest comes from and what does it need to occur Kimy?

Is that like accounting for dummies? I take it you have done that course then?

kimy: utter nonsense. go back to spruiking lower interest rates.

Well Kimy I don't profess to have any accounting skills, but perhaps you shoud troll back through the archives to for background info because by calling out Iconoclast and Stephen Hulme you really are making a complete dick of yourself. But it is apparent you like the sound of your own voice so keep digging.....

Don't put money with them then South Paw, isn't it obvious if it concerns you ?

Kimy -
"Contrary to what you guys believe, money is a zero sum game"
"The bank just makes the middleman percentage"
cognitive dissonance? Need to believe? The system relies on future growth, and can therefore not be described as 'zero-sum game'. Yet when I pointed out to you the reasons why the underwrite couldn't continue to support, you did your arrogant 'yawn yawn', and faied to investigate.
Why the need to spin, here?

Kimy, you say "Not identify and fix a symtom but to get to the very core and fix it." and "Sorry I deal in reality."
Neither case it appears is true.
As you ignore what PDK is saying.  So when you say "There are known facts that are fundamental to our entire financial system."  and PDK says one is the system has to have  growth, but we cant grow anymore so got to change. Then if indeed growth is a fundimental of our financial ssytem then ergo our financial system has to be replaced and not "fixed".
The answer is you havent stripped it back enough yet. The core is we rely on fossil fuels to underwrite everything. Money is an IOU for future workenergy so bebt is a future call on those fossil fuels and since there isnt enough the debt has to be defaulted on so our financial ponzi scheme system is going to fail.

Solution? - suicide. I doubt it - so it's back to business as usual - what's the realistic alternative. 

Billsay - all you're saying is that the banks are highly leveredged. Well frankly they always have been as that's the way banking has always worked otherwise rates and fees would be higher to cover the non earning capital. The NZ ones are now less leveredged than previously thanks to the RBNZ, but lets not compared NZ/Australian banks with the over the top leveraged, and indeed by most measures, insolvent banks in europe, and some would argue in the US. There are risks with all of them, as there is with all other investments, but I know where I feel most safe. There is a place for watchful comments on banks, but the paranoia displayed regularly on here at times is not productive if your consider your other options where to put your money; under the mattress, stock market, property, bonds etc - I can make you a paranoia case against each.
We live in a world of artifically supressed interest rates, and massive money printing, and if you think you can correctly evaluate the risk, of or indeed value at all of, any monetary or physical asset, your'e kidding yourself - that's the environment that central banks have created, and indeed are still creating around the world.

You really do speak nonsense. The loan to deposit ratio has litlle to do with leverage ratios. It's a measure of bank dependence upon hot wholesale foreign lenders for domestic funding beyond the local deposit base - they tend to disappparear at the first sign of trouble.
 I wish you would cease to comment about matters of national importance when all you seem to want to do is peddle ideological dogma.
Please read the referenced documents and links I pointed you to on this thread before you insult me and the rest of us further.

Hi Grant, "should the tax payer be sheltering me from my investment risk/decisions".  I used to work for the Financial Services Authority in the UK and help set up the Financial Services Compensation Scheme (FSCS).  The way it works is that regulated firms (banks and other financial service providers) pay a contribution to the FSCS and that money sits in a 'pot' that gets bigger and bigger up to a pre-agreed level.  So, depending on the size of the failure, the tax-payer may not contribute anything if the pot can cover it. 
The devil is in the detail on deposit guarantees, in the UK your only covered up to 50kGBP per person, not per account.  Some people think that you can put up to the limit in lots of different accounts; this may be covered in some countries, some not, depends on the detail. 
Whilst a deposit scheme is a positive thing to have your much better having effective regulation, prevention rather than a cure.  2008 tells us what happens when banks are left unregulated and, as other posters have alluded to, bank deposits aren’t really a optional service. 

I fear your information about the UK scheme is incorrect (which is odd given your apparent provenance).
Depositors are protected 100% up to the first 85,000 pounds, and that is per accounts in total with that institution, NOT per individual - thus it is possible to have multiple deposits with different banks (as long as they are distinct entities) , which will all be fully insured as long as they do not exceed 85,000 pounds in each case. Joint accounts with any given bank are covered up to 170,000 pounds total value. Where there has been some confusion is where particular banks are owned by others ie Santander owning various of the building societies. In such cases an individual would have a total 85,000 pound insurance limit shared between Santander and any of its subsidiaries that they have deposits with. Thus if someone had 50,000 with Alliance and Leicester and 50,000 with Santander and both got into trouble, only 85,000 in total would be insured.

Yes we all need banks, but you're lucky if the situation suddenly develops bad enough to lead to the default/failure of your bank that leads you to lose access to one wage, one social welfare payment, increditably lucky. If you leave significant more money in that bank, you take the upside and downside, not me. And understand, that if you want to demand banks pay some deposit insurance charge, guess who's going to pay for it, their shareholders or the customer ? it's just another cost to be passed on -at least that's to the customers of that bank, not the taxpayer.

John ward put it this way. My rendition
 I go to pick my car up from the garage and get there to find its been sold. Yep the garage owner tells me he went broke and had to sell my car. I didn't invest in his gararge so why the hell should my car get sold.

I guess Westpac depositors would wish the management at this branch to go easy on the drive to indebt customers, if they knew how weak their position is in respect of recovering their life savings in the event of a banking crisis. Read article
Some Westpac Lower Hutt banking staff are complaining about ‘‘intolerable’’ pressure to push more debt onto Hutt residents.
FIRST Union regional secretary Sheryl Cadman says 10 staff and the union took the ‘‘very unusual’’ step of calling a morning stopwork meeting on April 19 because they felt so strongly.
Hutt News asked Westpac for comment. Corporate affairs media advisor Nicki Russell says: ‘‘ We don’t discuss staffing matters and are always happy to engage with the union.’’

You must be mistaken, the RBNZ tells this sort of behaviour does not happen here.
10 workers able to attend the meeting described ‘‘ completely unrealistic sales targets’’ and pressure to encourage people to increase their mortgages, credit card levels, insurance cover and suchlike.
‘‘It’s like McDonald’s and ‘upsizing’. They might ring in for something but staff have to ask ‘can I help you with anything else’?’’

Yes all the banks have had staff go to the media about sales targets, they feel pressured. So do most salesmen in high performing businesses but unfortunately when a salesman pushes me to buy something (or borrow for something) I know when to say "no" - again, we need to protect people from themselves but why is banking different ? Yes I know, its the no personal responsbility culture that we have now.

This is what being Cyprused looks like in your online account.
$849 682 deposit of which $720 898 are "blocked funds".

Stephen - impressive comment. Youre over rating your knowledge here and perhaps talking to people more directly involved - closed

Grant A, I am not over rating the fact that those bank assets (Mortgages etc) funded by swapped NZD sourced from foreign wholesale lenders are exempt from the exigencies of the RBNZ's Open Bank Resolution policy.
 NZ based depositors will have haircuts imposed to resolve any impairment - not the foreigner. I do not believe NZers understand each dollar of their deposits could in the event of say the BNZ (162% loan to deposit ratio ) becoming insolvent end up having exposure to $1.62 of failed assets. To be fair the piddling $amount of shareholders funds and unsecured bondholders will share in the loss to diminish the impact slightly.
The RBNZ with the connivance of our elected representatives is actively extending the so called woes of moral hazard to the entitled few who happen not to be NZers. Just as the Federal Reserve does by printing the foreign money that our banks borrow at damn near zero% plus NZ's credit premium.

Kimy,  I am afraid you might want to consider going and getting your money back from whatever institution gave you your misleading view of just how the international supply side of money works and for that matter just what money is;
Professor David Miles, Monetary Policy Committee, Bank of England;
"The way monetary economics and banking is taught in many – maybe most – universities is very misleading and this book helps people explain how the mechanics of the system work."

The reason the workings of our monetary system are taught incorrectly is that the details of how it operates in practice are too complex for students to study in a reasonable period as part of an undergraduate course. Instead they learn an oversimplified cartoon version of reality. Teaching simplified models is not necessarily a bad thing so long as the choice of simplifications are well made. It is done all the time in physics and chemistry without problem. Unfortunately the choice of simplifications made in the teaching of our monetary system have led a great many economists to some disastrously wrong conclusions about the behaviour of money.

Thanks for those links they look interesting - I was thinking of going back to Uni and doing a Finance degree, but this is kind of putting me off, lol.

Regarding deposit insurance, I think you have to be crazy to hold large deposits with banks that have no government gaurantee.  If the banks are so safe and are so well regulated then the government has nothing to fear.   Instead at every opportunity the government says they are fearful of the consequences of guaranteeing the banks.
It is a very strange situation. 
In Finland i can have Euro 50,000 guarantee in every bank, and so can my wife, which would probably come to about EUR 800,000 total.   And supposedly our current bank Nordea is the strongest bank in Europe.
The NZ attitude towards a modest deposit guarantee is just odd and it defies explanation.

"The NZ attitude towards a modest deposit guarantee is just odd and it defies explanation."
Cyprus is the explanation, its the new template and the canary in the mine.
The banksters and their mates are already stealing from us with supressed interest rates, QE efforts - all that fiat curreny manipulation.
They've run out of sneaky moves, next crisis ( any time now ) they are just going to help themselves to our bank deposits.

I gave a talk recently to 130 odd "senior" citizens about Lessons from the GFC. When we got to the Q+A, someone asked about the deposit guarantee. I used that as an opportunity to ask the room if they knew what their bank deposit represented. 
When I told them it was an unsecured laibility of the bank, there was a collective gasp. I didn't go too deeply into it because I didn't want any cardiac arrests on my hands. But it was fairly clear that no one really had any clue about this stuff. This not shocking when one considers the $6b odd that went up in flames in the finance company sector. 
The RB seems to be doing its best to act against the horrors of moral hazard, without a massive public education campaigh about the realities of how banking works and what their "money" actually constitutes.
Perhaps a job for A clear exposition on the OBR, the capital structure with rankings and a clear example of how risk cascades downwards from shareholders at the top to the covered bond holders at the bottom (with depositors just above!).

Raf, I enjoyed your comment. Maybe we ought to draw up a chart/diagram illustrating that risk cascade that you outline to go with our next OBR/deposit insurance story. I'll see what we can do.
In the meantime, for anyone interested in these issues I recommend listening to the interview I did with the University of Auckland's David Mayes here -
All our other OBR stories (and there are lots) can be found here -