By Gareth Vaughan
The old chestnut of deposit insurance has reared its head in the International Monetary Fund's assessment of the New Zealand financial sector, with the IMF recommending its introduction to enhance the credibility of the Reserve Bank's Open Bank Resolution (OBR) policy and strengthen the financial safety net.
The IMF suggests this in its Financial Sector Assessment Program (FSAP) and Financial System Stability Assessment of New Zealand, released on Tuesday.
"The crisis resolution framework needs to be enhanced further. The Open Bank Resolution (OBR) framework, which aims to avoid the use of public funds when resolving systemically important banks, is a step in the right direction. To enhance its credibility and strengthen the financial safety net, the introduction of deposit insurance would be the best option," the IMF says.
It notes the lack of deposit insurance in NZ, making the country an outlier amongst OECD counterparts, reflects both current government policy and the Reserve Bank's long-standing view that the emphasis should be on reducing the moral hazard attached to any public perception of the government backstopping all or part of the financial system through an implicit guarantee. Additionally, the IMF points out the Reserve Bank considers deposit insurance to be challenging in a highly concentrated banking system like NZ, and that it's not well suited to dealing with systemic failures.
Whether NZ should have deposit insurance is a long running debate. NZ did, of course, have deposit insurance through the Crown Retail Deposit Guarantee Scheme, which ran for 38 months from October 2008 until the end of 2011 costing taxpayers' the thick end of $1 billion. See all our stories on deposit insurance here.
"The introduction of a deposit insurance framework is the first-best element to complete the financial safety net. OBR involves freezing a portion of balances - including deposits - to cover any losses beyond what the bank’s capital position could absorb. As the authorities have reiterated their long-standing opposition to deposit insurance, it is recommended, as a second best option, to introduce limited deposit preference to provide a clear legal foundation for a de minimis exemption from freezing and haircutting deposits in OBR," the IMF says.
"The RBNZ public consultation has suggested a de minimis [minimum] exemption of NZ$500, but it is recommended that a higher amount, established in legislation, would provide some of the benefits of deposit insurance - such as mitigating against runs and reducing the political pressure to bail out depositors. Authorities’ analysis suggests that NZ$10,000 per depositor would exempt the full amount of 80 percent of the number of bank deposits, while still leaving the bulk by value of deposits at risk. Moreover, the issuance of additional capital instruments with write-down and convertibility features could be considered, to provide a further buffer of bail-inable liabilities. However, caution is needed as the majority of these instruments have been purchased by individual investors who may not fully appreciate the assumed risks," says the IMF.
The IMF notes that the $10,000 figure is well below the two to three times per capita GDP rule of thumb commonly used in determining deposit insurance limits, and reflects the fact that most New Zealanders do not accumulate large savings in bank deposits. Deposits in registered banks and equity in investment fund shares represented about 60% and 23%, respectively, of NZ household financial assets as at June 2016.
Under the Australian deposit insurance scheme, deposits are protected up to a limit of A$250,000 for each account-holder at any bank, building society or credit union that's authorised by the Australian Prudential Regulation Authority.
Joyce welcomes IMF recognition of government's approach
Asked about the IMF report Finance Minister Steven Joyce said the Government is considering making some "tweaks" to the OBR framework.
"We're looking at something like a de minimis as an alternative to deposit insurance. We looked at deposit insurance and found that wasn't necessarily going to work from a New Zealand perspective. And it's good to see the IMF recognises the approach that we are thinking about taking might meet the needs of a potential crisis management," Joyce said.
Meanwhile, the IMF also argues the decision-making process in a NZ banking crisis and the exercise of resolution powers needs clarification.
"The RBNZ should be the sole resolution authority, with clear mandates and responsibilities, requiring the approval of the Minister of Finance only for resolutions with fiscal or systemic implications."
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