Unless you’ve been under a rock (or without broadband and TV for 3 days like me!) you will have no doubt heard about the “bail in” of banks via bank depositors in the small island nation of Cyprus. The proposal (which has since been voted down) was to tax – a.k.a. steal funds – up to 13% from all depositors to gain sufficient capital to get the IMF and EU agree to a larger “rescue” of Cyprus.
And if you’ve read any local press you’ll have no doubt seen that the Green Party here made good use of the situation to get some attention on a similar process the Reserve Bank of New Zealand has planned for New Zealand in case of a bank failure locally.
About time too. We wrote about this back in 2011 and other than on interest.co.nz, where they have been keeping a close eye on the plans too, we have read very little elsewhere on what should be a subject of focus for all New Zealanders.
The RBNZ has done well to keep it under the radar for this long. As we wrote back in November last year:
“Of course the very fact that the Reserve Bank needs to come up with plans for bank failures should be enough of a warning sign. But we’d hazard a guess that not even 1% of the population would even be aware of them. It’s probably the way the Reserve Bank and the banks would prefer it too. Better not to have a spotlight cast on the planning for bank failures when the financial system relies upon confidence to stay afloat!”
Well, maybe more than 1% of NZ knows about it now we hope.
We won’t rehash the full details of the RBNZ Open Bank Resolution (OBR) now but in simple terms if a bank were to fail in New Zealand the RBNZ would shut it down for a day and freeze a portion of funds on deposit, with a view to reopening the next day. Deposit holders would receive a “haircut” commensurate with the amount of funds needed to keep the bank functioning.
“Brother John” whose Youtube videos we’ve featured in the past posted this video yesterday:
At 9.37min he discusses the RBNZ haircut plans.
The RBNZ’s Opinion on OBR Versus Cyprus
Yesterday the RBNZ issue the following press release.
NEWS RELEASE Date 20 March 2013
Open Bank Resolution New Zealand’s Open Bank Resolution policy would facilitate a rapid and orderly resolution of a collapsed bank, and is markedly different from proposals to resolve the banking crisis in Cyprus, Reserve Bank Deputy Governor Grant Spencer said today.
Mr Spencer said depositors’ money has never been guaranteed, apart from temporary periods, such as under the Deposit Guarantee Scheme from late 2008 to December 2011.
“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.
“Fortunately, bank failures in New Zealand are rare. The major banks in New Zealand are amongst the most highly rated banks in the world. We saw their resilience through the Global Financial Crisis.” Mr Spencer said the OBR policy bears little resemblance to proposals to resolve the banking crisis in Cyprus.
He said the alternative to OBR is for the government to bail out banks with taxpayers’ money – which comes with potentially enormous fiscal costs – or to close the failing bank, which comes with large economic costs.
“The Cyprus situation is very complex, it is a systemic collapse and not a case of just one institution failing. It must be seen in the context of the broader European sovereign debt and banking crisis. Further, the Cyprus banking system is dominated by a large foreign deposit base, from Russia in particular.”
Mr Spencer said deposit insurance is not a substitute for OBR or any other resolution tool.
“It is a separate issue altogether. The New Zealand Government has looked hard at deposit insurance schemes and concluded that they blunt the incentives for investors and banks to properly manage risks, and may even increase the chance of bank failure.
“Deposit insurance is widely used in Europe, including Cyprus, but hasn’t prevented banking failures, as we saw during the Global Financial Crisis.”
So the RBNZ says OBR bears “little resemblance” to Cyprus? We guess merely the fact that Cyprian depositors were faced with getting a haircut and under OBR that is what NZ deposit holders will get in the case of a bank failure is the only thing similar?!!
The RBNZ point out that the Cyprus situation is different in that it is a systemic problem not isolated to one bank. But who’s to say NZ could not have a systemic bank failure either? If one major bank went down who’s to say it would be isolated. They all appear to be using the same business model.
How the RBNZ OBR “Haircut” is worse than the Cyprus “bail in”
One difference we noted was that at least under the Cyprus plan deposit holders would get a share in equity in the bank (albeit probably a worthless share), in exchange for their “haircut”. Here in NZ it’s just a short back and sides only. No exchange for bank equity.
The Greens Take on OBR
The Greens angle is that a deposit insurance scheme is preferable so deposit holders don’t suffer for a banks poor decisions. Banks pay a premium to the Government as a form of insurance so in case of a failure the government backstops depositors up to a set limit. For example $100,000 in the US and we believe it’s $250,000 in Australia.
There are a couple of downsides with this. Firstly it will cost depositors more as banks have to pay the premium for coverage and of course we wouldn’t expect them to do this out of their miserly profits would we?!! But secondly, in Cyprus (as mentioned in the above RBNZ press release) a deposit guarantee was in place but that hasn’t stopped them from staring down the barrel of a hair cut to their bank deposits anyway!
Of course, people could just spread their money around various banks to get higher than $30,000 coverage this way. But again there is no guarantee it wouldn’t be changed in the future anyway, just like in Cyprus.
Our Take on OBR
As usual we disagree with just about everyone here in New Zealand on the issue.
Our take? As usual all these “solutions” are merely band aids over the wound and don’t address the real problem.
The structure of the banking system, not which tools are used to save it.
The real problem is the modern fractional reserve banking system. Where we have central planners from Government and Central Banks deciding what reserves it is “safe” for a bank to hold. In the (very) “olden days” it was the depositors who determined what the bank kept on reserve not some intellectual. You chose what portion of your funds was held on reserve for your use. And what portion the bank could lend out and give you a return on. You didn’t have access to these funds until the time was up. This is where term deposits came from. But nowadays the money in your “on-call” account isn’t in the bank either as it too has been lent out!
As we have said before we wonder if push came to shove would the govt let depositors take the hit as planned via OBR? Given how easily they have rolled over on the recent car park tax and now the iPad tax would they actually let hundreds of thousands of NZers lose a chunk of their bank savings?
But if the Government did a U-turn and carried out a taxpayer bailout we would all pay in the end anyway. If a major bank failure occurred, either the depositors lose money up front or taxpayers lose money via higher taxes or via the stealth tax that is inflation.
You know our thoughts aren’t going to be surprising as to what to do. Having your own “deposit insurance” is the way to go. Physical gold and silver in your possession is your insurance policy against bank failure as they will always be worth something.
The poor Cypriots may be about to learn that you can’t say the same thing about bank accounts. It’s a lot harder to seize physical gold and silver than it is to pass a law and require banks to hand over a portion of your funds.
Of course we do make money from selling gold and silver so why believe us? It’s in our interests to talk up the problems. Better to listen to the politicians and central bankers. They always look out for us don’t they?
What do you think? What is the answer for New Zealand’s banking system? Will we face a potential bank failure? Show us you’re alive and leave a comment below!…