New Zealand tipped to follow OECD and guarantee bank deposits

Friday, 2 November 2018

Westpac Bank New Zealand's first half profit fell, as competition for deposits and a higher cost of funds drove down revenue.

New Zealand is being tipped to join the rest of the OECD in having a government-backed bank deposit guarantee scheme.

Kiwi households have around $170 billion on deposit with banks, and currently, should a bank fail in New Zealand, there's no guarantee the Government would bail it out.

Under the Reserve Bank's Open Bank Resolution scheme (OBR), depositors at a failing bank might have to take a 'haircut' with some of their money being taken to recapitalise their bank, and get it open for business again quickly.

But former Reserve Bank head of financial markets Michael Reddell is tipping an end for OBR following the release of a discussion paper into the future of the Reserve Bank.

Michael Reddell says New Zealand will not be the only country in the OECD not to have a bank deposit guarantee scheme.

* Bank haircuts and insurance holes

* Reserve Bank stress tests show how banks would react to economic crisis**

The Reserve Bank is charged with regulating our banks, and keeping the financial system safe and stable.

The paper contains a lengthy section on whether to scrap OBR, and replace it with a deposit guarantee insurance scheme.

'I think this document is mostly a lead in to deposit insurance,' Reddell said.

'It's a pretty compelling story. It's bringing us into line with everybody else, including what's happening in Australia.'

Israel is the only other OECD country not to have a bank deposit guarantee scheme.

Only New Zealand and Israel currently had no bank deposit guarantee scheme, he said, and Israel had signalled it would introduce one.

The Green Party had been pushing for deposit insurance, and Reddell now expected it to be introduced, though he predicted resistance from some in the Reserve Bank.

'Almost all advanced countries provide depositor protection of some sort, most often through insurance,' the discussion paper said.

Bringing in deposit insurance was also a recommendation made to New Zealand by the Financial Stability Board, which was set up by the G20 group of countries after the Global Financial Crisis.

New Zealand's OBR is based on the idea that those who invest in, or deposit money at a bank, are earning a return, and should accept the consequences of the risks they are taking to get that return.

Under OBR, a failing bank would close temporarily, but re-open the next day under statutory management.

Customers would then be able to access a portion of their deposits, but the rest would remain frozen, and potentially used to absorb the bank's losses.

To restore public confidence in the bank, it is expected unfrozen deposits would receive a government guarantee.

'Once the bank's problems were resolved, any unused portion of frozen deposits would be returned to customers,' the discussion paper says.

The EQC fund exists to help rebuild after an earthquake. A deposit guarantee fund could do the same after a bank collapse.

But, the paper says New Zealand's OBR approach has 'become unusual relative to similar countries where, increasingly over time, the perceived advantages of well-designed depositor protection have been seen to more than offset the disadvantages.

'With this in mind it is timely to review New Zealand's depositor protection framework.'

It notes that everyone needs to operate bank deposits, whether they want to take risks with their money, or not.

The paper lays out three options: status quo, a 'preference' regime, where retail depositors money gets repaid before other creditors to banks, and deposit insurance.

Reddell said he expected the deposit insurance to win out and the scheme to be run by the Government.

An EQC-like fund would be created to collect insurance premiums from all depositors, with no banks allowed to opt out, he said.

The premium would be about 10 basis points on deposits, so a deposit account paying interest of 3 per cent, would be cut to 2.9 per cent, with the rest funding the deposit guarantee premiums, Reddell said.

The fund would be guaranteed by the taxpayer, Reddell said.

In other guarantee schemes each depositor only has a maximum amount of their money guaranteed. The paper mentions $50,000, but Reddell said the scheme, if introduced, would have a cap of around $100,000.

But a big bank failure was not imminent, he said.

'Canada has gone over 100 years without a big bank failure. There's no reason to think we will get one in the next few decades,' he said.

- This story has been corrected to say; a big bank failure is not imminent

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