How about a haircut?
Rob Stock looks at the Government’s justification for the power to take a razor to your bank deposits.
Bank customer Tony Bevin is certain he isn’t able to judge whether his bank could weather a global financial crisis better than one of its rivals.
Jill Nichols isn’t a financial expert, and doesn’t possess the high-end financial skills to read bank financial statements.
Both of these ordinary Kiwis need bank accounts, for transactions and storing savings.
And yet the Reserve Bank says the threat of taking a ‘‘haircut’’ on their deposits, should their bank fail, will make them more careful depositors.
New Zealand’s plan to deal with a bank collapse is called Open Bank Resolution, or OBR for short.
It’s designed to be an alternative to using taxpayer money to bail a bank out.
Under OBR, a collapsed bank could be recapitalised by a statutory supervisor appointed by the finance minister, by taking a proportion of the money depositors have in term deposits, and cheque, savings and other transactional accounts.
The aim of OBR is to get such a bank open for business again quickly, limiting damage to the economy.
‘‘By reducing the potential for government support, OBR increases the incentives for bank management to properly conduct their business and for creditors (which includes depositors) to choose their bank carefully,’’ says the Reserve Bank, in its OBR Made Simple publication.
But when it comes to weighing up the relative strengths of New Zealand banks, Bevin says he wouldn’t have a clue.
And he resents being equated with an investor in a bank.
‘‘Depositors are not investing in a bank, they are depositing their money for safe keeping, or so I thought and hoped.
‘‘Depositors do not share in the bank’s profits. In fact they are charged a fee for the privilege of depositing their money with the bank.’’
Nichols said using transaction accounts did not make her an investor, as the Reserve Bank seems to think.
‘‘It is now almost impossible to operate one’s finances without having a bank account. Therefore the argument that account holders are investors, who knowingly accept a risk of loss, is invalid, is it not?’’
It’s not only ordinary depositors who do not believe the OBR is fit for purpose.
Finance expert Geof Mortlock, who has consulted to the IMF and World Bank, says bank disclosure is impossible for ordinary people to read, and is published quarterly, in arrears.
‘‘Effective market discipline does not rely on mumand dad. They don’t have a clue. I’m not being disparaging. The average person can’t know if a bank is safe, or not.’’
The OBR is to protect taxpayers, not depositors. The Reserve Bank is the regulator of banks, and guardian of the financial system, but its duty is not to depositors directly.
Under the Reserve Bank Act, its ‘‘purpose’’ is to be responsible for monetary policy to keep a lid on inflation, and ‘‘promoting the maintenance of a sound and efficient financial system’’.
OBR is merely an option, however. A finance minister could choose to let a bank go bust, or to bail it out using taxpayer funds.
Mortlock would like to see OBR scrapped, and would like to see a depositor deposit insurance scheme created. He’s not alone. The International Monetary Fund’s lukewarm description of the OBR in April last year was that it was ‘‘a step in the right direction’’.
But the IMF continued: ‘‘To enhance its credibility and strengthen the financial safety net, the introduction of deposit insurance would be the best option.’’
If the Reserve Bank did not do that, then OBR needed clarifying, instead of leaving the decisionmaking until the heat of a bank collapse.
It suggested establishing an explicit ‘‘de minimis’’ to exclude people with low deposits.
Mortlock said the Reserve Bank had suggested a de minimis of $500, which he felt was far too low, instead suggesting $10,000.
Smart, well-advised money can take steps to insulate itself from haircuts.
The likes of Mortlock have a much higher chance than an ordinary person of spotting a bank teetering, giving them a chance to withdraw their money.
And, says Mortlock, OBR haircuts would be calculated on an account-by-account basis, rather than by working out each bank customer’s total deposits, and applying a single haircut.
That means well-advised money may spread itself across banks, and across accounts, to minimise its risk.
OBR also threatens some miserable bad luck and timing. A person who has sold a house and is about to complete payment for a new home could find themselves taking a haircut and being unable to afford their new place, even losing their deposit to the vendor.
The IMF was not entirely convinced that the Reserve Bank was in a position to regulate, either.
‘‘The competence and professionalism of staff is recognised by market participants, but the RBNZ operates under specific resource constraints and numbers are insufficient,’’ it concluded.
It noted that the RBNZ’s lighthanded ‘‘non-intrusive’’ approach to supervising banks was in contrast to policy in other countries.
Mortlock says that overseas, CoCo bonds (Contingent Convertible Bonds) are sometimes used to provide a new layer of bank funding. They are bonds paying interest, but which convert into shareholder equity in the event of a bank running into trouble, effectively recapitalising them.
Big international investment funds which buy the bonds are sophisticated investors, says Mortlock, able to scrutinise banks properly, bringing real market discipline to banks.
The Reserve Bank is being reviewed, providing an opportunity to revisit OBR, which Mortlock says he will push for, but the scope is ‘‘yet to be determined’’, the Reserve Bank says.
Treasury said it was not ‘‘appropriate’’ to comment on OBR while the review was under way, but the Reserve Bank says: ‘‘There has been consideration given to adopting a broader de minimis allowance as part of the OBR policy. This work will be reassessed in line with the priorities of the current Government’’.
That could happen as part of phase two of the review, the Reserve Bank says.