A ‘hair­cut’ that trims sav­ings

The Horowhenua Mail - - CONVERSATIONS - ROB STOCK MONEY MAT­TERS rob.stock@fair­fax­me­dia.co.nz

The past decade has taught us a lot about breath­ing life into dead banks, fi­nance com­pa­nies and in­sur­ers.

When peo­ple are un­der wa­ter too long, res­cuers at­tempt to bring them back through ar­ti­fi­cial res­pi­ra­tion and chest com­pres­sion.

To a hu­man, oxy­gen is the stuff of life. To a bank, in­surer, or fi­nance com­pany, the stuff of life is money.

Fi­nan­cial re­sus­ci­ta­tion money has come from tax­payer bailouts, gov­ern­ment guar­an­tees, and cen­tral banks sup­press­ing in­ter­est rates.

Tax­pay­ers pay be­cause gov­ern­ments fear neg­a­tive im­pacts on the econ­omy (and their fu­ture job prospects) when a ‘‘too big to fail’’ fi­nan­cial ser­vices com­pany fails.

But th­ese days should a bank fail, it’s more likely a ‘‘statu­tory man­ager’’ would be ap­pointed, and tasked with get­ting it open again in a few days.

This bank re­sus­ci­ta­tion


Keep your ears open Stay in­formed Be pre­pared to fight for ‘‘fair’’

mech­a­nism is called OBR, or Open Bank Res­o­lu­tion.

In an OBR re­sus­ci­ta­tion, de­pos­i­tors (who are un­se­cured cred­i­tors) may find a por­tion of their money (say 10 per cent) taken to re­cap­i­talise the bank. This is known as giv­ing them a ‘‘hair­cut’’.

If the bank sur­vives, and is sold, the de­pos­i­tors stand a chance of get­ting their money back.

The moral ar­gu­ment for OBR is that de­pos­i­tors in­vest for profit. They are tak­ing risks, and should, like good cap­i­tal­ists, suf­fer the losses should things not go well.

The ar­gu­ment against is that or­di­nary peo­ple aren’t able to po­lice banks, and that it’s the job of gov­ern­ment reg­u­la­tors to keep them on the straight and nar­row.

Once OBR was con­ceived of, how­ever, it be­came the likely way New Zealand would deal with a fail­ing bank.

And, there’s just been a sug­ges­tion we should now cre­ate an OBR for in­sur­ance com­pa­nies, with pol­i­cy­hold­ers be­ing the ones to foot the bill for re­cap­i­tal­is­ing them should they go bust.

AMI failed af­ter the Christchurch earth­quakes be­cause it had in­ad­e­quate rein­sur­ance, and tax­pay­ers will end up spend­ing about $1.5 bil­lion re­build­ing AMI pol­i­cy­hold­ers’ houses.

Eco­nom­ics think tank The New Zealand Ini­tia­tive thinks we should con­sider an OBR for in­sur­ers.

In the case of AMI, which had around half a mil­lion cus­tomers with 1.2 mil­lion poli­cies, that’d be around $1230 per pol­icy.

Less OBR thanOMGto peo­ple al­ready in a fi­nan­cial hole as a re­sult of prop­erty dam­age.

It’s one thing giv­ing bank de­pos­i­tors a hair­cut. It’s quite an­other put­ting fam­i­lies in dire fi­nan­cial straits into deeper holes.

I can see how peo­ple could ar­gue AMI pol­i­cy­hold­ers paid too lit­tle for their in­sur­ance.

But I don’t think Par­lia­ment would pass the laws nec­es­sary to cre­ate an in­surer OBR.

Big gen­eral in­sur­ers fail af­ter nat­u­ral dis­as­ters, which re­ally isn’t the time Ki­wis will feel com­fort­able ask­ing vic­tims to stump up more money. It also fails the fair­ness test. How was any or­di­nary house­holder sup­posed to recog­nise AMI’s lack of rein­sur­ance if ex­pert reg­u­la­tors didn’t?

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