NZ tipped to follow OECD on deposits
New Zealand is being tipped to join the rest of the Organisation for Economic Co-operation and Development (OECD) in having a government-backed bank deposit guarantee scheme.
Kiwi households have about $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 (OBR) scheme, depositors at a failing bank might have to take a ‘‘haircut’’, with some of their money taken to recapitalise their bank.
But former Reserve Bank head of financial markets Michael Reddell is tipping an end for OBR following the release of a discussion paper on the future of the Reserve Bank.
The paper contains a lengthy section on whether to scrap OBR and introduce a deposit guarantee insurance scheme.
‘‘I think this document is mostly a lead-in to deposit insurance. It’s a pretty compelling story. It’s bringing us into line with everybody else, including what’s happening in Australia,’’ Reddell said.
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 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 take to get that return.
Under OBR, a failing bank would close temporarily, but reopen the next day under statutory management. Customers would then be able to access a portion of their deposits, but the rest would remain frozen.
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 said.
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: the 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. 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, so a deposit account paying interest of 3 per cent would be cut to 2.9 per cent, with the rest funding the guarantee premiums, Reddell said.
The fund would be guaranteed by the taxpayer, Reddell said.
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.’’
‘‘There’s no reason to think we will get one [a big bank failure] in the next few decades.’’ Michael Reddell