Bank depositors should share risk – English

Finance Minister Bill English supports proposals to relieve taxpayers of the burden of guaranteeing bank deposits in favour of placing it on shareholders and creditors, including depositors.

He was responding to a question from banking expert David Tripe at the annual Finance 2013, a speech hosted by Massey University and the Auckland Chamber of Commerce.

Associate Professor Tripe has raised objections in a National Business Review article to the so-called Open Bank Resolution (OBR) mechanism because it will mean depositors will share in a “haircut” to cover losses in a financial collapse.

He poses the question why it is proposed New Zealand depositors will being treated no differently than other creditors – in other words, sharing the risk of a collapse and in funding a recapitalisation with the institution's shareholders and creditors.

In countries, such as the US, the UK and Australia, government-mandated deposit guarantee schemes offer this protection.

“We have a more robust view [than these countries],” says Mr English, adding “We don’t want taxpayers carrying that liability.”

While some countries offer a threshold – say deposits up to $250,000 – until a “haircut” applies, this may not even be available here, Mr English has hinted.

Speaking later to NBR ONLINE, Dr Tripe says creditors could also mean bondholders, meaning depositors could carry less of the burden.

Both concede the issue is tricky and full of unintended consequences, such as depositors breaking up their deposits and banks finding it hard to attract funds.

The OBR is just part of a wider group of monetary policy tools under consideration.

Mr English says these are up for discussion and include:

• Hold additional capital on their balance sheet as a buffer during an economy-wide credit boom.
• Hold additional capital against loans in specific sectors if risks emerge in those sectors.
• Adjust their funding ratios to use more stable sources of funding to avoid the impact of short-term funding shortages.
• Restrict high loan-to-value ratio lending in the housing sector.

Regardless of what is decided, Mr English says all decisions will be made independently by the Reserve Bank and not subject to political intervention.

"The temptation for some politicians to fiddle with the economy for sjort-term gain at the expense of long-term pain would be too great," he told his invited audience.

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24 Comments & Questions

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Of course depositors should carry some of the risk! That is why they are paid interest. Interest is the risk premium they recieve for depositing their money at that institution. If there is to be a Government guarantee, then the Government should take a share of any interest earned to cover its risk.

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The Govt take a cut already - its called TAX. If they aren't offering any guarantee then they can forgo the tax slice so depositors receive all their returns on the risk they are taking.

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When depositors are paid an interest rate that fully prices in and reflects the risks the banks are taking with that money, sure. Current deposit interest rates are low and any Economics 101 student can tell you that the lower the interest rate the lower the implied risk. Imagine if the banks had to offer interest rates that truly reflected risk - everyone would flock to the bank with the lowest interest rate and the rest would go bust. It would however be a really good mechanism to "encourage" bankers to be more conservative and thereby a bank collapse would in theory be avoided, but it won't do much to help expand the economy. Perhaps it's time to consider linking deposit interest rates to the rates of return of the banks?

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In the case of Heartland Bank the depositors would need interest rates above 10% to take into account the risk involved.

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Absolutely correct. The real upside of such a policy would be a more careful investment attitude by savers.
It is an outrage that the taxpayers should guarantee any individuals private investment.
Savers are no more or no less important than borrowers are to the financial well being of NZ.

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Agree in principle, but would this not cause a flood of local depositors to exit NZ, causing a credit crunch/ run on the banks?
Either that or they will reprice risk pushing up interest rates.

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You are probably correct re banks lifting interest rates to keep deposits, but they also need borrowers, so I believe it is the banks margin that'll have to absorb most of that. And I don't see a lot wrong with that!!
As for deposits fleeing? Yep maybe, but don't they have to buy the currency they are fleeing to? Which should just mean their coin stays here but in new hands? No?
And would that not tend to drag the kiwi down? Again, I see nothing wrong with that?
Go Bill English, do it.

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Put your money into real estate.
At least you can touch it and not disappear down some receivers hole

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..umm like Bluechip ?

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What idiot would invest in Blue Chip
Do your own real estate investing I think is what anonymous is implying

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Bank depositors have no control over the level of risk a bank's management might accept in various transactions and certainly don't share in the profits of any schemes, so why should they lose their money through no fault of their own other than trusting the bank to look after it for them?
It is the shareholders who should take this risk and it is up to the prudential authorities (the Reserve Bank backed by parliament) to determine a set of mandatory rules which should have protection of depositors' funds as one of its requirements.

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Shows what a crock the banking industry is. Full of crooks too. The question begs: what banks are so vulnerable that this is a discussion point? Kiwibank?

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The history in the US at least isn't encouraging for Creditors to police the banks. In the end when big financial institutions the govt keep stepping in.

Savings and Loan
Continental Illinois
Long Term Capital Mgt
Mexico Crises

All bailed out in most cases 100% on the dollar. Clinton even claims the US "made money" on the Mexico bail out, but it was wasn't a bailout of Mexico, it was a bailout of all the banks that should have known better and not lent Mexico money (Goldman, JP, et al)

I think we need to watch a few big ones collapse with no bailout, that might scare a people straight. Otherwise they will keep going back to Govt for a handout under the guise that they are TBTF. That phrase was coined in 1980s over Continental Illinois... we didn't learn then.

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The solution is simple:
1. If a bank goes bust the the current equity holders have lost their dough.
2. To the extent that depositors' money is used to recapitalise the bank then those depositors become shareholders pro rata with any other parties who provide fresh capital.
That way any bank shareholder has an incentive to keep a closer eye on the institution rather than free-riding on either the taxpayer or the depositors
Anything less is theft.

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QUOTE unintended consequences, such as depositors breaking up their deposits UNQUOTE. Depositors should ALWAYS spread their risk over different TYPES of investment, and even over different countries.

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The sheer nerve of arguing that those who deposit money in a bank should be liable if a bank collapses is outrageous, and this is the main point.

What a Jesuitical one, Bill English pretending outrage that taxpayers at large should have to pay. This is exactly what was envisaged under the bank deposit guarantee scheme.

If a bank collapses, it's the managers who are responsible. No doubt they would still walk with a golden handshake.

I wonder how many New Zealanders know about this?

The only safeguard for NZers then is to refuse to deposit money in a bank.

The government has a nerve to keep blaming NZers for investing in housing, etc, and too many lost money heavily in shares. What's left? Burying any savings in the back yard? Not so silly after all...

If nobody deposits with the banks, it will bring them down. Why not- if they won't guarantee savings deposited there?

Let's make the banks accountable, for a change....

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I'm hearing ... "get your money out of kiwi banks" spoken in code of course. I wonder what they all know at the top ... GS checking into Kiwibank, $kiwi dollar sliding, things are starting to align?

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Punter had $8m in property, now increased to $16m because of low interest rates [ true story ]. Will sell property after 10 years tax free.
Are these the taxpayers English wants to protect.
They have no cash in the banks, of course.

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One thing Mr. English could do is prevent banks that do not have deposit guarantees from issuing covered bonds. Clearly the fact that Bill lets the Aussie banks do this, should be a more than clear enough signal to depositors that the interest being paid by these banks is not worth it for the risk involved in being second ranked. Investor beware, don't put your money in the Aussie banks.

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Very simple, I will put all of my excess funds into more real estate. I don't need this crap, we are about the only country in the world that does not provide some form of deposit guarantee insurance...even Zimbabwe does. Why are people so gullible in NZ.
See how much mortgage money is available if others follow me.

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Fool, you cannot put your "excess funds into more real estate"
You can only put in your "equity", the "funds" go to the seller, and what the seller does with those funds is the sellers business.

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This forum is not a grammar lesson. The point is, only a loser with no money in the bank like you would have no problem with this banking scheme.

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Rabo bank is the only one in NZ where your total deposits are guaranteed by the Parent Bank overseas.
Problem solved, move you money there. See how the Aussie banks like that, if every depositer moved.

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Why should a private bank be bailed out by its public customers or taxpayers? What other private business has that luxury? And why do governments and the public borrow money from foreign private bankers anyway! Any sovereign nation can issue its own money without debt or interest. Oh yeah, that's right, the 193 UN member governments are corporations registered with the US Securities and Exchange Commission, working for the global bankers, and we are all collateral since the 1933 Chapter 11 bankruptcy, which is why we are using debt-money.

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