NZ
gov't preparing Cyprus-style confiscation for NZ banks
I first reported on THIS back in November, 2011, but this is the first mention in the New Zealand media that I am aware of, of the Open Bank Resolution scheme that the Reserve Bank has been preparing under the radar.
As
the Greens have pointed out this is eerily similar to the diktat that
the EU had in mind for Cyprus.
No
doubt in a similar situation there would be even less democratic
oversight in this country.
Risk to savings if bank fails
Kiwis with money in the bank could see their nest eggs and savings dwindle in a government move the Greens say is a "Cyprus-style solution" to help out failing banks.
20
March, 2013
New
Zealand banks are readying their IT systems for Open Bank Resolution,
a Reserve Bank policy that in extreme cases like insolvency would see
a bank's losses shouldered in part by its shareholders and creditors
- including everyday depositors.
The
Reserve Bank has the power to freeze bank deposits but up to now has
lacked the technical infrastructure to implement it - hence their
requirement for banks with retail deposits of more than $1 billion to
change their systems and meet their requirements by July 1.
Under
the policy, which can only be activated by the Minister of Finance,
if a bank fails a statutory manager is appointed to calculate the
bank's liabilities.
The
statutory manager can then freeze a percentage of customers' bank
deposits to cover those liabilities before it reopens the next
trading day.
But
the Green Party's co-leader Russel Norman said OBR was a
"Cyprus-style solution" that would see small depositors
suffer to fund big bank bailouts.
"Bill
English is wrong to assume everyday people are able to judge the
soundness of their bank," he said. "Not even sophisticated
investors like Merrill Lynch saw the global financial crisis coming.
"If
he insists on pushing through this unfair scheme, small depositors
can be protected ahead of time with a notified savings threshold
below which their savings will be safe from any interference."
Dr Norman questioned the Government's insistence on pursuing OBR when
virtually no other country in the OECD used it.
He
said most OECD countries run deposit insurance schemes that protect
people's deposits up to a maximum ranging from $100,000 to $250,00.
"A
deposit insurance scheme is a much simpler, well-tested alternative
to Open Bank Resolution. It rewards safe banks with lower premiums
and limits the cost to taxpayers of a bank failure."
Prime
Minister John Key said the OBR policy was a "last-resort
facility" and when told that few people seemed to know about it
he responded that it was unlikely to be used.
"The
basic principle is, what would you do in the event of a catastrophe,
how would you recapitalise the bank and it's reasonable logic to say
that is one way through that.
"This
is really in the event a bank was in such a terrible mess that it
fell over and had to start again," he said.
When
asked about deposit insurance, Mr Key said there were significant
costs involved. "The argument is it is so unlikely to happen
that this is a cheaper way through it."
Auckland
University Professor of Banking and Financial Institutions David
Mayes said OBR was an efficient and simple method to deal with
failing banks that would not see chaos caused in the banking system
or costs passed on to the taxpayer.
New
Zealand Bankers Association chief executive Kirk Hope said an IMF
report showed New Zealand had a strong, stable and well-capitalised
banking system with plenty of liquidity and Kiwis could feel
confident.
What
is open bank resolution?
Reserve
Bank policy to ensure the losses of a failing bank are taken on by
its shareholders and creditors - including depositors - rather than
taxpayers, and to ensure the bank is open for business the next
trading day. If a bank fails it can be closed for 24 hours while a
statutory manager is appointed to calculate liabilities and then
freeze a percentage of customers' bank deposits to cover liabilities.
Why
have it?
In
the absence of the OBR policy, the options for responding to a bank
failure are limited to liquidation, government bail-out or takeover
by a competitor. If a private sector solution is not available the
government must choose between allowing the bank to enter the
liquidation process, or providing public support.
Which
institutions are covered?
All
locally incorporated banks with over $1 billion of retail deposits
are being required to participate.
Why
aren't deposits guaranteed?
The
Government placed temporary guarantees on retail deposits. But in
2011 the Minister of Finance announced that further guarantees would
not be provided following the expiry of the existing scheme.
NZ bank bailout scheme is last resort, says PM
The Government says a policy allowing banks to dip into depositors' savings to help fund an emergency bailout would only be used in a worst-case scenario.
20
March, 2013
The
Reserve Bank is in the final stages of implementing the Open Bank
Resolution policy that would be used if a bank failed.
Under
its provisions a collapsed bank would immediately be placed in
statutory management and customers would have an unspecified amount
of money taken out of their accounts to help fund the bailout.
In
a letter to banks, the Reserve Bank says it would expect the them to
be complying with the new policy by the end of June.
Prime
Minister John Key says the Reserve Bank has been considering that
option as way of managing any future financial market difficulty,
without putting the burden on taxpayers.
"At
the end of the day we're talking about emergency provisions. These
banks are heavily regulated, they have significant oversight and
lender of last resort facilities at the Reserve Bank.
"This
is really in the event that a bank got itself in such a terrible mess
that it fell over and had to restart again."
The
Green Party said this policy would hit all bank depositors and a
deposit insurance scheme in which banks pay a levy to insure against
collapse would be much better.
Mr
Key said an insurance scheme would be too costly, and the proposed
policy would only be used in a worse case scenario for the financial
market.
Labour
Party finance spokesperson David Parker says the Government should
consider guaranteeing the first $30,000 of bank deposits in line with
Australia.
David
Tripe from the Centre for Banking Studies at Massey University says
having a plan in place in case a bank goes under is a good thing. But
he believes the Open Bank Resolution proposal is too complicated for
most bank customers to understand, and might put people off using
banks.
To see the Reserve Bank's consultation paper GO HERE
UPDATE: The
Government is refusing to be drawn on how much money might be taken
from a depositors' savings to bail out a bank, if it looks like it
will fail.
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