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Moody's rating concern about financial management option

Tuesday 22nd March 2011 1 Comment

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Some bank ratings could come under pressure from a policy option being considered as a way to maintain confidence in the financial system in the event of a bank failure.

The open bank resolution (OBR) is described by the Reserve Bank as a long-standing policy option aimed at resolving a bank failure quickly, in a way that the bank can be kept open for business, minimising stresses on the overall banking and payment system.

The Reserve Bank released a consultation paper to banks last week on the systems requirements needed for the option.

Today Moody's Investors Service said the OBR policy could create additional negative pressure on the supported debt and deposit ratings of New Zealand's four major banks - ANZ National, ASB Bank, Bank of New Zealand and Westpac New Zealand.

All four have long term bank deposit ratings of Aa2.

Moody's assistant vice president and analyst Marina Ip said the ratings of the four were already under review for possible downgrade for reasons unrelated to the OBR.

The adoption of a pre-positioning mechanism, that banks would be expected to comply with to fully implement the OBR, could add further downward pressure to their supported deposit and debt ratings, she said.

Pre-positioning - preparing banks' IT system design and documentation to allow a statutory manager to take control easily - would make OBR a more viable policy option for large, complicated banks.

The OBR was designed to reinforce market discipline, by eliminating the need for authorities to provide extraordinary support to a troubled bank so it could maintain its essential day-to-day operations and minimise disruptions to the financial system.

Instead, the OBR would make bank shareholders, creditors and even depositors shoulder the losses of a failing bank, while ensuring that the payments system continued to function, Ip said.

Moody's would have to evaluate the likely response of the Reserve Bank and the Government in case of stress at a major bank, and the practical and operational feasibility of implementing the OBR policy.

Earlier this month Finance Minister Bill English said the Government was considering options for maintaining confidence in the financial system when the retail deposit guarantee scheme finished at the end of this year.

Brought in during the global financial crisis, the deposit guarantee was extended last year under tighter terms and conditions and now protected only $2 billion of the $210 billion New Zealanders had on deposit. The scheme would not be extended again.

The Government did not favour compulsory deposit insurance, which was difficult to price and blunted incentives for both financial institutions and depositors to monitor and manage risks properly, English said.

OBR was an option for minimising disruption to the financial system and maintaining investor confidence, and the Reserve Bank would discuss it with banks in coming months.



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Comments from our readers

On 22 March 2011 at 7:17 pm Don Baxter said:
Para 10 "Instead, the OBR would make bank shareholders, creditors and even depositors shoulder the losses of a failing bank" I don't understand how the above changes anything as the shareholders, creditors and depositors (who are unsecured creditors) are the parties,at present, who would shoulder losses in the event of a bank failure outside of the Crown Guarantee period. How would this improve the security for depositors? In fact it appears that the formal clarification that the Crown/ Govt. would not assist in the event of a failure would result in a down grading of the security ratings of the banks. This surely would decrease the confidence of depositors?
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