Thursday 30th October 2014
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New Zealand and Australia are continuing work to iron out differences between their respective depositor protections, which operate under different regulatory regimes, Finance Minister Bill English says.
Australia operates a deposit insurance scheme, whereas New Zealand depositors are governed by the open bank resolution framework, an issue that's discussed regularly at the Trans-Tasman Council on Banking Supervision, English said in response to questions from NZ First leader Winston Peters in Parliament yesterday.
"We hope to continue resolving the differences, bearing in mind that each government has the interests of its own taxpayers and depositors at heart, and they do not always align completely with each other," English said.
"The government has been monitoring both the current regime that is in place - open banking resolution, which does not include government guarantees of depositor funds - and the differences between our regime and, for instance, the Australian one, which is a pretty real-time issue: to have two different regimes applied to the same banks," he said.
New Zealand's open bank resolution framework would mean a failed bank has to write down the value of the most pressing unsecured liabilities almost immediately, so service could resume a day after an insolvency event or statutory management to allow customer transactions to keep flowing. The policy’s ultimate goal is to place the cost of failure on the shareholders, while providing the flexibility to assign losses to creditors without unnecessarily disrupting banking services.
Last year, a report on New Zealand by the Organisation for Economic Cooperation and Development said permanent deposit insurance would be a further bulwark against banking system vulnerability caused by New Zealand’s relatively small number of large banks, and that the open bank resolution framework might not be enough to stamp out a run on other banks if one institution was to fail.
English said yesterday deposit insurance effectively means depositors pre-pay any bailout funds, and impose a cost on the wider economy by forcing up interest rates.
There's ongoing work and discussion with the banking sector "around the appropriate level of bank resolution and depositor protection" given the government's experience bailing out failed financier South Canterbury Finance under the now-withdrawn retail deposit guarantee and the substantial fall-out that would come with the collapse of a major local bank, he said.
"Managing the risk of bank failure is complex, with potentially large costs to the taxpayer," English said. "The government has to balance the security offered by a government guarantee to depositors alongside the need for banks to have good incentives to ensure that they are sound financial institutions and will not impose large costs on their depositors, shareholders, creditors, or the taxpayer."
Last week, Reserve Bank head of prudential supervision Toby Fiennes said the central bank's task to manage system-wide risk meant that it was willing to allow individual entities to fail to avoid risks posed by moral hazard, where a party will take more risk as it won't bear all of the consequences, and inefficiency. It estimates the cost of a severe financial crisis would be between 10 percent and 20 percent of gross domestic product.
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