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KPMG identifies sequencing issue in proposed bank deposit guarantee scheme

Thursday 11th July 2019

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Financially distressed banks may need to go through the controversial Open Banking Resolution process and fail before the government's proposed deposit guarantee would come into play, KPMG says.

"Under the Open Banking Resolution concept, the bank enters the OBR stage when the bank becomes 'unstable' or 'distressed'," the accounting firm says in its latest quarterly banking sector review. "The process, when activated, would result in some deposits being frozen while a statutory manager takes over the bank, and then this frozen money would be used to resolve the bank's issues.

"The difference between this concept and the deposit protection regime is that these deposit protection regimes require the bank to 'fail' in order tor the protection to be activated," KPMG says. "The OBR, as the core of its purpose, steps in before the bank 'fails'" and includes a government guarantee over any non-frozen funds that the statutory manager may decide to leave available to depositors.

"We have little to no doubt that this process will be worked through as part of the finer details of the programme", which is likely to be funded by levies on the banks.

"We will watch deposit rates closely to see if these costs are passed on to depositors through reduced savings interest rates and possibly under the premise of the deposits being 'safer' due to the protection" offered by the deposit protection scheme, KPMG says.

The New Zealand government announced a number of 'in principle' decisions on June 24 at the same time as it announced the second phase of a fundamental review of the country's 30 year-old Reserve Bank Act.

That included accepting International Monetary Fund advice, received in 2017, to add to its globally unusual commitment to an OBR-only regime for dealing with bank collapses by also implementing a bank deposit guarantee scheme.

Critics of the OBR-only approach have pointed to the likelihood of central government intervention in the event of a collapse that required depositors to take a so-called 'haircut', given applying such a haircut to retail depositors would be likely to produce political and economic turmoil.         

The deposit protection scheme outlined by the government offers protection for deposits up to $30,000 in any one bank account, which the RBNZ estimates would cover around 90 percent of New Zealand depositors and 40 percent of total deposits.

KPMG noted this seemed "quite low" compared to similar jurisdictions, with Australia's protection set at A$250,000 for any one account, the UK at 85,000 pounds, the US at US$250,000 and the European Union at 100,000 euros.

Noting far more activist regulation in the March quarter, KPMG also flagged the potential for additional costs and oversight for other finance firms as an in-principle decision to combine the regulation of banks and non-bank deposit takers is enacted.

(BusinessDesk)

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