Wednesday 7th December 2016
|Text too small?|
The Reserve Bank is unlikely to introduce state-backed insurance on bank deposits, saying the moral hazard is too high and it prefers the option of protecting those with small balances through guaranteed repayments.
New Zealand is the only country in the OECD without deposit insurance, with Israel's central bank in the process of introducing the state guarantee on bank deposits.
Governor Graeme Wheeler told the finance and expenditure committee, at the central bank's annual review this morning, that developing a deposit insurance fund would take an "awful long time" and New Zealand's banking system is highly concentrated in bigger banks.
"Where they tend to be most successful is in banking systems with a large number of very small banks, and some of those collapse over time, but our set up is completely different here," Wheeler said "We do worry about the moral hazard issues, for example what is the incentives bank managers would feel knowing there's a bailout fund set up."
There would also be difficulty in charging appropriate premiums, Wheeler said. "You would want to make sure you were adopting appropriate credit risk pricing to build up that fund. You'd be saying bank X, the deposit levy on that is so much, bank Y, the levy is so much again. You end up with differential rates."
Grant Spencer, deputy governor and head of financial stability, said there was scope for the minister to determine a minimum guaranteed repayment amount to protect small depositors, and the bank was having some discussion as to whether to fix that number more specifically, at around $5000.
James Shaw, Green party co-leader and finance spokesperson, said there was a view the banking market is concentrated because New Zealand doesn't have a deposit insurance scheme, so savers don't feel confident putting their money outside the major banks. Such a scheme could encourage competition, he said.
Spencer said the bank didn't want to encourage unfair competition by guaranteeing a riskier institution, as happened with the collapsed South Canterbury Finance.
"People suffered, and the government suffered as a result. To avoid that, you need a risk-adjusted insurance premium, but when you look around the world you never actually see proper risk-adjusted premia. You often have a bias towards a flow of funds to riskier banks, and that's the moral hazard issue," Spencer said. "We support more the approach of de minimis to protect smaller deposit holders rather than putting in protection for $250,000, as you might have in Australia."
No comments yet
MARKET CLOSE: Blue-chip stocks Meridian, A2 lead market lower
NZ dollar rises on Brexit hopes, rate cut reassessment
Three not failing, just needs a new owner - MediaWorks CEO
Major investors back new CBL class action targeting directors
Rip Curl purchase a done deal on Kathmandu proxies alone
Comvita chair Neil Craig eyes the exit once he finds a new CEO
Mercury raises guidance on increased storage, high spot prices
Eroad reports strong 3Q sales growth, eyes ASX listing
MediaWorks puts TV business on the block
NZ dollar benefits as preliminary Brexit deal improves risk appetite