Open banking resolution in New Zealand

The excellent Eric Crampton sends me this by email:

NZ’s wound down the temporary deposit insurance we had in place post 2008 in favour of Open Banking Resolution: freeze a part of all deposits, keep the banks open, liquidate the shareholders and unsecured creditors, then (if necessary) haircut the depositors.

The Greens here have been comparing it to Cyprus, which is obviously rather different.

Anyway, if interested:

RBNZ: http://www.rbnz.govt.nz/research/bulletin/2007_2011/2011sep74_3HoskinWoolford.pdf

http://www.rbnz.govt.nz/finstab/banking/4933917.html

TVHE critique (on credibility): http://www.tvhe.co.nz/2013/03/21/political-equilibrium-obr-and-deposit-insurance

Me: http://www.offsettingbehaviour.blogspot.co.nz/2013/03/deposit-insurance.html

A 10-yr old piece by then RBNZ Deputy Governor, now U Canterbury Vice Chancellor, Rod Carr, on related topics: http://www.rbnz.govt.nz/speeches/0104984.html

Here, the Reserve Bank distances its policies from those of Cyprus.

Comments

"keep the banks open, liquidate the shareholders and unsecured creditors, then (if necessary) haircut the depositors."
They Eu seems to be doing the opposite of this instead.

"the Reserve Bank distances its policies from those of Cyprus." And it distances itself from the policies of The US. There was enough bond and shareholder equity to cover our bank losses, but our politicians chose to hose the even more innocent party than depositors, the taxpayers.

It is a stretch to say the 'taxpayers' had to pay for anything in the TARP/bailout of the USA banks. It is far more accurate to describe what really happened: The Treasury used its 'Exchange Equalization Fund' (an already existing account) to take a preferred capital position in the banks that was then repaid (for the most part) when the banks strengthened their capital from the marketplace. The 'taxpayers' did not pay for anything, nobody's taxes were increased.

I suggest it was a fairly successful operation, especially compared to the present state of affairs in the EZ or even GB. The banks continued to function (and pay taxes) and the economy soon resumed a (weak) growth path.

That's because there's no point to liquidating unsecured creditors. They'll get something like 100 million out of that, they need 7b.

It seems to me that charging 10% now means they didn't charge enough for their deposit insurance previously, thus making unsecured credit more enticing by its premium.

Less secure, more interest. What's hard about this?

Is the implication that the secured creditors will have some claim on the depositor? That seems a bit problematic.

Easy to do when all your banks are foreign owned! NZ is a free rider on the Aussie TBTF syndrome. Do not laud them for that, it is parasitic, Good politics but not sustainable.

Depositors are currently also unsecured creditors. In your footnote you can’t understand why they are not secured.

My understanding of "why?" is simply that its cheap money for the bank and they can use the funds. The bank co-mingles these with other borrowed monies to lend and to back credit, thus putting them at risk to earn higher interest and more profit for the a bank. If it has to secure these funds, they are not available to back bank credit. Perversely, the tight bank regulation and implicit guarantee by the Govt. allows the banks to convince customers that their funds are safe without any security!!!

However, there is a difference between customer's moneys held for safekeeping and transactions, and money held in savings accounts where the bank will put them at risk to earn higher interest.

Since we want to eliminate taxpayer guarantees and bailouts and the need for deposit insurance, the simple solution is to make transaction accounts (basically cheque accounts and non-interest bearing on-demand accounts which can be used for day to day money transactions) secured!

OBR (a good policy) then leaves these accounts untouched in a bank failure and the bank's participation in the interbank transaction system can continue unaffected by the freeze and haircut on unsecured deposits.

Most of us deposit funds (dematerialising them) in our cheque accounts either for safekeeping (better than under the mattress) or to make and receive payments in the interbank system. These monies are ours and should be held in trust at the RB (i.e. not available to lend out at risk to earn higher interest). The RB regulates the payment system and it is the only practical way we have of receiving payments (wages etc) and making payments, so it should make sure it is reliable and robust. We already pay transaction fees and get no interest on these accounts (though the bank earns some on its deposits at the RB to help offset the costs of running the transaction system.)

Banks could then also offer customers secured interest bearing deposit accounts without any regulatory impost.

If transaction account monies are secured, and putting money in a secured or unsecured (interest bering) deposit account with the bank is a customer choice, this then totally removes the argument for taxpayer guarantees or protection. Customers who have little money (no savings accounts) have their funds protected and keep getting and making day to day payments and any element of unfairness in the bank resolution is eliminated....

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