Deposit insurance scheme needs careful scrutiny

Monday, 06 October 2008

Serious trans-Tasman talks are needed about insuring bank deposits here to ensure New Zealand taxpayers do not end up subsidising Australian-owned banks, a banking academic said today.

The issue of insurance for money people put in banks has arisen as part of the global financial crisis.

German Chancellor Angela Merkel today assured German savers their money was "safe".

Germany is guaranteeing more than 500 billion euro ($NZ1.056 trillion) in private deposit accounts to protect savers. Austria quickly followed suit.

Most of the major European countries have deposit insurance schemes of some sort but most do not offer full-cover. There is no deposit insurance in New Zealand or Australia, though Australia is looking at the issue.

Director of the Centre for Banking Studies at Massey University, David Tripe, said there was some ambiguity in the translation of Ms Merkel's announcement and the extent of the scheme was unclear.

"It may not be the blanket guarantee that some people have assumed."

He said the difference between Germany and New Zealand was that Germany already had a scheme in place.

Before New Zealand introduced a scheme a decision on who should pay had to be made first.

"It is not a good idea and likely to be very dangerous, in terms of cost, to try and implement a system which you haven't yet designed. And that's what, to some extent, would be happening if people were to try and rush into something now."

He told NZPA New Zealand tax payers might end up subsidising the Australian banks because New Zealand subsidiaries of Australian banks would pay back loans to their parent companies first.

Mr Tripe's "perception" was that Australian banks were in better shape than those overseas.

But, deciding on the process of bank closures was also important, he said.

When US regulators closed IndyMac in July they announced the bank would be closed and reopened as a new bank on Monday. "In the meantime, where are you going to get your money to buy your groceries?"

"One of the other issues with a deposit insurance is that it absolves people of taking any responsibility from looking at investing their money prudently."

He used New Zealanders' "delight at chucking money at finance companies" as an example.

"There wasn't necessarily a whole lot of analysis or thinking done prior to directing funds to them (the finance companies)."

There is also a real threat of "cowboys" entering the market and registering banks to take advantage of the deposit insurance scheme, he said.

"All of these sorts of issues need to be addressed."

Australia is moving towards a deposit scheme with a rumoured $A20,000 ($NZ23,579) cap.

"That raises some very significant issues if we were to have a deposit insurance scheme in New Zealand without there being one in Australia.

"It probably actually needs, in practise, to be sorted out jointly. Trying to do anything else is likely to be distinctly problematic."

Until now, there has been some "unwillingness" by the Reserve Bank to be involved in such discussions.

"The whole area of bank failure and bank failure management needs to be seriously discussed. Any attempt to deal with it in a rush is very problematic and would be reasonably expected to lead to unsatisfactory outcomes."

He said this was not something New Zealand could resolve on its own because of the foreign ownership of the country's banks.

The exception to the foreign-owned banks is Kiwibank which, Mr Tripe said, is state owned but not state insured. The state has no obligation to insure Kiwibank's deposits.

"On the other hand, there is some argument that Kiwibank has been marketing itself as sort of government guaranteed or something, so us lucky old taxpayers may be lumbered with the cost anyway.

"If one was being strictly straight up-and-down about it, you would look at the relative credit ratings and you would say `well, the Australian banks are rated higher than Kiwibank they're therefore safer. The question is that there might be a political challenge if there was to be a problem with Kiwibank and that is in effect what people are relying on."'

Interest.co.nz managing editor Bernard Hickey has been leading the call for New Zealand's major political parties to work with the Reserve Bank to create a bank deposit insurance scheme here.

He said the scheme should guarantee up to $100,000 per person in any licensed bank or registered building society.

"Action is now required across New Zealand's political and economic leadership to ensure New Zealand is no longer the only country in the OECD without any form of bank deposit insurance or bank deposit guarantee."

He said if Australia brings in the proposed scheme New Zealanders would open Australian bank accounts.

"We are nowhere near this stage yet, but reducing that risk of a trans-Tasman exodus should be a top priority."

NZPA