Financial Armageddon!!

[Wayne]

I think banks used to lend to anyone who could fog a mirror by breathing on it.

And if you couldn't fog a mirror they did it for you

[speights boy]

Gareth Morgan points out the stream of unfettered credit from central banks can have a big cost, one revealed in the Cyprus bank collapse.

One of the major moral hazards of financial sector liberalisation of the last 40 years has been the guarantee from central banks of the deposits at banks.

That leads people to store their money in the bank with no regard for the credibility of the bank.
And then the banks have increasingly disregarded at worst, or not taken seriously the risks they take with their lending.

If you know there’s an implicit or explicit guarantee from the central bank that underwrites the deposits you take in and then lend out, then it follows as night does day that you’re going to be relatively relaxed about credit risks.

www.interest.co.nz/opinion/63666/gareth-morgan-points-out-stream-unfettered-credit-central-banks-can-have-big-cost-one-

[Perry]

Go Credit Unions!

Time to change away from banks?

Hello Perry

Only registered banks are covered by the OBR. This Q&A tells you which
institutions are expected to be covered.

Which institutions will be covered by the OBR?

All locally incorporated banks with over $1 billion dollars of retail deposits
are being required to participate in the scheme. This means that these
banks will have to put in place the necessary systems to allow the OBR
to be carried out within the necessary timescales. This is referred to as
pre-positioning. All other registered banks have the option to opt-in to
the scheme voluntarily if they wish to do so.

For other facts about OBR please see the full Q&A document, or a back
ground feature and an earlier Reserve Bank Bulletin article entitled
A Primer on Open Bank Resolution (PDF 745KB), available on the Reserve
Bank’s website.

Regards
Mike Hannah
Head of Communications | Reserve Bank of New Zealand
2 The Terrace, Wellington 6011 | P O Box 2498, Wellington 6140

[speights boy]

What happens now Perry, if a CU has a liquidator appointed?
All depositors are ranked equal with other unsecured creditors, or do they have a priority standing?
Genuine question.

[Perry]

No idea - I'd have to ask someone. I talked to my local
CU branch manager this morning and he said they would
not be a part of the OBR. Their funds position is less than
$250M, he told me. They have some sort of 'prudential
trustee' who has oversight and they must also get one of
those epic fail rating agencies credit ratings, too.

Last AGM I went to, their ??? ratio (reserves, perhaps) was
something like 50% more than their minimum requirement.
On that basis, they seem OK and they were left largely
unscathed by the GFC. Different source of funds may be
the main factor in that. I.e. I don't think they 'borrow'
from the RBNZ, like the big boys do. So the only effect
the OCR has on them is responding to the influence of
deposit and lending rates that other banks offer, which
are in turn based on the OCR.

[Perry]

Interesting site with a NZ debt clock on it.

[Wayne]

I didn't want a Sierra pickup anyway (2 peoples share)

[Austrokiwi]

If this is indeed fact, and I am not implying it is, then this is one reason why I believe the OBR is better than a Govt Guarantee as mentioned in my post #2.
Make offshore investors less keen to buy our dollar.

An OBR will hit every one and as a result it will be the majority NZ depositors who would hurt the most. Effectively an OBR uses the money of small depositors to offset the losses of large depositors. so as Speights boy has said it is probably better for the the rich depositors and in the long run the NZ$.
A deposit guarantee scheme protects small depositors. In the US deposits to a maximum of US$100,000 are protected in Austria €150,000 is the protected amount. If a bank goes belly up it is the mum and dad depositors, those usually with the least ability to assess the adequacy of a bank, that are protected. Large depositors, who are more likely to to have the skills to judge a banks adequacy, are the ones who shoulder more of the risk. Who would vote for the gvt of the day if they didn't rescue those who conduct their performance appraisal every election. I think it is reasonably possible as overseas investors digest the news the Kiwi$ will rebound. except if this next musing is more accurate:

The fact is if NZ faced a cyprus like crisis the gvt would be forced to cover small depositors through public outcry even if an OBR were in place. IMHO it would be better to set a a deposit guareentee system ( as the previous one was minus finance companies) with insurance premiums paid into a account so that a emergency store of money is built up to cover a bank failure. With an OBR mum and dad depositors are by default underwriting the banks risks.

[speights boy]

Austro
1.Why is the OBR worse than the system we have now?
2.Under a guarantee scheme would Building Societies and Credit Unions be covered?
3. Solid Energy requires a taxpayer funded bailout to survive.
Do you think that should come totally from the Govt, or should the company's banks also share the pain and take a haircut?

[Perry]

Do you think that should come totally from the Govt, or should
the company's banks also share the pain and take a haircut?

Huh? In reality, there is no such thing as "from the government."
It's the worst type of euphemism for corporate welfare with the
implicit internalisation of profits and socialisation of losses.

[Austrokiwi]

Speightsboy I think you and I are actually concerned about the same things

1.Why is the OBR worse than the system we have now?

Its not worse its just formalizing the current situation

2.Under a guarantee scheme would Building Societies and Credit Unions be covered?

They are in the US but in the US credit unions and Building societies operate more like banks in NZ they are more strictly ( some say too strictly) controlled,

3. Solid Energy requires a taxpayer funded bailout to survive.
Do you think that should come totally from the Govt, or should the company's banks also share the pain and take a haircut?

I don't think the gvt should bail out banks ( Solid energy may not be a good comparison as some of the problems it encountered were politically created)
this is where we seem to have the same base assumption but different outcome.

In Europe and the US the deposit guareentee schemes are not funded by the tax payer they are funded by specific fees charged to banks ( insurance premiums if you like) and probably passed on to customers. So when a bank fails it is not tax payer money that is paid out but money ( including reinsurance) specifically set aside to cover the eventuality.

What I am saying is an OBR in effect will more than likely guarantee that Tax payer funds will be used in a bail out.

[plh]

Yes I agree with you Winston001 when you mentioned the government listens, reacts etc.As the need to.

[speights boy]

Its not worse its just formalizing the current situation

Yes, correct.
The OBR is no worse, in fact I believe it is a lot better than the current system.
With OBR the depositor will have access to a portion of their funds almost immediately while the statutory manager does their work.
As opposed to now, where a liquidator will freeze ALL funds.

What I am saying is an OBR in effect will more than likely guarantee that Tax payer funds will be used in a bail out.

Any more likely than the present system?

What we have in the last week, is a group of shonky banks, in a bankrupt country, having to be bailed out by their economic masters.
Why the heck this has SUDDENLY got NZers all upset about the OBR (which has been discussed for quite a few months) I really don't understand.

Re a bank guarantee.
As NZ was being weaned off the 2008 / 2010 guarantee one (perhaps more) finance company offered both guaranteed and non guaranteed deposits.
As it became apparent they would survive, more and more depositors took the non guaranteed option as it paid a higher interest rate.

A lot of depositors may not want a guarantee from a NZ bank, they would rather be paid more interest and be prepared to accept the very small risk of loss.....exactly as they do now or under the OBR.

[Austrokiwi]

The OBR is not different to the current system it is the current system formalized (IMHO they are one and the same)

Deposit guarantee schemes were set up in Europe and the USA in the aftermath of the 1930s depression. Prior to the 1930s Europe and the USA operated the way NZ does now! In particular in the US with the depression the collapse of house prices, loss of bank deposits and the continuing debt burden after mortgage foreclosures led to the the institution of the deposit guarantee scheme and in some states the legal limitation that sees a mortgagor discharged of all remaining debt( relating to the house) after a foreclosure. New Zealand made no such moves. New Zealand is one of the very few countries in the world that does not protect deposits.

Finance companies should never be covered by a deposit guarantee scheme as they operate outside of banking regulations with much less gvt control. IMHO the NZ Politicians were buying votes when they included Finance companies in the briefly existent NZ scheme. A bank deposit insurance scheme is a responsible way of a gvt putting in place a system to protect its most vulnerable citizens against Banksters. The OBR proposal ( which will likely come into being) is a Claytons solution. When a bank in NZ fails under OBR NZ would see protests similar to those being seen in Cyprus, like Cypriot politicians NZ politicians would panic and more than likely commit tax payers money to cover the mum and dad deposits. Anticipating the cowardice of NZ politicians we might see 100% coverage rather than a limited coverage offered by deposit insurance.

As banking failures seem to run in approx 20-25 cycles and it is unlikely there would be any significant failures in NZ for at least 10 years. A measured well thought out deposit insurance scheme is the best way to go, the current risk is low so the premiums would be low....and over 10 years the cash built up would limit the amount of tax payer rescue money. Effectively there are two choices...1. NZ depositors pay a very low premium for a very long time so providing majority of NZ depositors with an effective 100% deposit guarantee ( Assuming a NZ$100,000 maximum coverage) and it is the Rich ( and most likely to survive) depositors who will loose the most money or 2. The OBR where every day Kiwis will loose proportionally more than the big Players.

IMHO the OBR is a "Mattress-at-the-bottom-of-the-cliff" ( And large investors will have parachutes) solution while a Deposit guarantee scheme is a fence at the top of the cliff (that only the allows the biggest and most able to survive the drop to "fall over" the edge) approach.

Edit

With OBR the depositor will have access to a portion of their funds almost immediately while the statutory manager does their work.
As opposed to now, where a liquidator will freeze ALL funds.

I really doubt it will work this way in practice; in fact I think it very naive belief...just watch what is happening in Cyprus. Banks and Bank machines are still closed and lets watch the bank run when they reopen. Deposit insurance schemes have the main advantage that they tend to limit a bank run..........an OBR in NZ would makes a bank run more likely to occur as mum and dad depositors try to anticipate a possible problem. Even with an OBR in place a bank would be closed for a brief period to prevent a run on deposits.

[speights boy]

Austro

Well reasoned post.
Thanks.