Bank aim defended

New Zealand's Open Bank Resolution would ensure a rapid and orderly resolution of a collapsed bank but is different from proposals put to Cyprus, Reserve Bank deputy governor Grant Spencer says.

Labour and the Greens yesterday criticised the proposal, which they said was similar to what faced Cypriots. Along with New Zealand First, Labour and the Greens were calling for a deposit insurance scheme.

The Cypriot Parliament rejected the European Union's conditions in the face of anger among citizens at the prospect their bank deposits would be raided. While Cyprus and the 10 billion ($NZ15.7 billion) bail-out is a only a small part of the EU, investors fret it may set a precedent for wider turmoil. Risk assets such as stocks, the New Zealand and Australian dollars weakened after the vote.

Mr Spencer said depositors' money had never been guaranteed, apart from temporarily, such as under the deposit guarantee scheme from late 2008 to December 2011.

''If their bank fails, depositors have always needed to understand that deposits are not guaranteed. What OBR does is facilitate a rapid and orderly resolution of a bank failure. It does not change the fact that depositors' and other creditor funds are at risk.''

Bank failures in New Zealand were rare, Mr Spencer said. The major banks in New Zealand were among the most highly rated in the world. Their resilience was seen through the global financial crisis. The Reserve Bank's OBR policy had little resemblance to proposals to resolve the banking crisis in Cyprus.

The alternative to OBR was for the Government to bail out banks with taxpayers' money - which came with potentially enormous fiscal costs - or to close the failing bank, which came with large economic costs.

Harbour Asset spokesman Christian Hawkesby said in an interview the conditions of the rescue package came as a surprise to markets and served as another reminder of the social and political challenges still facing Europe. A key condition of the package was that depositors in Cypriot banks must share some of the bail-out burden.

While it was described as a ''special tax'' on deposits, it was a debt-equity swap where the depositor exchanged a proportion of their deposit for a shareholding in their banks, he said. That would help the bank recapitalise its balance sheet.

''The depositor shares the burden of the bank failure but can benefit from an eventual recovery in the banking sector. This is a textbook response to a bank failure.

''The beauty of having this tool available in 'peace-time' is that it provides depositors with a strong incentive to ensure their bank is sound and this acts as a discipline on banks.''

When finance companies were in the market, people were looking at the returns, not the strength of the company.

The problem with the proposed deal with Cyprus was that it was unusual for policy makers to introduce new policies to deal with moral hazards in the middle of the bank collapse. Their priority was normally crisis management, minimising spillovers to the rest of the system.

The deal, as well as sending depositors in Cyprus on to the streets to withdraw funds, worried international markets that bail-out conditions for other countries could be renegotiated on those tough terms, Mr Hawkesby said.

Labour Party finance spokesman David Parker called on the Government to protect New Zealand bank depositors and ensure the first $30,000 of all deposits was guaranteed.

The Reserve Bank's proposed OBR meant all unsecured New Zealand depositors in a failed bank would lose money - through no fault of their own. Under current policy, some overseas lenders to banks had recently been protected through covered bonds which increased the risk to ''ordinary'' depositors, he said.

''This means that Kiwi households will be forced to help bail out banks while overseas lenders have their money protected,'' Mr Parker said.

Mr Spencer said deposit insurance was not a substitute for OBR or any other resolution tool.

''The New Zealand Government has looked hard at deposit insurance schemes and concluded that they blunt the incentives for investors and banks to properly manage risks and may even increase the chance of bank failure.''

Deposit insurance was widely used in Europe, including Cyprus, but had not prevented banking failures, he said.

Open Bank Resolution
• Helped depositors because it allowed for the bank to reopen the next working day - hence the ''open bank'' in title.
• Customers would be able to get full or partial access to their accounts and other banking services while an appropriate long-term solution to the bank's failure was identified.
• Some of the deposits could be frozen but the remainder would be available and would actually be government guaranteed.
• The Reserve Bank has been consulting banks to ensure their operating systems could implement an OBR if required.
• The deadline to have systems in place is June 30. Nothing changes for depositors on that date.