National planning Cyprus-style solution for New Zealand

[BadJuju]

http://www.scoop.co.nz/stories/PA130...ew-zealand.htm

The National Government are pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts, the Green Party said today.
Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.
“Bill English is proposing a Cyprus-style solution for managing bank failure here in New Zealand – a solution that will see small depositors lose some of their savings to fund big bank bailouts,” said Green Party Co-leader Dr Russel Norman.
“The Reserve Bank is in the final stages of implementing a system of managing bank failure called Open Bank Resolution. The scheme will put all bank depositors on the hook for bailing out their bank.



“Depositors will overnight have their savings shaved by the amount needed to keep the bank afloat.
“While the details are still to be finalised, nearly all depositors will see their savings reduced by the same proportions.
“Bill English is wrong to assume everyday people are able to judge the soundness of their bank. Not even sophisticated investors like Merrill Lynch saw the global financial crisis coming.
“If he insists on pushing through this unfair scheme, small depositors can be protected ahead of time with a notified savings threshold below which their savings will be safe from any interference.”
Dr Norman questioned the Government’s insistence on pursuing Open Bank Resolution when virtually no other OECD country uses it.
“Open Bank Resolution is unprecedented in the world. Most OECD countries run deposit insurance schemes which protect people’s deposits up to a maximum ranging from $100,000 – $250,000,” Dr Norman said.
“OBR is not in line with Australia, which protects bank deposits up to $250,000.
“A deposit insurance scheme is a much simpler, well-tested alternative to Open Bank Resolution. It rewards safe banks with lower premiums and limits the cost to taxpayers of a bank failure.
“Deposit insurance will, however, require the Reserve Bank to oversee and regulate our banks more closely – a measure which is ultimately the best protection against bank failure.”

[thriftyandboringinohio]

Re: National planning Cyprus-style solution for New Zealand

But, my dear sir, any alternative would be unthinkable!

Do you seriously propose that the bank should close and the shareholders lose their invested capital?
Or that bond holders of any sort - senior, junior, or subordinated -should lose their money?

Why, sir, that would violate Sanctity of Contract!

Sadly, one must liquidate the unwashed masses first, despite any contract to which they might foolishly believe they are a party.
Most unfortunate, but there you have it.

[ProdigyofZen]

Re: National planning Cyprus-style solution for New Zealand

http://www.scoop.co.nz/stories/PA130...ew-zealand.htm

The National Government are pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts, the Green Party said today.
Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.
“Bill English is proposing a Cyprus-style solution for managing bank failure here in New Zealand – a solution that will see small depositors lose some of their savings to fund big bank bailouts,” said Green Party Co-leader Dr Russel Norman.
“The Reserve Bank is in the final stages of implementing a system of managing bank failure called Open Bank Resolution. The scheme will put all bank depositors on the hook for bailing out their bank.



“Depositors will overnight have their savings shaved by the amount needed to keep the bank afloat.
“While the details are still to be finalised, nearly all depositors will see their savings reduced by the same proportions.
“Bill English is wrong to assume everyday people are able to judge the soundness of their bank. Not even sophisticated investors like Merrill Lynch saw the global financial crisis coming.
“If he insists on pushing through this unfair scheme, small depositors can be protected ahead of time with a notified savings threshold below which their savings will be safe from any interference.”
Dr Norman questioned the Government’s insistence on pursuing Open Bank Resolution when virtually no other OECD country uses it.
“Open Bank Resolution is unprecedented in the world. Most OECD countries run deposit insurance schemes which protect people’s deposits up to a maximum ranging from $100,000 – $250,000,” Dr Norman said.
“OBR is not in line with Australia, which protects bank deposits up to $250,000.
“A deposit insurance scheme is a much simpler, well-tested alternative to Open Bank Resolution. It rewards safe banks with lower premiums and limits the cost to taxpayers of a bank failure.
“Deposit insurance will, however, require the Reserve Bank to oversee and regulate our banks more closely – a measure which is ultimately the best protection against bank failure.”

Wow thats incredible. Savers are not supposed to take losses.......

Anything to help out the international bankers.

[quigleydoor]

Re: National planning Cyprus-style solution for New Zealand

This doesn't seem to surprising. NZ has been a libertarian petri dish for a long time. The comparison with Cyprus is goofy.

I'm glad USA has FDIC. Seems like the euro zone and NZ never got around to implementing it.

Although FDIC makes the cash deposit game more of a dilemma. Would you rather earn negative yield on insured deposits, or positive yield on risky investments (short term corporate bonds, longer UST bonds)? I think FDIC keeps many Americans including me from hoarding hard assets.

[charliebrown]

Re: National planning Cyprus-style solution for New Zealand

I don't have too much of a problem with this, in my little eaglitarian fantasy land if the following rules were applied.

1) equity holders are wiped out first.
2) bond holders next.
3) Any other assets get sold off such as excess buildings, equipment etc.
4) Then and only then do depositors get dinged.
5) Bank is taken over immediately so depositors can get most of there money out while 1-3 get settled.
6) bank is opened to forensic examination to check for improprieties/wrecklessness and officers are imprisioned and or fined.
the fines will be greater than the officers "stole" and not be dischargeble via bankruptcy etc.

I think the FDIC has 25B in assets, I think there are roughly 10T in bank deposits. Let's see that's .025%. If there was a real bank panic here
the insurance would not be enough. I think the FDIC can borrow from the treasury. But even 1% of 10T is 100B. How deep are the treasuries pockets?

I think the real value of assets in the entire system is not enough to support the nominal amount of debt that they back. Some day the pin-prick is going
to come and end this confidence game.

[lakedaemonian]

Re: National planning Cyprus-style solution for New Zealand

Oh dear.......

And I thought I was already divested enough outside of NZ.

I may need to look at Aussie and Singapore for storing more cash.

[don]

Re: National planning Cyprus-style solution for New Zealand

Maintaining confidence in the financial system

The Government is considering options for maintaining confidence in the financial system when the Retail Deposit Guarantee Scheme expires at the end of this year, Finance Minister Bill English says.

“During the global financial crisis, many countries sought to reassure retail depositors that their savings in financial institutions were safe,” he says. “In New Zealand, we did that through the Retail Deposit Guarantee Scheme.

“As markets stabilised, those measures have been unwound. New Zealand’s deposit guarantee was extended last year under tighter terms and conditions, covering only a handful of institutions.

”It now protects only $2 billion of the $210 billion New Zealanders have on deposit and will not be extended beyond 31 December this year.

“Looking ahead, the Government is considering a number of permanent options to manage any future financial market difficulties.

“The Government does not favour compulsory deposit insurance. This is difficult to price and blunts incentives for both financial institutions and depositors to monitor and manage risks properly.

“One option for minimising disruption of the financial system and maintaining investor confidence is referred to as Open Bank Resolution. This aims to provide continuity of core banking services, allow the banking system to get back to normal and limit the costs to taxpayers.

“The Reserve Bank will discuss this option with banks over coming months.

“Open Bank Resolution permits banks to continue functioning while full resolution is worked through.

“This option has been available to the Reserve Bank for a number of years. This next stage is about engaging with the banks to ensure it could be implemented effectively if required,” Mr English says.

The Reserve Bank will shortly release details of the Open Bank Resolution consultation process.

http://www.beehive.govt.nz/release/m...nancial-system

What is an OBR?

The Open Bank Resolution policy is a tool for responding to a bank failure. It allows the bank to be open for full-scale or limited business on the next business day after being placed under statutory management (as a result of, for example, an insolvency event). This means that customers will be able to gain full or partial access to their accounts and other bank services, whilst an appropriate long-term solution to the bank’s failure is identified.

Why is the OBR policy required?

In the absence of the OBR policy, the options for responding to a bank failure are limited to liquidation, government bail-out or take-over by a competitor. If a private sector solution is not available the government must therefore choose between allowing the bank to enter the liquidation process, or providing public support. The liquidation process can be complex and time-consuming, during which time customers of the bank would not have any access to their funds or banking services. This has potentially significant implications for the wider economy, and can create pressure on the government to provide support. By providing a mechanism through which liquidity can be provided to customers whilst the resolution of the failed bank is being worked out, the OBR mitigates some of the risks that banking failures pose for the wider economy.
In reducing the pressure for government to provide a bail-out to a failed bank, the OBR might also help to strengthen incentives on bank management to operate in a more prudent manner, and on creditors to provide greater external scrutiny, helping to mitigate the moral hazard concerns that arise when an assumption of implicit government support prevails.
Furthermore, one of the key lessons emerging from the financial crisis is the potentially enormous fiscal costs associated with supporting troubled banks. Some governments that chose to guarantee their banking system’s liabilities are now faced with a sizeable public debt burden. By increasing the likelihood of bank shareholders and creditors shouldering the losses of a failing bank, the OBR can help to mitigate the risk of New Zealand being placed in such a position in the future.

Why should depositors bail-out banks?

The OBR policy is designed to ensure that first losses are borne by the bank’s existing shareholders. In addition, a portion of depositors’ and other unsecured creditors’ funds will be frozen to bear any remaining losses. To the extent that these funds are not required to cover losses as more detailed assessment of the position of the bank is completed, these funds will be released to depositors. At a high level, this outcome replicates the outcome that would apply in the event that a failed bank was liquidated. The primary advantage of the OBR scheme, however, is that depositors would have access to a large proportion of their balances throughout the process. This contrasts with what would happen under a normal liquidation, where depositors might not have access to any of their funds for a significant period.

Why aren’t deposits guaranteed?

During the recent global financial crisis the government took the decision to put in place a temporary guarantee on retail deposits. On 11 March 2011 the Minister of Finance announced that further guarantees would not be provided following the expiry of the existing scheme. Furthermore, the Minister ruled out the possibility of introducing a compulsory deposit insurance scheme. In coming to this conclusion the Minister noted that deposit insurance is difficult to price and blunts incentives for both financial institutions and depositors to monitor and manage risks properly. The full statement from the Minister can be accessed at http://www.beehive.govt.nz/release/m...nancial-system

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.

Is the OBR the only option in the event of a bank failure?

The OBR is not intended to be the only option in the event that a registered bank gets into difficulty, rather it is designed to be an option that is available to the government if required. There may, for example, be circumstances in which a private sector solution is available.

Who is responsible for deciding that the OBR should be used?

The Reserve Bank will undertake an initial assessment of the health of a troubled bank. Following this initial assessment it may make a recommendation to the Minister of Finance that the bank be placed under statutory management. The Minister of Finance is responsible for taking the decision to place the bank under statutory management, and whether to apply the OBR. As part of any recommendation for statutory management, the Reserve Bank will be available to provide advice to the Minister on the appropriateness of activating the OBR policy.

What happens to depositors funds during the OBR process?

The first stage of the process is to freeze all access channels to the bank and establish the balance of each account at the point at which the bank was placed under statutory management. A high-level assessment of the bank’s losses will then be undertaken, and a conservative portion of account balances frozen.
The frozen funds are then set aside to cover any losses beyond what the bank’s capital position could absorb. The frozen funds are not cancelled or written off, and the depositors and creditors continue to hold a legal claim to these funds. To the extent that all or some of these funds remain available after all losses have been covered, they will be returned to depositors and creditors.

Who determines the size of the frozen portion?

Once the bank is placed under statutory management and all access channels have been temporarily closed, the Reserve Bank will make an initial assessment of the scale of losses incurred by the bank. It is not necessary for this assessment to be precise. What is initially required is a high-level calculation that is expected to ensure that a sufficient amount is frozen so that final losses do not exceed the frozen funds set aside.
It is expected that the size of the portion to be frozen will be issued to the statutory manager as a direction from the Reserve Bank, following consultation with the Minister of Finance.

How soon will depositors be able to access their funds?

The bank will re-open for ordinary transaction business on the next business day after it is placed under statutory management. At this point, depositors will have full access to the unfrozen portion of their accounts. These funds will be subject to a government guarantee.
The full assessment of the condition of the bank and the identification of the appropriate long-term solution to the failure are likely to take a number of days or even months to work through. Additional frozen funds may be periodically released to depositors during this time, to the extent that it becomes clear that they will not be required to cover the losses that have been incurred.

Could more money from accounts be frozen later in this process?

No. A key element of the policy is that no additional funds will be frozen once the bank re-opens. The initial amount frozen is expected to be sufficiently conservative to ensure that the losses of the bank do not exceed the level of funds available in the frozen portion of account balances. All funds that are not frozen will be subject to a government guarantee to ensure that all participants in the financial system are able to engage with the re-opened bank with confidence that any transactions will be honoured.

Who runs the bank whilst the OBR process is carried out?

The first stage of the OBR process will see the failing bank placed under statutory management. From that point on the statutory manager is empowered under the Reserve Bank of New Zealand Act 1989 to carry on the business of the registered bank. In doing so, the statutory manager is required to comply with any directions given in writing by the Reserve Bank. Once the bank is placed under statutory management, it is unlawful for any of the bank’s previous management to conduct the business of the registered bank except with the permission of the statutory manager.

What happens to the bank after the OBR has been carried out?

One of the key features of the OBR policy is that creditors are able to access the majority of their funds immediately after the bank fails and is placed in statutory management. This means that depositors and small businesses have on-going access to banking facilities, mitigating the risk that urgent liquidity concerns dictate how losses are allocated between shareholders, creditors and perhaps government.
The OBR is therefore not designed to determine how the bank failure should be resolved in the long term, but to create time for a full analysis of the appropriate course of action to be determined. In practice, the OBR is consistent with a range of long-term solutions, including sale to new owners, restructuring to become a stand-alone bank, repurchase by a parent group, government recapitalisation or liquidation.

How likely is it that the OBR will be used?

Banking failures are infrequent, reflecting the low risk nature of the business that New Zealand banks undertake relative to many other financial institutions. This is reflected in the high credit ratings held by the major banks in New Zealand. The Reserve Bank does not expect the risk profile of banks to change significantly in the future, and as such would not anticipate an increase in the likelihood of a registered bank failing. However, banking failures can and do happen. One of the key objectives of the OBR scheme is to reduce the costs of allowing a bank to fail, and minimise access to taxpayer funds or bailouts.

http://www.rbnz.govt.nz/finstab/banking/4368385.html

[ProdigyofZen]

Re: National planning Cyprus-style solution for New Zealand

I think the real value of assets in the entire system is not enough to support the nominal amount of debt that they back. Some day the pin-prick is going
to come and end this confidence game.

Adam Smith said that no government in history has ever paid off all their debts. But then again sovereign accounting is different from financial accounting.

[astonas]

Re: National planning Cyprus-style solution for New Zealand

Adam Smith said that no government in history has ever paid off all their debts. But then again sovereign accounting is different from financial accounting.

Adam Smith said that before it actually happened. The U.S. (under Andrew Jackson) paid off its national debt in 1835. It was short-lived, in part because there was no good way to deal with a surplus. The extra money was divided between the states, feeding a land bubble, and a subsequent 6 year depression. The national debt was restarted to end the depression.

[ProdigyofZen]

Re: National planning Cyprus-style solution for New Zealand

Adam Smith said that before it actually happened. The U.S. (under Andrew Jackson) paid off its national debt in 1835. It was short-lived, in part because there was no good way to deal with a surplus. The extra money was divided between the states, feeding a land bubble, and a subsequent 6 year depression. The national debt was restarted to end the depression.

And there in lies the key. In every instance that the national debt was paid off a depression began.

I was hoping someone would bring an instance up of paying off the national debt.

[astonas]

Re: National planning Cyprus-style solution for New Zealand

And there in lies the key. In every instance that the national debt was paid off a depression began.

I was hoping someone would bring an instance up of paying off the national debt.

Well, causality is a little hard to assign on this one. The bubble had already begun before the debt was paid off, and so it would likely have popped at some point either way. And it could of course be argued that there were better investments that could have been made rather than giving the surplus money back to the states. Jackson famously vetoed a national highway program, for instance, in his ruthless drive to cut spending. National highways wound up not happening for some time as a result, and could have boosted growth much earlier.

As I see it, it's not so much the size (or even existence) of the debt, but whether the money is being spent on things that foster growth, or just being handed out through a political process. The latter is unlikely to either increase the velocity of money much, or foster meaningful growth. But there are plenty of government investments that can, over time, more than pay for themselves. It's just that the political process ensures that those only make up a tiny sliver of the actual budget.

[ProdigyofZen]

Re: National planning Cyprus-style solution for New Zealand

Well, causality is a little hard to assign on this one. The bubble had already begun before the debt was paid off, and so it would likely have popped at some point either way. And it could of course be argued that there were better investments that could have been made rather than giving the surplus money back to the states. Jackson famously vetoed a national highway program, for instance, in his ruthless drive to cut spending. National highways wound up not happening for some time as a result, and could have boosted growth much earlier.

As I see it, it's not so much the size (or even existence) of the debt, but whether the money is being spent on things that foster growth, or just being handed out through a political process. The latter is unlikely to either increase the velocity of money much, or foster meaningful growth. But there are plenty of government investments that can, over time, more than pay for themselves. It's just that the political process ensures that those only make up a tiny sliver of the actual budget.

Well, yes, perhaps in that instance the debt deleveraging was already in tow but you still have 5 other depressions/recessions that occurred after the government stopped running a deficit.

Correct if the government had spent 1 trillion into infrastructure spending or TECI as EJ writes then we would be on much better footing instead of 1 trillion to bailout politically connected banks. This is always the case.

The government always has the money especially when they make the right choices and invest in the economy. It is unfortunate that most countries still havent figured this out.

The individuals running the show get into power to steal money from the citizens and government instead of building the nation up.
There are tons of Zimbabwe's but very few Singapore's.

Singapore is a great example of a small island nation using public/private enterprise to increase the overall standard of living of the people (aside from the virtual migrant workers of course). http://www.heritage.org/index/country/singapore

An actual mixed economy. Now if they can just get rid of rent seeking interests....... and economic rents like Adam Smith suggested.

[c1ue]

Re: National planning Cyprus-style solution for New Zealand

Singapore is a great example of a small island nation using public/private enterprise to increase the overall standard of living of the people (aside from the virtual migrant workers of course). http://www.heritage.org/index/country/singapore

An actual mixed economy. Now if they can just get rid of rent seeking interests....... and economic rents like Adam Smith suggested.

heh seriously - you call Singapore a mixed economy?

A literal city-nation built on holding offshore money?

If that's the case, the Manhattan is also a 'mixed economy'.

[ProdigyofZen]

Re: National planning Cyprus-style solution for New Zealand

heh seriously - you call Singapore a mixed economy?

A literal city-nation built on holding offshore money?

If that's the case, the Manhattan is also a 'mixed economy'.

Haha clue, why not? I don't see many other nations that can be called mixed economies, do you?

Singapore and perhaps a few other nations might be the closest thing we have to a mixed economy no?

[Sharky]

Re: National planning Cyprus-style solution for New Zealand

The article in the OP is misleading. Here's a recent press release from the Reserve Bank of NZ:

NEWS RELEASE
Date 20 March 2013

Open Bank Resolution
New Zealand’s Open Bank Resolution policy would facilitate a rapid and orderly resolution of a collapsed bank, and is markedly different from proposals to resolve the banking crisis in Cyprus, Reserve Bank Deputy Governor Grant Spencer said today.

Mr Spencer said depositors’ money has never been guaranteed, apart from temporary periods, 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.

“Fortunately, bank failures in New Zealand are rare. The major banks in New Zealand are amongst the most highly rated banks in the world. We saw their resilience through the Global Financial Crisis.”

Mr Spencer said the OBR policy bears little resemblance to proposals to resolve the banking crisis in Cyprus.

He said the alternative to OBR is for the government to bail out banks with taxpayers’ money – which comes with potentially enormous fiscal costs – or to close the failing bank, which comes with large economic costs.

“The Cyprus situation is very complex, it is a systemic collapse and not a case of just one institution failing. It must be seen in the context of the broader European sovereign debt and banking crisis. Further, the Cyprus banking system is dominated by a large foreign deposit base, from Russia in particular.”

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

“It is a separate issue altogether. 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 is widely used in Europe, including Cyprus, but hasn’t prevented banking failures, as we saw during the Global Financial Crisis.”