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."
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Note to editors:
The Reserve Bank has been consulting for a considerable time with banks to ensure their operating systems could implement an OBR if required. The deadline to have systems in place is 30 June 2013, in order to make OBR a feasible option in the Government's failure resolution toolkit. Nothing changes for depositors on that date.
What is the OBR?
Open bank resolution is one option for responding to a bank failure.
It actually helps depositors because it allows for the bank to reopen the next working day (hence the "open bank" in the title) and means that 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 is identified. Some of their deposits could be frozen, but the remainder would be available and would actually be government guaranteed.
On the other hand, if the bank went into liquidation, that process could be complex and time-consuming, during which time customers would not have any access to their funds or banking services.
But in any event, the first losses would be borne by the bank's shareholders.
The OBR is not intended to be the only option in the event that a bank gets into difficulty. There may, for example, be circumstances in which a private sector solution is available.
A Q&A on OBR, a background feature and an earlier Bulletin article entitled A Primer on Open Bank Resolution (PDF 745KB) are also available on the Reserve Bank's website.