OBR enables authorities to re-open the failed bank the next day under statutory management and avoid the adverse consequences wherein the bank’s critical functions are abruptly disrupted. The basic idea is to provide customers access to their accounts as swiftly as possible so they can carry on making and receiving payments.
Fortunately, bank failures are very rare in New Zealand, but they can happen. It is important that the RBNZ has tools in place for responding to them.
OBR allows the bank to be kept open for business, while placing the cost of its failure firstly on its shareholders, and then if necessary, on its creditors (rather than having some or all of this cost borne by the taxpayer).
About Open Bank Resolution
When OBR is applied, it allows customers to gain full or partial access to their accounts and other bank services while an appropriate long-term solution to the bank’s failure is worked out.
Under OBR, a portion of creditors’ claims may be frozen to absorb losses. Note that shareholders would be the first to lose their investment in the bank when failure occurs. Only when the amount of shareholders’ funds are insufficient to absorb losses will some portion of creditor funds be frozen. OBR does not change the fact that creditors to a failed entity may lose money if the business that owes them cannot meet all its obligations.
While OBR is not designed to determine how the bank failure should be resolved in the long term, it creates time for a full analysis of the appropriate course of action to be determined.
Why do we need OBR?
In the absence of an 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. While it is occurring, bank customers would not have access to their money or banking services. This has potentially significant implications for the wider economy and can create pressure on the government to provide support.
OBR is not intended to be the only option in the event that a registered bank gets into difficulty. Instead, it is designed as an option that is available to the government if required.
Which institutions are covered by OBR?
Our OBR policy covers all locally incorporated banks with over $1 billion of retail deposits. This means these major banks must have in place the necessary systems to allow 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 OBR scheme voluntarily.
How OBR works
1. The Minister of Finance decides whether OBR should be applied
After we have completed an initial assessment of the financial condition of a troubled bank, we may recommend to the Minister of Finance that the bank be placed under statutory management as part of the process of implementing OBR.
2. A statutory manager is empowered to carry on the bank's business
Once the Minister of Finance has placed a bank under statutory management, from that point on a statutory manager is empowered under the Banking (Prudential Supervision) Act 1989 to carry on the business of the registered bank. In doing so, the statutory manager is required to comply with any written directions we provide them.
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.
3. Account balances are frozen
The first stage of the OBR 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. We will then do a high-level assessment of the bank’s losses and freeze a conservative portion of account balances.
The frozen funds are 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.
The size of the portion to be frozen is issued to the statutory manager as a direction from us, after consultation with the Minister of Finance.
4. Bank re-opens for ordinary transaction business
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.
One of the main features of the OBR policy is that creditors can access a significant portion of their funds immediately after the bank fails and is placed in statutory management. This means depositors and small businesses have ongoing access to banking facilities, avoiding the adverse consequences when the bank’s critical functions are abruptly disrupted. The basic idea is to provide customers access to their accounts as swiftly as possible so they can carry on making and receiving payments.
Another important element of the OBR policy is that no additional funds will be frozen once the bank re-opens. All funds that are not frozen will be subject to a government guarantee to ensure all participants in the financial system can engage with the re-opened bank with confidence that any transactions will be honoured.
5. Full assessment and identifying long-term solution
It is likely we will take several days or even months to complete a full assessment of the bank's condition and implement the appropriate long-term solution to the failure. We may periodically release additional frozen funds to depositors during this time, to the extent that it becomes clear they will not be needed to cover the losses that have been incurred.
In practice, 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.
Development of OBR policy
Note: all of the consultation documents relating to OBR policy below are available in our online document library. Search on OBR, consultation and the year.
We released the OBR Pre-positioning Requirements Policy (BS17) and the revised Statement of Principles (BS1).
We published a response to the submissions on our 2011 OBR consultation along with a regulatory impact assessment and a summary assessment of OBR against the recommendations of the Financial Stability Board.
We consulted on the pre-positioning requirements that locally incorporated banks with retail deposits over $1 billion would be expected to comply with to implement the OBR policy.
The OBR policy would allow a distressed bank to be kept open for business, providing continuity of core banking services to retail customers and businesses, while placing the cost of a bank failure primarily on the bank’s shareholders and creditors rather than the taxpayer.