Calls for deposit insurance in NZ

Opposition parties and some economists have called for the adoption of a deposit insurance scheme in New Zealand after a week of debate over the Reserve Bank's new system for dealing with a bank failure known as Open Bank Resolution.

The Green Party kicked off the debate by comparing OBR to Cyprus' plan to give regular term depositors a haircut to help pay for a restructure of its bloated and bankrupt banking system.

OBR allows the Reserve Bank to effectively shut down a failing bank one day and freeze a portion of term deposits, before reopening the next day. This opens up the possibility that unsecured creditors, including term depositors, could take a haircut.

New Zealand had a deposit insurance scheme from 2008 to 2011, but unlike Australia, has opted for an OBR system without an insurance scheme so as to reduce the government's risks of a bailout and remove the 'moral hazard' of a government guarantee for banks.

Green co-leader Russel Norman said smaller term depositors were in no position to judge the financial soundness of their banks.

"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," Norman said.

Labour Finance Spokesman David Parker also called for a deposit insurance scheme with a guarantee for those with accounts of less than NZ$30,000, which is well below the A$250,000 threshold set in the Australian scheme.

The Reserve Bank took the unusual step of responding to the Opposition's comments, saying the OBR was "markedly different" from the proposals in Cyprus.  The bank said depositors had always needed to understand that deposits were 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," said RBNZ Deputy Governor Grant Spencer.

Economists also weighed into the debate. Auckland Business School Professor David Mayes called for a deposit insurance scheme, as did Infometrics Economist Matt Nolan.

The Reserve Bank is in a final round of consultation on the policy with submissions due by April 15. See more here from the RBNZ. Banks are required to have organised their computer systems to handle OBR by the end of June this year.