RBNZ and Greens spar over OBR
The Reserve Bank of New Zealand has responded to critics of its Open Bank Resolution framework for dealing with bank collapses, saying it gives any government extra options in a time of crisis.The bank also argued against the adoption of a deposit insurance scheme, saying it increased moral hazard and made banks more rather than less susceptible to failure.The RBNZ's head of prudential supervision, Toby Fiennes, was responding to criticism from the opposition Green and Labour parties in recent weeks over the OBR and the absence of a deposit insurance scheme. Green co-leader Russel Norman had compared the OBR to the situation in Cyprus where term depositors were "bailed in" and had to take haircuts. Labour finance spokesman David Parker called for a deposit insurance scheme for smaller depositors, pointing to the scheme insuring deposits worth less than A$250,000 in Australia.Fiennes said in a speech to the Institute of Directors in Wellington that OBR was compatible with a deposit insurance scheme, but the Reserve Bank and the Government preferred not to have such a scheme.He said OBR, where a bank was closed for one day and then reopened after a portion of deposits were frozen, was flexible and dealt with payment and liquidity issues."It reduces moral hazard. Bank shareholders, management and investors know that in the case of bank failure the authorities have a viable option that would put their stakes at risk," Fiennes said."The mere presence of OBR in the toolkit will impact expectations of government support," he said.Fiennes then said OBR and deposit insurance were not alternatives."OBR is also applicable in a world where we have deposit insurance as in one where we don't," he said.However, Fiennes said such deposit insurance schemes were not always effective in stopping bank runs, pointing to the run on Northern Rock in Britain in 2007 despite the presence of such a scheme.He also said it raised 'boundary issues' about who was in and out."Should it be just for banks - as is currently the case for OBR - or should it also include finance companies, building societies and credit unions? How would we ensure that the least risky banks do not end up subsidising the more risky?"Fiennes said deposit insurance increased moral hazard and such a scheme may not be big enough to cope with a large crisis. He pointed to the US Savings and Loan failures of the 1980s."We believe it is better to keep the risk of failure very low, including through a strong regulatory framework, than to build structures that can distort incentives and behaviour."Norman pointed out after the speech that New Zealand and Israel were the only countries in the OECD without deposit insurance schemes."Open Bank Resolution allows our major banks to get off scot-free from having to pay insurance premiums to protect their customers' savings - premiums banks have to pay everywhere else," Norman said."Deposit insurance isn't designed to prevent bank failure; it's designed to protect small investors who don't have the ability to assess the risks