Bank Failure – Could it Happen in NZ? What does the SVB Bank Failure Mean for NZ?

Big news over the weekend is the 2nd biggest bank failure in US history. That of Silicon Valley Bank (SVB), which while a large bank is only the 18 largest in the USA and more of a speciality bank for tech companies and start ups.

Estimated reading time: 8 minutes

What led to this bank failure? Here is the 10 second reasoning:

SVB in a nutshell:

They lost more than a billion dollars every time interest rates went up 25 basis points
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interest rates went up 450 bps last year
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they had no interest rate hedges
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deposit outflows as VC funding slowed down
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attempt to raise equity triggered a bank run pic.twitter.com/ieC8UQzITe

— Jack Farley (@JackFarley96) March 11, 2023

The interconnected nature of the modern financial system and the spiderweb of derivatives means there was a very real risk of contagion. As it happens a very rushed solution has been enacted today to avert the risk of contagion (for now anyway). With the US Federal Reserve and US Treasury choosing to backstop all deposits at not just SVB but also another failed bank, Signature Bank. So not just those depositors who are protected by the US deposit guarantee of $250,000 but all depositors.

They say this is not a tax payer bailout as it is the Federal Reserve and the US Exchange Stabilisation Fund that is funding it. However it will be US tax payers who pay for it in the long run via the ongoing dilution and devaluation of the US currency.

Of note is the fact that it was rising interest rates that caused the problems for SVB. Just last week the US central bank announced it intends to keep raising interest rates. So it could be a question when, not if, another bank gets into trouble. Will they repeat this process?

Now, this trouble in the USA got us thinking (not for the first time), could a bank failure occur here in New Zealand?

Could a Bank Failure Occur Here in New Zealand?

According to a BusinessDesk headline today, “NZ depositors have no reason to fear bank losses”. This article said, “Depositors in New Zealand banks shouldn’t be concerned about the safety of their money in the event of a bank collapse.”

This echoes a Herald article from 2011 the last time there were issues with bank failures in Greece. That article painted a fairly rosy picture of the NZ banking environment, as you can tell from the headline “NZ banks well placed to cope with Greek crisis”. That article confirmed that 35% of our bank funding came from offshore in 2011.  Offshore funding has improved further in intervening years. However it still stands at 20% from offshore and just over half of this has maturities of less than 1 year (i.e. short term).

This still means we are reliant upon “the kindness of strangers” so to speak for capital.  Our Government borrowing may not be as bad as some other nations. New Zealand public – i.e. Government – debt is around 57% of GDP as of 2022. Up sharply from 33% of GDP in 2010. (Source).

However add in private borrowing and we’ve seen numbers that blow out to in the vicinity of 150% of GDP.

The point is, we as a nation, owe a lot of money and we need to keep borrowing to keep the balls in the air.  Not too dissimilar to most other nations.

But the key factor to consider we believe, is the interconnectedness of the global financial system. 2008 taught us that a decent sized market shock can reverberate around the globe. The system was only hours from falling over in 2008.  

So if there is a credit freeze, then the 20% funding we require from offshore suddenly looks like a big number. The very nature of the modern fractional reserve banking system means that it doesn’t take much for a bank run to occur. As banks are leveraged at least 10 to 1 on deposits.

Well, it seems this fact is not completely lost on the Reserve Bank of New Zealand (RBNZ).

Bank Failures in New Zealand Would be Managed via RBNZ “Open Bank Resolution”

A 2011 article in the Herald outlined the RBNZ Open Bank Resolution Policy (OBR):“NZ banks wary of new Reserve Bank rescue rules”.

OBR basically means if your bank were to fail it could be shut down by the RBNZ and then immediately reopened. But with deposit holders taking a “haircut” on a percentage of their savings.

Why the OBR?

The theory being that “it beats the alternative, which potentially involves depositors losing access to their entire savings, not just a proportion of them, if a bank’s doors are shut for good. They say the key thing about OBR is that Joe Public would gain almost immediate access to at least a part of his savings if the bank failed. It would also allow the bank to keep its doors open, and lessen the chances of the taxpayer having to step in to prop it up.”

Primer on the OBR

If you feel the urge you can read a 6 page “Primer on Open Bank Resolution” at the RBNZ website.  

In this document the writers Kevin Hoskin and Ian Woolford concluded:

“While rare, bank failures can happen, and can be enormously costly and disruptive. The global financial crisis has renewed the focus on finding resolution mechanisms to deal with failed banks that do not involve heavy recourse to the taxpayer (i.e. taxpayer-funded bail-outs).“

So you could wake up one day and find there’s been a “Bank Holiday”. Not the kind where you get a day off work and a long weekend! But one where your savings have been cut by say 20%!

In 2019 the RBNZ began consulting with banks about increasing the amount of capital that they must hold: Bank Capital Changes: What is the RBNZ Preparing For? The implementation of these increases were eventually delayed during the Covid-19 response. So increases will be phased in over a 7 year period beginning mid 2022. But it is still further evidence that the RBNZ has been concerned about the safety of the New Zealand banking system.

See these articles for more on the OBR. Now official RBNZ policy for handling a bank failure in New Zealand:

What’s Wrong With the RBNZ’s Bank Failure Plans?

Bank Failures: Will New Zealand be Cyprussed?

Has New Zealand Been a “Test Case” for Depositor Haircut Scheme?

Aren’t NZ Bank Deposits Government Guaranteed?

But aren’t my bank deposits now government guaranteed you may be thinking?

You might be surprised to learn that this was only the case until 2010.  

And prior to October 2008 we actually had no bank guarantee scheme. But as Australia was about to announce a government guarantee of their banking sector we were pretty much forced to follow suit.

However, the guarantee was only for a set period.  From 12 October 2010 it was voluntary. But none of the major NZ banks elected to go into the scheme. The extended scheme was then wound up on 31 December 2011.

Hat tip to our friend Louis Boulanger who first brought our attention to the expiry of the bank guarantee. See this article published in the Gold Standard Institute Journal in 2011. Louis commented that the banks might have chosen not to participate in the scheme for a couple of reasons:

1. Because they think the government will step in if necessary. Just like they did in instituting the original guarantee in 2008.
2. Because by electing to do so would be to admit they need it.

Can’t argue with either of those theories!

Don’t Leave All Your Eggs in One Basket

Regardless of the reason, the fact remains that your bank deposits are not guaranteed.  

However there is currently a bill before select committee to look at implementing a deposit insurance or guarantee scheme up to a maximum of $100,000 per depositor.

But even when passed this still isn’t expected to be in place until 2024.

So until then…

Any bank failure in New Zealand is likely to be managed by via the OBR…

Thereby handling a bank failure by using a haircut to depositors savings…

So maybe not leaving all your eggs in the one basket is a good idea?  Of course we can be accused of “talking our book”.  You could argue we would say that. Since we sell gold and silver, the only financial assets on the planet that are not at the same time someone else’s liability.  

But with all the above going on, having all your savings purely in paper money in a bank seems like too high a risk to us. Perhaps a good question to ask yourself is how safe is my money?  Or as we heard Eric Sprott once say at the Gold Symposium “be very concerned about where you have your money.”

Get some peace of mind. Buy some gold or silver.

Editors Note: This article was originally published 29 November 2011. Updated 7 May 2019 to include the latest statistics and links to more recent articles supporting these. Last updated 13 March 2023.