Back in 2011 we were reading a Zero Hedge article with the rather long headline: “Futures Plunge As Fed Discloses New Stress Test: Fears US Banks Will Need To Raise Tens Of Billions In New Capital”.
This article outlined how the US Federal Reserve was intending to stress test 6 large US banks against a “hypothetical” market shock, including a worsening of the European situation.
Zero Hedge surmised that as a result the banks would likely have to raise tens of billions in capital. In short the big US banks are under capitalised. This 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?
A Herald article from 2011 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”. However even that article confirmed that 35% of our bank funding must come from offshore. Offshore funding has improved further in intervening years. However it still stands at 22% from offshore and one third 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 30 of GDP. Down 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 (like the one the Fed was “testing” for perhaps) can reverberate around the globe. The system was only hours from falling over in 2008.
So if there is a credit freeze, then the 22% funding we require from offshore suddenly looks like a big number. So 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 was not completely lost on the Reserve Bank of New Zealand (RBNZ).
RBNZ Prepares For Bank Failures With “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).“
Not surprisingly the banks were non committal on OBR. From the above Herald article…
“You really have to wait until the rest of the world also determines how it deals with bank failures,” Westpac NZ chief executive George Frazis said.”If you are not aligned you can get yourself unstuck. Our view is continue consulting until we see what comes out.”….ANZ New Zealand’s chief executive David Hisco, … said the ANZ was still “working through the issues” with the Reserve Bank.”We understand the logic behind it. We just need to make sure that New Zealand is not disadvantaged in relation to other countries, such as Australia,” he said.”Investment capital is mobile. If New Zealand becomes a place that is harder to invest in than other countries, then it may work against us.”
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%!
2019 Update: As we have written recently, the RBNZ is also consulting with banks about increasing the amount of capital that they must hold: Bank Capital Changes: What is the RBNZ Preparing For? Further evidence that the RBNZ is 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:
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. Since 12 October 2010 it has been voluntary. But none of the major NZ banks have elected to go into the scheme.
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:
- Because they think the government will step in if necessary. Just like they did in instituting the original guarantee in 2008.
- 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 no longer guaranteed.
Meanwhile… Having already put in place the means to implement the OBR… Thereby handling a bank failure by using a haircut to depositors savings… The Reserve Bank of New Zealand is now busy canvassing the banks about increasing the amount of capital they hold… Preparing the New Zealand the banking system to be “resilient to shocks that might occur only once every two hundred years”.
So maybe not leaving all your eggs in the one basket is a good idea? Of course as always we can be accused of “talking our book”. You could argue we would say that. Since we sell gold, the only asset on the planet that is 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 say once at the Gold Symposium “be very concerned about where you have your money.”
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.