Bank Failures: Will New Zealand be Cyprussed?

Bank_Failures__Could_NZ_be_Cyprussed

Unless you’ve been under a rock (or without broadband and TV for 3 days like me!) you will have no doubt heard about the “bail in” of banks via bank depositors in the small island nation of Cyprus. The proposal (which has since been voted down) was to tax – a.k.a. steal funds – up to 13% from all depositors to gain sufficient capital to get the IMF and EU agree to a larger “rescue” of Cyprus.

And if you’ve read any local press you’ll have no doubt seen that the Green Party here made good use of the situation to get some attention on a similar process the Reserve Bank of New Zealand has planned for New Zealand in case of a bank failure locally.

About time too. We wrote about this back in 2011 and other than on interest.co.nz, where they have been keeping a close eye on the plans too, we have read very little elsewhere on what should be a subject of focus for all New Zealanders.

The RBNZ has done well to keep it under the radar for this long. As we wrote back in November last year:

“Of course the very fact that the Reserve Bank needs to come up with plans for bank failures should be enough of a warning sign. But we’d hazard a guess that not even 1% of the population  would even be aware of them. It’s probably the way the Reserve Bank and the banks would prefer it too.  Better not to have a spotlight cast on the planning for bank failures when the financial system relies upon confidence to stay afloat!”

Well, maybe more than 1% of NZ knows about it now we hope.

Bank_Failures__Could_NZ_be_CyprussedWe won’t rehash the full details of the RBNZ Open Bank Resolution (OBR) now but in simple terms if a bank were to fail in New Zealand the RBNZ would shut it down for a day and freeze a portion of funds on deposit, with a view to reopening the next day. Deposit holders would receive a “haircut” commensurate with the amount of funds needed to keep the bank functioning.

For the full low down here is our article from back in 2011 on just how the RBNZ (OBR) is meant to work and what our thoughts were on it.
Bank Failures – Could they happen in NZ? The Reserve Bank thinks so

Interestingly if you Google “Bank Failures NZ”, there are a pile of articles online now. Ours from 2011 is still on there but a week ago there wasn’t too much else showing up!

Amazing what a bit of politicking can do for an issue!

Here’s more of what we’ve written on the topic previously:

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

More on planning for Bank Failures in NZ

New Zealand: World Famous for All the Wrong Reasons

The RBNZ approach has even attracted some attention from overseas.

Russia Today (RT) features an article headlined “New Zealand considers Cyprus-style banking failure solution

“Brother John” whose Youtube videos we’ve featured in the past posted this video yesterday:

At 9.37min he discusses the RBNZ haircut plans.

The RBNZ’s Opinion on OBR Versus Cyprus

Yesterday the RBNZ issue the following press release.

NEWS RELEASE
Date 20 March 2013

Open Bank Resolution
New Zealand’s Open Bank Resolution policy would facilitate a rapid and orderly resolution of a collapsed bank, and is markedly different from proposals to resolve the banking crisis in Cyprus, Reserve Bank Deputy Governor Grant Spencer said today.

Mr Spencer said depositors’ money has never been guaranteed, apart from temporary periods, such as under the Deposit Guarantee Scheme from late 2008 to December 2011.

“If their bank fails, depositors have always needed to understand that deposits are 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.

“Fortunately, bank failures in New Zealand are rare. The major banks in New Zealand are amongst the most highly rated banks in the world. We saw their resilience through the Global Financial Crisis.”
Mr Spencer said the OBR policy bears little resemblance to proposals to resolve the banking crisis in Cyprus.

He said the alternative to OBR is for the government to bail out banks with taxpayers’ money – which comes with potentially enormous fiscal costs – or to close the failing bank, which comes with large economic costs.

“The Cyprus situation is very complex, it is a systemic collapse and not a case of just one institution failing. It must be seen in the context of the broader European sovereign debt and banking crisis. Further, the Cyprus banking system is dominated by a large foreign deposit base, from Russia in particular.”

Mr Spencer said deposit insurance is not a substitute for OBR or any other resolution tool.

“It is a separate issue altogether. The New Zealand Government has looked hard at deposit insurance schemes and concluded that they blunt the incentives for investors and banks to properly manage risks, and may even increase the chance of bank failure.

“Deposit insurance is widely used in Europe, including Cyprus, but hasn’t prevented banking failures, as we saw during the Global Financial Crisis.”

So the RBNZ says OBR bears “little resemblance” to Cyprus? We guess merely the fact that Cyprian depositors were faced with getting a haircut and under OBR that is what NZ deposit holders will get in the case of a bank failure is the only thing similar?!!

The RBNZ point out that the Cyprus situation is different in that it is a systemic problem not isolated to one bank. But who’s to say NZ could not have a systemic bank failure either? If one major bank went down who’s to say it would be isolated. They all appear to be using the same business model.

How the RBNZ OBR “Haircut” is worse than the Cyprus “bail in”

One difference we noted was that at least under the Cyprus plan deposit holders would get a share in equity in the bank (albeit probably a worthless share), in exchange for their “haircut”. Here in NZ it’s just a short back and sides only. No exchange for bank equity.

The Greens Take on OBR

The Greens angle is that a deposit insurance scheme is preferable so deposit holders don’t suffer for a banks poor decisions. Banks pay a premium to the Government as a form of insurance so in case of a failure the government backstops depositors up to a set limit. For example $100,000 in the US and we believe it’s $250,000 in Australia.

There are a couple of downsides with this. Firstly it will cost depositors more as banks have to pay the premium for coverage and of course we wouldn’t expect them to do this out of their miserly profits would we?!! But secondly, in Cyprus (as mentioned in the above RBNZ press release) a deposit guarantee was in place but that hasn’t stopped them from staring down the barrel of a hair cut to their bank deposits anyway!

Labour’s line on OBR

Labour thinks that the first $30,000 should be exempt from the OBR policy.

Of course, people could just spread their money around various banks to get higher than $30,000 coverage this way. But again there is no guarantee it wouldn’t be changed in the future anyway, just like in Cyprus.

Our Take on OBR

As usual we disagree with just about everyone here in New Zealand on the issue.

Our take? As usual all these “solutions” are merely band aids over the wound and don’t address the real problem.

Which is?

The structure of the banking system, not which tools are used to save it.

The real problem is the modern fractional reserve banking system. Where we have central planners from Government and Central Banks deciding what reserves it is “safe” for a bank to hold.  In the (very) “olden days” it was the depositors who determined what the bank kept on reserve not some intellectual. You chose what portion of your funds was held on reserve for your use. And what portion the bank could lend out and give you a return on. You didn’t have access to these funds until the time was up. This is where term deposits came from. But nowadays the money in your “on-call” account isn’t in the bank either as it too has been lent out!

See below link for more detail on how this works.

Why Fractional Reserve Banking is Not the Problem

So What to Do About OBR?

As we have said before we wonder if push came to shove would the govt let depositors take the hit as planned via OBR? Given how easily they have rolled over on the recent car park tax and now the iPad tax would they actually let hundreds of thousands of NZers lose a chunk of their bank savings?

But if the Government did a U-turn and carried out a taxpayer bailout we would all pay in the end anyway. If a major bank failure occurred, either the depositors lose money up front or taxpayers lose money via higher taxes or via the stealth tax that is inflation.

You know our thoughts aren’t going to be surprising as to what to do. Having your own “deposit insurance” is the way to go. Physical gold and silver in your possession is your insurance policy against bank failure as they will always be worth something.

The poor Cypriots may be about to learn that you can’t say the same thing about bank accounts. It’s a lot harder to seize physical gold and silver than it is to pass a law and require banks to hand over a portion of your funds.

Of course we do make money from selling gold and silver so why believe us? It’s in our interests to talk up the problems.  Better to listen to the politicians and central bankers. They always look out for us don’t they?

What do you think? What is the answer for New Zealand’s banking system? Will we face a potential bank failure? Show us you’re alive and leave a comment below!…

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20 thoughts on “Bank Failures: Will New Zealand be Cyprussed?

  1. Duane Loveday says:

    Hi there, Regarding the govt having the ability to raid our bank accounts, Would that include them having the ability to raid things like Bonus bonds, cash deposits in online share trading accounts (not the shares) etc. Thanks, Duane

  2. Brian Dodds says:

    The problem of failing banks, broke governments and broke countries is not going to go away until we look at the real cause…. the fractional reserve system. Most people don’t understand that private banks when they loan us money work very hard for 10 minutes to write in the loan amount into their computers and we spend the next 20 years working hard to pay back the money. They create that money they loan us, not from deposits, not from reserves but by the mere legal action of typing it into the computer. No person, no government, no country can ever pay back those loans so it’s just a sophisticated version of slavery to keep people paying and working for ever until they die.

    Solution
    Do what Iceland did. Sack the government, reinstate an honest one that declared that ‘The Fractional Reserve System’ is to be put in front of a Supreme Court judge to decide if it’s a fair system, and bingo most of the bankers left the country that week. Others were later arrested for fraud.

  3. Gerry says:

    The fear factor (having to look after and protect) has been the only reason to keep wealth in the bank for several years. Now that the counter party risk has been clearly shown for what it is, the real cost of keeping it there should be obvious to anyone with more than one braincell (I have two) and is just more “told you” to us who removed it all in 2008. My point? None of this, and worse to come, should be a surprise. The best way to end all this is obviously what they are inadvertently (?) indicating for people to do: Replace your digits with shiny metal and collapse their game now.
    Cheers! Gerry.

  4. Glenn Thomas says:

    Hi Duane, The RBNZ OBR policy only applies to a failed banking institution. So it would depend I guess on how the share trading account is classified and related to a failed bank (if at all). Odds are many brokerage accounts are held with a bank. You’d have to ask your broker who the account is with. It could make for some interesting conversations! Bonus Bonds I’m not 100% sure on how they are classified. See this article from last year where we commented on them. https://goldsurvivalguide.co.nz/are-nz-banks-in-the-worlds-top-50-safest-banks/But obviously that was just us speculating so you’d have to get a legal opinion on that. Of course history shows any rules/laws can be changed so there are no guarantees regardless.

  5. Glenn Thomas says:

    @Brian, Thanks Brian for your insightful comment. Yes indeed we do need the system to change. Slowly more people are being awakened to just how corrupt it is and how we have been duped and as you say enslaved. Keep spreading the word. P.S. Some interesting stuff on your website. We do find that a good many people who have had their eyes opened about the monetary system have also had their eyes opened regarding other aspects such as health. Thanks again for commenting. Glenn.

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  8. Greg Thai says:

    Great stuff this website – keep up the good work David D.

    Yeah, it should blow our minds how the mainstream media don’t even entertain the possibility that the system is inherently unstable. And neo-liberal economics keeps us indoctrinated in the “magic” of market fundamentalism and rogernomics.

    As aussie Dr Steve Keen says, it’s time to occupy the economics departments of universities. Some lessons need to be learned from the Austrian school of economics and from history:

    “There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.”
    -Ludwig von Mises

    Low (manipulated) gold prices. Real money. Take advantage…

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  13. Deck Hazen says:

    One of the great things about the coming collapse, if we survive it, and assuming the 1 percent are defeated and unable to implement their plans to enslave the human race, we will have an opportunity to start again. If enough of us have have learned enough from history our fresh start will enable us to formulate a banking system whereby money can be created by a local government and loaned out to the community interest free. Until they got swindled by rich bankers in the US, Americans enjoyed a system like this (on and off) until 1913. After the collapse we will have the benefit of history and what remains of our advanced technology.

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  16. Hala says:

    Well my need the insurance companies to start offering bank deposit insurance to individuals the same way they insure our health, income and home and content etc.. Gold and silver is good but it too has its share of haircut when the value drop.

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