Find out how Kiwisaver and bank bail ins work. See if your Kiwisaver funds would be affected if a New Zealand bank fails and customer accounts undergo a bail-in or “hair-cut”…
An insightful reader writes in:
I have a question for goldsurvivalguide.co.co.nz regarding bail in.
If banks trigger bail in, I understand that bank investors and depositors take a haircut. In such a case does that also mean that bank administered kiwisaver funds will also be affected (particularly if the “cash fund” option is used)? If so, would other types of kiwisaver funds (e.g those run by insurance firms for investment funds) be any safer?
Also, banks usually act as the custodian for foreign stocks on behalf of clients. Would these be at risk of being taken as part of a bail in?
This is a great question on the RBNZ’s Open Bank Resolution (OBR) policy. First a reminder on the OBR.
Kiwisaver and Bank Bail Ins: What is the Open Bank Resolution (OBR)?
Most New Zealanders are probably unaware that if a bank were to fail, there is no government guarantee of any deposits held in New Zealand banks.
To summarise the OBR quickly, if a bank fails the Reserve Bank of New Zealand would step in as the statutory manager.
All customer deposits would be frozen, with the aim of the bank then reopening the next business day.
A percentage of deposits may be made available to the banks customers. This unfrozen portion would be guaranteed by the government to avoid any runs on the bank.
The remaining frozen deposits would be assessed. A determination would be made as to whether there were sufficient assets to meet the banks debts. Any remaining funds would then be made available to depositors.
See the RBNZ flow chart below for a visual summary.
The end result is likely to be that depositors take a “hair cut” on a portion of their money held with the failing bank. That is where the term “bail-in” comes from. Instead of the government bailing out a failed bank, the bank’s shareholders and depositors perform a “bail-in”. Depositors funds are used to pay a banks debts.
So How Are Kiwisaver Funds Affected by the OBR and a Bank Bail In?
Let’s look at the RBNZ “Open Bank Resolution (OBR) Pre-positioning Requirements Policy”. This will inform our thinking on Kiwisaver and bank bail ins.
What is Pre-positioning?
‘Pre-positioning’ is a mechanism for providing bank customers continued access to liquidity and banking service in a bank failure event.
Pre-positioning means “having the IT, payments, resource and process functionality in place ahead of a crisis, such that should a bank enter into statutory management, access channels can be closed, a portion of customer funds can be frozen, and access channels can be reopened for business by no later than 9am the next business day enabling customers to have access to the available or good portion of their funds.”
Liabilities that need to be pre-positioned include transactional accounts and term deposits.
“Non pre-positioned liabilities are those liabilities that are not required to be prepositioned as they are not in the nature of customer liabilities or customer liability accounts as described above. They include liabilities to related parties as well as complex financial products that are generally held by more sophisticated creditors or counterparties who can typically better manage temporary illiquidity. They also include liabilities owed to suppliers and service providers as payment for goods or services provided to the bank.”
What happens to liabilities that are not pre-positioned?
“Liabilities that are not pre-positioned are frozen in full until the statutory manager is in a position to release the unfrozen portion of these liabilities at a later date.”
In the RBNZ “Open Bank Resolution (OBR) Pre-positioning Requirements Policy”, there is a compendium of liabilities. This lists which of these liabilities must be pre-positioned.
But the key point is listed in the notes at the end [emphasis added is ours]:
1. The compendium is a listing of common banking products and instruments and whether they are in or out of scope for pre-positioning. The OBR functionality is available for pre-positioned liabilities at the date the compendium is issued. All other liabilities not pre-positioned are frozen in full until dealt with by the statutory manager in due course.
2. This compendium itemises the discrete classes of liabilities directly owed by the bank and does not include obligations of the bank pertaining to its role as funds manager (e.g. Kiwisaver and PIE funds), where the underlying customer liabilities are not on the bank’s balance sheet. Kiwisaver and PIE funds invested in the bank’s products such as deposits will be treated like other customer accounts.”
So the compendium of liabilities only lists liabilities “directly owed by the bank” and does not include the likes of Kiwisaver funds where the “underlying customer liabilities are not on the bank’s balance sheet”.
That would seem to indicate that Kiwisaver funds invested in the likes of shares and other assets not listed on the bank’s balance sheet may not be impacted by the OBR.
However the final line we have bolded above is key. This indicates that Kiwisaver funds invested in the likes of cash and term deposits would be subject to bail in. And in many funds especially conservative ones, cash and term deposits will make a large proportion of the fund assets.
Would Kiwisaver Funds Run by Insurance Companies and Fund Managers Be Protected from a Bail In?
So then our reader asks would other types of Kiwisaver funds (e.g those run by insurance firms or investment funds) be any safer?
The short answer would seem to be “No”.
Because in the case of cash and term deposits these investments, while being “managed” by an insurance company or fund manager, would most likely still need to be held with a bank.
So cash and term deposits managed by a non bank fund manager, would likely still be at risk in a bank failure.
Of course you would need to check with your own Kiwisaver fund manager to be sure how various investments owned in the fund on your behalf are held.
But this article from Kiwisaver firm KiwiWealth seems to confirm our reading of the OBR document [emphasis added is ours].
A large chunk of KiwiSaver money is parked as loans to banks – as bank bills, term deposits or bonds. This is because banks and financial institutions are the biggest issuers of fixed income assets in New Zealand. In other words, you don’t necessarily need to hold a term deposit with a bank to be standing in their creditors queue; if you have a KiwiSaver account, you probably have a big chunk of it in a bank already, particularly if you are at the conservative end of things.
Would Foreign Stocks Held Under Custody by a New Zealand Bank Be Subject to Bail In?
The final part of our reader’s question was would foreign stocks be at risk of a bail in, when a bank holds them as the custodian on behalf of clients?
This proves a little trickier to find a definitive answer to.
First, what is a custodial service?
“A custodial service is when an entity or individual holds a client’s property or money on their behalf. The custodian is responsible for the safety of the financial products. If you are a custodial client, you are still the beneficial owner of the financial products but are held on your behalf by the custodian.”
So who exactly owns the shares that are held in custody?
“The registered holder of all shares in custody is ANZ New Zealand Securities Nominees Limited (‘Custodian’) or an offshore custodian appointed by the Custodian who holds them in custody on your behalf, but you remain at all times the beneficial owner of the shares held in custody for you. A custodial trading service allows you to continue managing your portfolio, to choose when to buy or sell shares and to receive dividend payments, but the Custodian takes care of the administration for you.”
This is a somewhat murky answer in terms of ownership.
We’ve had a look through a couple of the banks financial statements. Specifically trying to see if and where on the bank balance sheet these shares in custody may be listed. But we’ve been unable to determine this.
So it may be best to err on the side of caution and conclude that shares in custody could be classed as bank liabilities.
Conclusion: To Protect Yourself from Bank Bail In, Design Your Own “Kiwisaver” Fund
The conclusion seems to be that any Kiwisaver fund that holds cash, bank bills and term deposits will be at risk in a bank failure. Given that just about every fund is likely to contain some of these what is the answer? Should you avoid Kiwisaver altogether?
Our thinking is to offset any investments you have with assets with no counter-party risk. So Kiwisaver would be just the same.
Buy and hold some physical gold or silver to offset any investments you have. Gold and silver are the only financial assets that have no counter-party risk. That is they are not at the same time someone else’s liability. That’s why we refer to gold and silver as “financial insurance”. See: Why Gold Bullion is Your Financial Insurance
Design your own “precious metals Kiwisaver fund”, to offset the risk.
Update: If you have an actual Kiwisaver fund, there is also an option to get gold exposure in that. Although this still comes with the same counterparty risk that all Kiwisaver funds have. See: Is There a Kiwisaver Gold Fund or Gold Investment Option?