Here’s a quick video summary of the Reserve Bank Of New Zealand’s Open Bank Resolution (OBR) scheme. Implemented in June 2013 as an alternative to a government (i.e. tax payer) bail out of any failed bank in New Zealand, this rather innocuous sounding name actually means a Cyprus like bank “bail in” or depositor “Hair cut” as a means of getting sufficient capital to keep a failing bank operating.
We’ve actually written about this quite a bit over the past two and a bit years, but a request from a reader finally prompted us to turn these into a short video as well.
So if you don’t know too much about this topic we’d suggest you also check out the links below to the previous articles we’ve written as well:
Bank Failures: Could they happen in NZ – The Reserve Bank thinks so
What’s Wrong With the RBNZ’s Bank Failure Plans?
Bank Failures: Will New Zealand be Cyprussed?
RBNZ Links:
This RBNZ website page has numerous links and information on the OBR:
http://www.rbnz.govt.nz/regulation_and_supervision/banks/policy/4430900.html
This document from the RBNZ explains the whole scheme and what the banks must do to prepare for it.
http://www.rbnz.govt.nz/regulation_and_supervision/banks/banking_supervision_handbook/5341478.pdf
This ‘OBR Made Simple’ fact-sheet (PDF 1.4MB) explains the OBR and how it works.
http://www.rbnz.govt.nz/regulation_and_supervision/banks/policy/5340579.pdf
Offshore funding chart in the video from:
http://www.rbnz.govt.nz/financial_stability/financial_stability_report/fsr_nov13.pdf
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Surely savvy investors will understand the position. (usually those with a few bob more than most).
The effect of this policy will result in them putting their hard earned in a vast number of overseas countries where their money is guaranteed. Those who wish to invest here will choose Rabo, govt stock or gold and silver.
Looks like investors have been forewarned.
P.S. I did have funds in an Icelandic bank at one point but I pulled them out. I was also in Saudi in the first Gulf war. Guess what the Kuwait dollar was worth? The unfortunate refugees couldn’t buy any gold in the Souk then with their Kuwaiti dollars.
What I don’t understand is your articles which say the Reserve Bank have decided that tax payers should not pay the burden of bank failures – thus the depositors take the hit.
The CDIC in Canada, which guarantees most bank deposit to $100,000, is funded by the participating institutions.
Is there a reason here in NZ that our financial institutions can not contribute to a similar scheme?
Regarding why the choice is bail out or bail in, with insurance not being an option:
http://www.greaterfool.ca/2011/05/13/dont-count-on-it/
tl;dr- CDIC has 2.5 billion dollars in assests to insure against an issue that it would be reasonable to expect to cost 100 billion dollars or more to resolve.
I’m not sure why Maurice thinks that the OBR policy would cause investors to head for Rabo. If a big bank fails and the government doesn’t bail it out, OBR means depositors take a haircut and can access the rest of their money the next day. If a small bank fails and the government doesn’t bail it out, the resolution process could take a lot longer, and depositors can still lose out.
Similar policies seem to be either in place or close to in Canada, USA, and the EU so don’t know whether peoples funds will necessarily be any safer in many other countries. Some may have deposit insurance like in the US but only up to $100,000 or Aussie – only up to $250,000 I think. Of course if there was a systemic failure not limited to one bank then these insurance schemes would not have enough funds to cover the losses anyway. Perhaps this is why The Powers That Be are opting to prepare for depositor haircuts and bail ins rather than bail outs?
What ever happens when a bank fails the taxpayers will probably cover it one way or another. A government bail out is via taxpayers. A bail in is by a smaller subset of taxpayers i.e. just the depositors of a specific bank. But if it was a system wide failure then just about everyone will pay for it if a number of major banks go down. If there is an insurance scheme like in the USA (FDIC) or Canada (Thanks Adam for that link on the CDIC) they likely won’t have sufficient funds to cover a number of major bank failures at once. So an insurance scheme may be more about “keeping up appearances” and confidence as much as anything. Also such a scheme existed in Cyprus and they came pretty close to ignoring the insurance limits and giving everyone a haircut of 10% across the board in all banks. So that showed no guarantee of a guarantee actually guaranteeing anything! That’s the problem with trying to come up with a solution to a problem that is a result of the whole system being unstable – they are band aids not solutions.
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