The future of the New Zealand banking system is an interesting subject for speculation, but Associate Professor Tripe (pictured) and Geoff Bertram from Victoria University of Wellington have a more immediate worry: the Reserve Bank’s adoption and implementation of a policy known as Open Bank Resolution (OBR).
OBR is the mechanism that will apply if a bank is seen to be failing. The scenario, Tripe explains, is that if a bank is seen to be in difficulty, its activities will be frozen, a statutory manager appointed, and a portion deducted from deposits to bring the bank back into solvency. This is likely to be on a percentage basis, but the Reserve Bank has yet to define how the haircut might be applied to balances.
OBR is intended to reinforce the Government’s rejection of blanket insurance of banking deposits. “In other words, if you bank with a dodgy bank, you’ll pay. No one will bail you out.” On the surface, this sounds sensible. Buyer beware. Why should the Government indemnify private risk?
But Tripe and Bertram believe that the approach is fraught with peril.
The first problem is knowing how to spot a dodgy bank. “The Reserve Bank would say, well we’ve got this wonderful disclosure regime. The disclosure regime came in 1996, but you can’t really compare a disclosure statement from 1996 and a disclosure statement from 2012. It is just so complicated to understand what a bank is actually doing.”
The second is knowing how to set about shutting a bank down, even temporarily. “There may be multiple banks with interests in any transactions. It is very difficult to bring things to a halt without major repercussions.” That many of New Zealand’s banks have Australian parents makes matters yet more complicated.
“If an Australian-owned bank were to collapse, it seems likely that its first loyalty would be to its major Australian shareholding.
“The argument is, of course, that a bank failure is so unlikely that you are never likely to have to pay for it.”
But ‘never’ is a very long time – and ‘safe as a bank’ doesn’t have the same ring that it had a decade ago.