Bank policy might hinder bailouts

The Reserve Bank. Photo / NZPA

But a systemically important bank may not be allowed to fail in future, says S&P.

The Reserve Bank's Open Bank Resolution policy might make it difficult for the authorities to defend intervening to bail out a distressed bank, credit-ratings agency Standard and Poor's says.

The agency, in a report on the New Zealand banking sector, said bank ratings would not be negatively affected by progression of an Open Bank Resolution (OBR) policy.

"Resolution regimes, such as New Zealand's OBR policy, are generally established by governments to lessen the damage to the economy and the cost for the taxpayer of a distressed, systemically important, bank," S&P analyst Peter Sikora said in the report.

The OBR policy requires all banks with retail funding of more than $1 billion to "pre-position" their systems so customers would have access to accounts the day after an insolvency event.

"Although the OBR policy does in some way signal that the New Zealand Government might not fully support a distressed bank in the future, this policy does not eliminate the option for the Government to extend extraordinary support to a bank."

The existence of a resolution regime would not indicate that a government would let a highly systemically important bank fail in the future, Sikora said.

"All this said, the existence of a resolution regime might make it more difficult for authorities to defend the use of public funds to support distressed banks," he said.

All locally incorporated banks that have retail deposits of more than $1 billion will be required to have their systems ready to meet the OBR requirements by June 2013.

The Reserve Bank's OBR policy allows the authorities to freeze a proportion of a bank's deposits while still allowing customers access to their accounts. The Reserve Bank already has the power to freeze bank deposits but has lacked the technical infrastructure to implement it.

The OBR's origins go back to the 1997 Asian financial crisis, which prompted the Reserve Bank to come up with a tool that would enable the failure of a large bank to be managed without many of the disruptions and stresses to the banking system and economy that would be caused by conventional failure regimes, such as liquidation.

Early this month, the Reserve Bank said it had received 14 submissions to its consultation on the pre-positioning requirements for OBR.

One bank recommended that OBR pre-positioning should only be mandatory for systemically important banks. Others said OBR should apply to all NZ-registered banks, as well as non-bank deposit takers such as finance companies.