Bernard Hickey: Unseen risk of fiscal haircut

Would people get all their money back if banks fail? It's not certain. Photo / Dean Purcell

Kiwi investors don’t realise their deposits are no longer guaranteed

Do you think the money you have in a bank term deposit is Government guaranteed? If so, you're wrong, but you're not alone.

A survey for the Financial Markets Authority by Colmar Brunton and published during Money Week found 52 per cent believed the money in a bank term deposit was guaranteed.

To be fair, during the global financial crisis, these deposits were guaranteed, from October 2008 to December 2011. Banks paid for the privilege, but that scheme is over now. So what would happen if a bank fell over? Would the taxpayers of New Zealand make sure you got all your money back?

The simple answer is we don't know for sure. The Reserve Bank has created a system that would allow a bank to be shut down over a weekend and reopen after a restructure that could see those deposits given a "haircut".

This means the Reserve Bank would arbitrarily freeze a portion of the deposit to ensure the bank can open again on a Monday. You might eventually get all your money back. You might not. This Open Bank Resolution (OBR) is another option for the Government if it chooses not to bail out a bank.

That's all fine and in line with what many overseas banks are doing to solve the problem of moral hazard. That's where savers, shareholders and bankers take extra risk expecting taxpayers will bail them out.

Essentially, these OBR, or "living will" systems mean regulators and politicians are telling bankers and savers there's a risk they could lose their money. The idea is they will take that risk into account and demand an appropriate return.

But this big bargain, designed to reduce the problem of "too big to fail" banks, all depends on savers and bankers knowing there is that risk.

Our bankers and regulators are well aware of OBR, but this survey shows at least 52 per cent of New Zealanders are not. It means at least half these depositors would expect the Prime Minister to force taxpayers to stump up to pay them in full.

That's a big expectation for any politician to stare down. It means there is an implicit Government guarantee. Hundreds of thousands of us have more than $127 billion in bank accounts, yet they are in effect guaranteed, free, by their fellow taxpayers.

That's simply not fair. Bankers also get something of a free ride. It is an implicit guarantee without the deposit insurance fees they had to pay from 2008 to 2011.

The way to solve this problem is to inform the public. Shouldn't the Reserve Bank be explaining to those 52 per cent of term depositors how OBR works and the risks of a haircut? The risks are small but should be taken into account. It may mean savers demand a slightly higher interest rate, which bank shareholders would have to bear or pass on to borrowers in marginally higher rates.Now is a good time to have this type of public education campaign when financial markets are stable and our banking systems are seen as strong and reliable. There is little risk of "scaring the horses" at the moment.