A: Of your three suggestions for people nervous about bank deposits, the first is clearly the best.
Kiwi Bonds are issued by the government and won't default unless the government does. They're like term deposits, with a minimum investment of $1,000 and terms of six months, one year, two years or four years. You can get them through banks or sharebrokers and some lawyers, accountants and financial advisers.
The downside is that interest rates tend to be lower than bank rates - reflecting the lower risk.
On Rabobank, you're referring to the fact that, until April 30, deposits with the New Zealand bank are guaranteed by its parent, Rabobank Nederlands. And the guarantee will continue as long as that money stays in the bank under the same customer name.
New deposits after April will no longer be guaranteed, as the New Zealand bank says it has outgrown the need for the parent guarantee. "This will bring Rabobank New Zealand Limited into line with other major overseas-owned banks in New Zealand, in terms of guaranteed status," says the bank's website.
It continues: "Because of the guarantee, Rabobank New Zealand has always held the same Standard & Poor's rating as its parent in the Netherlands. This rating is currently A+." From May, with the guarantee gone, the New Zealand bank's rating is expected to drop one notch.
Note that the A+ rating is just below the current AA minus ratings of ANZ, ASB, BNZ and Westpac. So, while you get a big international bank's guarantee before April 30, that big bank isn't rated quite as highly as New Zealand's major banks. It's hard to say which matters more.
Your third suggestion - depositing money in other countries - worries me. For one thing, as one expert puts it, "The legal question of whether overseas depositors are covered by a particular country's scheme might be highly complex and situation-dependent, and could change during a crisis."
For another, there's foreign exchange risk. Even if you put your deposits in Australia, which many would regard as a pretty safe bet, there's no knowing what will happen during the term of the deposit. If the Aussie dollar rises relative to ours, you'll do really well. But there's probably an equal chance it will fall, and you'll end up with less - possibly much less - than you put in. This is not a game for the risk averse.
On your comments about the finance industry contributing to an insurance fund so that deposits could be guaranteed, government guarantees usually involve such a fund.
In a 2013 speech, Reserve Bank head of prudential supervision Toby Fiennes gave three reasons why New Zealand doesn't have deposit insurance or a deposit guarantee:
• "Deposit insurance is not always effective in preventing bank runs by retail depositors. UK-based Northern Rock suffered a classic retail run in 2007, despite a deposit insurance scheme being in place.
• "Deposit insurance is hard to price accurately and fairly; and brings with it difficult boundary issues. Should it be just for banks - as is currently the case for OBR (Open Bank Resolution) - or should it also include finance companies, building societies and credit unions? How would we ensure that the least risky banks do not end up subsidising the more risky?
• "Deposit insurance will increase moral hazard, making the banks more susceptible to failure, which brings with it the need for more, costly regulation."
In that last point, Fiennes is saying that, if there's a government guarantee in place, banks will be tempted to lend to high-risk customers and customers will be tempted to chase higher returns despite underlying risk.
Fiennes spoke of World Bank research on 96 countries, looking at 2004-06, before the global financial crisis, and 2007-09, during the crisis. It found that in the good times, "the existence of a deposit insurance scheme does lead to riskier behaviour by banks". During a crisis, though, "bank risk is lower and systemic stability greater in countries with deposit insurance coverage".
However, the first effect is stronger than the second. The researchers "conclude that a deposit insurance framework increasing the likelihood of bank failure is a greater concern than the absence of an insurance framework worsening the impact of a crisis".
Fiennes added: "We believe it is better to keep the risk of failure very low, including through a strong regulatory framework, than to build structures that can distort incentives and behaviour."
Misleading headline
Q: Who determines the heading for your page, because the last one was very misleading? It stated that "Bank rules protect from a haircut", but you then wrote that the rules actually enable a haircut.
When the legislation was passed to allow depositors' funds to be used to bail out a failing bank I told my friends and they didn't believe me.
I explained that as a bank shareholder I was using their deposited money to earn a better return for me as a shareholder than I was giving them as a depositor; and further if the bank experienced financial hardship I could use their deposits to bail me out.
They said, first, that that couldn't be true because the government wouldn't allow it, and second, deposits in the bank were safer than owning shares in the bank. Needless to say, in my investment portfolio I have bank shares for a higher return, and limited bank deposits because I don't fancy a haircut. I know that bank shares can change in value, but over time they increase in value, and if the bank went belly-up I'd lose my money as a shareholder and as a depositor.
A: Subeditors write the headlines and captions, both of which were unfortunately off the mark last week. Apologies for that.
As you say, last week's column said that under the Reserve Bank's Open Bank Resolution (OBR), if a bank fails, the Reserve Bank may freeze a portion of customers' bank deposits - although customers may get some or all of that money back eventually.
What OBR is designed to do is to protect New Zealand bank customers from losing access to all their bank deposits if a bank fails. The bank would open the next day, and customers would be able to withdraw most of their money - or leave it in the bank, as in those circumstances the government would guarantee the accessible money.
The way you've described this to your friends isn't quite right. Shares do bring in higher average returns than bank deposits because they are riskier. But if a bank got into difficulties, the value of its shares would fall to close to zero before any funds were frozen. So the fund freeze wouldn't help shareholders. Your friends are quite right - bank deposits are definitely safer than bank shares.
But let's put this all in perspective. The Reserve Bank says it is confident the New Zealand financial system is sound and it's unlikely a New Zealand bank will fail.
Family lending
Q: I read your question with interest about siblings and parents lending money.
Recently my parents have decided to gift my sister money for a house deposit.
They mentioned that they didn't want me to feel jealous, and that it would be evened out "in the wills", although the specifics were not mentioned. I have since found out the sum of money was considerably larger than I had thought.
I had saved a deposit (and bought a home) a few years ago. My question is: if my sister receives money in 2015, what is the fairest way to ensure I get the "same" in 15 or 30 years?
A: Well done for raising this issue now. It's the kind of thing that can fester over the years. By far the best plan is for your parents, your sister and you to work out what's fair before the gift is made.
Often this is not done, says lawyer Peter Kemps. "Parents seldom appreciate the value, in real terms, of providing funds to one child over a long period, when they do not do the same for their other children. Very few parents genuinely attempt to equalise those benefits to the other children in their wills."
The way to take care of this is to adjust the size of the gift over time. There are two common methods, says Kemps:
• Adjust the amount by CPI inflation. When the parents die, it's easy to make that adjustment using the inflation calculator on the Reserve Bank website, rbnz.govt.nz.
• Adjust by the rate of mortgage interest the recipient would have otherwise had to pay. A search on rbnz.govt.nz for "mortgage interest rates" gives you a historical graph of rates.
Note that the adjustment will make a huge difference to the gift amount over several decades. For example, if the mortgage interest rate averages 7 per cent, the gift will almost double in 10 years and be close to eight times bigger in 30 years. But that's fair. It's as if the recipient has been given an investment that has compounded over the period.
But should we even worry about fairness among siblings? Read on.
And there's more ...
Q: Mary, I can't believe the drivel written on this subject. Why does either child expect to get anything from the father? It's his money. If he chooses to lend to one daughter that's his business.
Too many parents spend their whole life working to leave it to the kids, and too many children expect an inheritance.
The only thing my girls are getting is an education. I've told them that, and they are both on their way to being financially independent.
I have two older brothers who borrowed from our dad before he died. This has caused no friction between them and the other eight kids. We don't know if the loans were repaid or not and don't care.
Dad and Mum timed their run well and managed to spend most of it before passing.
Well done, I say.
A: Good on you. But judging from the letters I've received, you're in a minority about not caring what other siblings get. Fairness is a big deal for many people.
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.
