Call for savings safety-net against bank collapse

By PAULA OLIVER

New Zealand's hands-off banking regulations should have some protection for small depositors in the event of a collapse, says a visiting expert.

At the moment, deposits are not guaranteed should a bank fail.

George Kaufman, a professor of finance and economics at Loyola University in Chicago, is in New Zealand for this year's fellowship programme run by Victoria University and the Reserve Bank.

The fellowship has been running since 1994, and is intended to give the Reserve Bank independent critical comment on monetary policy.

Last year, its focus shifted to the regulation of banks - a topic that hit the headlines when the National Bank was sold to ANZ in October.

Kaufman has been in the country for a month, and has had access to the Reserve Bank's staff and resources.

He told the Business Herald that those who laughed off the possibility of bank failure were denying a threat that did exist.

"It's like saying 'I'll never get sick'," he said.

World Bank researchers had identified nearly 120 bank crises in 93 countries since the mid-1970s.

Another 50 near-misses had occurred in 45 countries.

"More than half of all countries in nearly all parts of the world have experienced serious banking crises in recent memory," Kaufman said.

"Many of the countries that did not suffer such crises are emerging economies that do not have a functioning banking system."

The cost of the failures was high and taxpayers often had to bail out the insolvent bank.

Kaufman said good public policy demanded that costs be as small as possible and largely removed from the shoulders of taxpayers.

In New Zealand, deposits are not guaranteed by the Government or the Reserve Bank - a point the bank has been keen to emphasise.

That lack of a guarantee might appear to ensure that taxpayers' money would not be called on, but Kaufman said that would not necessarily be true.

Heavy political pressure would come, particularly from small depositors who would lobby loudly and in large numbers for help.

"It's important to have a plan before the moment, because if you don't you will give in to the pressure of the day," Kaufman said.

Research has shown that many New Zealanders believe their money would be protected in a collapse.

Some felt it was unfair that they paid mortgage insurance and got no guarantee for their deposits.

The belief that protection existed was strengthened by comments such as one from then-Deputy Prime Minister Jim Anderton in 2000 that "It's inconceivable that banks can be allowed to fail, with all the repercussions that would go through the whole community."

The Reserve Bank has also conceded that while it would generally recommend against any form of taxpayer-supported rescue, the decision would be made by the Government.

Kaufman said many countries did not have deposit insurance - but most of them did not have strong, credible governments. New Zealand did.

It would be wise, he said, to have insurance for small depositors in the form of protection up to a certain amount, so that dealing with the smaller depositors would not interfere with larger ones who knew the risks and knew how to deal with banks.

Kaufman was uncertain what dollar amount would define a small depositor, and said it would need to be determined how the insurance was provided and who paid for it.

Overseas, deposit insurance is usually financed by a mixture of Government and bank sources. Most schemes are managed by a Government agency or in a public-private partnership.

Kaufman said it would be important also to ensure that larger depositors did not expect a taxpayer-financed bail-out.

Under his plan they would not have insurance.

But some might expect an exemption from that if they were large companies that could be seen as too important to be allowed to fail.

A high barrier should be set for those exemptions, Kaufman said.

Requiring the approval of the Reserve Bank, Prime Minister and Minister of Finance would be one way of making sure an exemption was not easy to get.

And other banks could be required to pay for the bail-out, something likely to be unattractive to other banks unless the large depositor was of major importance.

The Reserve Bank is developing a strategy for resolving bank insolvencies.

Kaufman said that his ideas, while appearing to go against the philosophy of the present regulatory regime, were not greeted with hostility at the Reserve Bank.

He applauded the level of investigation the bank had put into insolvency issues and questions of how it should deal with the high level of foreign ownership of New Zealand's banks.

Deposit insurance

* More than 70 countries are named in a World Bank report as having explicit deposit insurance schemes.

* They include: United States, United Kingdom, Argentina, Colombia, France, Germany, India, Indonesia, Japan, Lebanon, Norway, Turkey, Uganda.

* New Zealand and Australia are believed to be the only two countries in the OECD without explicit deposit insurance.