Finance Minister Bill English supports proposals to relieve taxpayers of the burden of guaranteeing bank deposits in favour of placing it on shareholders and creditors, including depositors.
He was responding to a question from banking expert David Tripe at the annual Finance 2013, a speech hosted by Massey University and the Auckland Chamber of Commerce.
Associate Professor Tripe has raised objections in a National Business Review article to the so-called Open Bank Resolution (OBR) mechanism because it will mean depositors will share in a “haircut” to cover losses in a financial collapse.
He poses the question why it is proposed New Zealand depositors will being treated no differently than other creditors – in other words, sharing the risk of a collapse and in funding a recapitalisation with the institution's shareholders and creditors.
In countries, such as the US, the UK and Australia, government-mandated deposit guarantee schemes offer this protection.
“We have a more robust view [than these countries],” says Mr English, adding “We don’t want taxpayers carrying that liability.”
While some countries offer a threshold – say deposits up to $250,000 – until a “haircut” applies, this may not even be available here, Mr English has hinted.
Speaking later to NBR ONLINE, Dr Tripe says creditors could also mean bondholders, meaning depositors could carry less of the burden.
Both concede the issue is tricky and full of unintended consequences, such as depositors breaking up their deposits and banks finding it hard to attract funds.
The OBR is just part of a wider group of monetary policy tools under consideration.
Mr English says these are up for discussion and include:
• Hold additional capital on their balance sheet as a buffer during an economy-wide credit boom.
• Hold additional capital against loans in specific sectors if risks emerge in those sectors.
• Adjust their funding ratios to use more stable sources of funding to avoid the impact of short-term funding shortages.
• Restrict high loan-to-value ratio lending in the housing sector.
Regardless of what is decided, Mr English says all decisions will be made independently by the Reserve Bank and not subject to political intervention.
"The temptation for some politicians to fiddle with the economy for sjort-term gain at the expense of long-term pain would be too great," he told his invited audience.