Freezing deposits plan slammed

Plans that would freeze a portion of all deposits in a failed bank could cause widespread hardship, an industry expert says.

The Reserve Bank has proposed that a portion of deposits in a bank that is placed in statutory management be retained to provide enough liquidity to allow the bank to quickly reopen.

Under the proposed Open Bank Resolution policy, a failed bank must be able to reopen by 9am the following business day and provide customers with full or partial access to their money.

Massey University head of banking studies David Tripe said though the Reserve Bank put forward two options, it appeared to favour all depositors potentially losing some of their money if their bank failed.

"Such a policy, if implemented, would impose financial hardship on large numbers of New Zealanders, including those with the least ability to bear the cost," Mr Tripe said.

The second option, which sets a limit below which retail deposits were safeguarded, perhaps $50,000, would affect relatively few people, he said.

A good proportion of people would have less than $100 in their account.

"If you start disrupting every single little balance, then it imposes very substantial costs on ordinary consumers," Mr Tripe said.

Figures from Australia and Canada suggested that a $50,000 cap would ring-fence 30 per cent or 40 per cent of the bank's assets.

Some customers with big deposits could minimise their exposure by spreading their money across several banks to avoid the cap. But it was more likely that they would take a closer look at the creditworthiness of their bank. However, the Reserve Bank has also reduced the amount and quality of financial information that banks are required to disclose, making it more difficult for customers to assess the credit risk of a bank.

The OBR policy was originally introduced after the Asian financial crisis in 1997. It was designed to resolve a bank failure quickly and to ensure the losses were primarily borne by the bank's shareholders and creditors, rather than taxpayers.

Submissions on the consultation document closed at the end of last month.

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