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Plans that would mean a "haircut" or partial loss on all deposits if a bank failed in New Zealand, as is happening in Cyprus now, are due to come into force from the end of June.
But a banking expert says a deposit guarantee scheme would be better than the "Open Bank Resolution" policy about to come in for New Zealand banks.
The other alternative would be a potentially costly government bailout or a potentially extended freeze of all money in a failed bank.
The big banks in New Zealand are owned by Australian parent companies. They are all highly rated by credit rating agencies, with strong domestic businesses and consistent, healthy profits.
However, Massey University head of banking studies David Tripe said New Zealand should learn from Cyprus, where a plan to seize up to 10 per cent of savings accounts to help pay for a € 15.8 billion (NZ$25b) bailout has been met with fury by bank customers this week.
Protesters in the capital, Nicosia, chanted, "Thieves, thieves!" outside Parliament.
Tripe said events in Cyprus were "very relevant" to New Zealand. Bank depositors would have to share some of the burden of a bailout under the "Open Bank Resolution" policy that can be applied after the end of June, if a bank failed.
Though a bank collapse in New Zealand is seen as a very remote possibility, the Reserve Bank has proposed that an unspecified portion of deposits in a bank that failed are kept to provide enough money to allow the bank to quickly reopen.
How bad that loss, or "haircut", would be depended on how big a shortfall a bank faced.
The Reserve Bank proposal has been planned for several years but banks now have till the end of June to get their IT computer systems in shape to cope with it.
The Reserve Bank has said little about the planned Open Bank Resolution policy recently, after initial reports and submissions in 2011.
A retired editor of Te Horo, Jill Abigail, said there had been no public warning of "this undemocratic proposition" and the discovery had come as a big surprise.
"Isn't it theft?" she said.
Abigail, who is in her 70s, lost part of her retirement savings in the Hanover finance company collapse. She said it was a "nasty shock" to learn her money would not be safe in a bank.
She had put money in Kiwibank thinking it would be absolutely safe there, because it was a New Zealand-owned bank.
She did understand bank deposits were not guaranteed.
"And I understand it would be better to lose 10 per cent of my savings than to lose the whole lot."
Former director of ASH (Action on Smoking and Health) Deirdre Kent, of the tiny New Economics Party, said yesterday the Reserve Bank's communications about OBR had been "appalling".
"I think they are afraid of telling people, because the minute you tell the public, you get a bank run. That's my hunch," she said.
Under the new OBR policy, Tripe said bank shareholders would lose first,then the balance of losses would be faced by creditors. But in other countries deposit guarantee schemes meant depositors were promised some, though perhaps not all, of their money. For example, in Australia the guarantee was for A$250,000, backed up by other banks.
Tripe said a bank deposit guarantee would be "a much better solution" for New Zealand. Cyprus was an example of "how not to do it, but the Reserve Bank [in New Zealand] doesn't seem to want to learn that lesson", he said.
Bankers Association chief executive Kirk Hope said the latest International Monetary Fund report on New Zealand pointed out the strength and stability of our banking system, and it was not helpful to compare it with Cyprus.
In the event of a bank failure, it was a question of who bore the losses, Hope said.
"Clearly the Reserve Bank thinks it is more appropriate that it is the creditors and shareholders of the bank, in the event that it fails."
COST FALLS ON SHAREHOLDERS, CREDITORS
The Open Bank Resolution policy is a long-standing Reserve Bank policy that, in the rare event of a bank failure, is aimed at allowing a distressed bank to be kept open for business.
The Reserve Bank says it would put the cost primarily on the bank's shareholders and creditors, rather than the taxpayer. It provides an additional tool for the Government as an alternative to bailout.
The policy does not provide the bank itself with the ability or power to access client funds to address financial difficulties. This policy can only be activated by the minister of finance in the event of a bank failing. It would also lead to the replacement of the existing management by a statutory manager.
"Without OBR, the options for responding to a bank failure are broadly limited to liquidation or government bail-out. Neither option is appealing," the Reserve Bank said yesterday.
A Government bail-out carried with it potentially huge costs to taxpayers, the Reserve Bank said.
Liquidation of a bank was complex and time-consuming, and meant the bank's customers would not be able to get any of their money for a lengthy period. In the case of a large bank, that could lead to serious disruption of the wider economy.
The Reserve Bank and Treasury looked at a deposit guarantee scheme. But in early 2011, the finance minister ruled it out because it was difficult to price and blunted "incentives for both financial institutions and depositors to monitor and manage risks properly".