Banks in New Zealand "strongly rejected" earlier attempts by the Reserve Bank to bring in a new policy that would mean a "haircut" or partial loss on all deposits if a bank failed, an industry source says.
The source says former Reserve Bank governor Alan Bollard was the driving force in the move to get "Open Bank Resolution" brought in during his time at the central bank but was earlier turned back by the big banks.
The policy had only been "crystallised" in the past year or so and is due to come into force at the end of June.
The Reserve Bank had pushed ahead because of the fear the Government could bear the huge cost of a bailout if a bank failed, though that is seen as a remote chance.
New Zealand banks are among the best credit-rated in the world and showed their stability during the global financial crisis.
"The banks in New Zealand are pretty unhappy with it [OBR]," the banking sector source said yesterday, and the reasons were apparent in Cyprus this week.
On Tuesday politicians in Cyprus decisively rejected a plan to seize up to 10 per cent of people's bank deposits to secure an international bailout and prevent a collapse of the country's banks.
But the vote left the tiny Mediterranean economy in financial limbo.
"They [banks] see OBR as something potentially pretty damaging to their business," the banking source said.
Australian banking regulators were also understood to be concerned about the OBR proposal. However, the Reserve Bank said the Australian bank regulator had not made a submission on OBR.
There is no formal basis for a "haircut" on deposits in Australia, but there is a bank deposit guarantee scheme, covering up to A$250,000 (NZ$315,000).
Yesterday, NZ First called for the introduction of a bank depositors' guarantee scheme to protect the savings of "blameless Kiwis" during any financial crisis.
The policy would provide a government guarantee for deposits of up to $100,000 in New Zealand-owned banks.
But Reserve Bank Deputy Governor Grant Spencer said deposit insurance was not a substitute for OBR or any other resolution tool.
"It is a separate issue altogether.
"The Government has looked hard at deposit insurance schemes and concluded that they blunt the incentives for investors and banks to properly manage risks, and may even increase the chance of bank failure."
Spencer said the OBR policy would mean a quick and orderly resolution of a collapsed bank.
"It is markedly different from proposals to resolve the banking crisis in Cyprus," he said.
Acting Finance Minister Steven Joyce said in the highly unlikely event a New Zealand bank failed and went into statutory management, the Open Bank Resolution scheme would help depositors.
"The bank would reopen the next day and customers would have full or partial access to their funds, which would then be government-guaranteed," Joyce said in Parliament yesterday.
The alternatives were that customers might not be able to get any money for a long period.
Green Party co-leader Russel Norman asked what amount mum and dad savers would pay under the OBR: "Will it be 10 per cent of their savings, 20 per cent of their savings, or whatever it takes?"
Joyce said he was "quite horrified at the member's scaremongering . . . It is a highly unlikely situation that the member suggests."