Reserve Bank has survival kit ready in case of crisis

Last updated 05:00 12/04/2013

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The Reserve Bank has its own version of a "get-through" kit in the unlikely event of a bank failure here, the Institute of Directors heard yesterday.

The emergency survival kit includes its planned Open Bank Resolution policy, an alternative to a taxpayer bailout or liquidation, the central bank said.

This measure would get the bank reopened quickly and customers would be able to start using their accounts swiftly.

Although the first losses would be borne by bank shareholders, part of depositors' and unsecured creditors' accounts would be frozen - effectively subject to a "haircut" or loss on part of their money.

But under the OBR a government guarantee would protect the balance of unfrozen money.

In a speech to the institute in Wellington, the Reserve Bank's head of prudential supervision, Toby Fiennes, said it was "building a strong framework to respond efficiently, flexibly and swiftly in the rare event a bank should fail".

Fiennes said the Reserve Bank already had considerable safeguards in place to prevent bank crises, including supervising banks and having conservative capital and liquidity requirements.

"I want to emphasise that New Zealand banks are sound and stable and we see the risk of failure currently as very low. "

But there was a need to think about how to handle potential stresses.

"Rather like regularly checking your earthquake survival kit at home to make sure it contains everything you might need," he said.

Every financial crisis would be different and so it was vital the failure resolution emergency kit was flexible, well-equipped and effective.

The OBR policy is a good example of this, he said.

"Open Bank Resolution is a tool that gives government an additional option to taxpayer bailout or liquidation."

The OBR was not the only option that would be available on the day of a collapse, but its existence gave important incentives for bank shareholders and management to minimise the risk of failure, he said.

Unlike liquidation, the OBR system would release transaction accounts to the bank's customers as swiftly as possible so they can carry on making and receiving payments, Fiennes said.

The first losses are borne by the bank's existing shareholders, then a portion of depositors' and unsecured creditors' accounts are frozen if required, to be released in whole or in part as resources are available. A government guarantee protects the unfrozen portion of their accounts.

But he said a deposit guarantee scheme, which operates in many countries, was not a direct alternative to the OBR.

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"It is not a case of choosing between OBR or deposit insurance. OBR is applicable both in a world with deposit insurance and one without," he said.

In 2011 the Government decided not to introduce a deposit insurance scheme in New Zealand because it might have reduced the incentive for banks and others to manage their risk properly, was difficult to price and was not always effective in preventing bank runs.

- Stuff

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