National Party leader, John Key, has announced that his party is willing to engage in a bi-partisan approach to financial regulation policy with the Labour government in the run up to the General Election on 8 November.
Labour's announcement of the introduction of a deposit guarantee scheme for retail deposits last week caught National somewhat off guard but National quickly agreed in principle to the scheme and National finance spokesman, Bill English, received briefings from the Labour government.
Labour's Minister of Finance, Michael Cullen, has responded to Key by saying that it continues to provide briefings on the developing situation to Bill English on behalf of National.
Reflecting the high degree of Trans-Tasman economic integration between Australia and New Zealand, a policy divergence between the countries in recent days on the issue of whether wholesale deposits should also be guaranteed has emerged. New Zealand's government announced last week that interbank deposits would not be guaranteed but the Australian government has decided that such deposits will be.
National is signaling that it will not seek to make political capital out of a Labour government reversal of last week's position should Labour choose to provide a guarantee of interbank lending to harmonize this area of Trans-Tasman financial regulation policy.
Both Labour and National see the New Zealand banking system as sound given the strong balance sheets and more cautious lending policies of the major trading banks compared to their international counterparts. Nonetheless, the policy dilemma is that failing to guarantee the wholesale deposits while important economic neighbour Australia does, is to face the high risk of capital flight to guaranteed deposits in Australia and elsewhere in these uncertain economic times.
Once again, as previously pointed out here, emergency economic policy making procedures in New Zealand have proven to be inadequate in a rapidly changing global economic climate. The deposit guarantee policy as it has unfolded in the past week or so has left more questions unanswered than answered. This reveals a failure to think more than two or possibly three steps ahead.
Post-election a new government will need to launch a major review of the failure to activate and engage effective policymaking to cope with what have been demonstrated to be more external than domestic economic problems.
It is all very well to sit back with self-satisfaction and pride that New Zealand's economic house is in order, but when the economic crisis reaches your doorstep you had better have the sandbags, mops, and more affirmative instruments ready to go. And you best have thought out a train of steps ahead to respond to rapidly changing circumstances if the house threatens to be washed away.
Showing posts with label deposit insurance. Show all posts
Showing posts with label deposit insurance. Show all posts
Sunday, October 19, 2008
Wednesday, October 15, 2008
Deposit Insurance to be Tightened Up for Finance Companies
In a sloppy exercise in policy formation, the Reserve Bank and the Treasury have belatedly moved to tighten up the deposit insurance regulations that will apply to finance companies following trading bank representations.
Finance companies that are rated BB or below or are unrated will now have to pay a fee set at 300 basis points each year on cumulative deposits to receive a deposit guarantee.
Non banks will also face tighter regulatory requirements, reporting standards, and be subject to government inspection.
Non-resident depositor accounts will be covered by the deposit guarantee but they will be capped at the 12 October account level plus 10 percent per year (for the two year guarantee period) to allow for interest and deposit variations. Foreign depositors note: there is, therefore, a limit to the guarantee on your deposits! Reserve Bank revised regulations press release here.
No doubt this limit on the guarantee on non-resident deposits will have a chilling effect on foreign deposit inflows into New Zealand. This is hardly a reassuring signal at a time when credit availability is tight in NZ financial markets and offshore funds are necessary to continue financing credit lines in New Zealand.
The Green Party has criticised the failure of the monetary authorities to regulate lending by finanicial institutions and the institutions themselves for profligate lending (Green Party statement here). The Greens have also demanded that deposit guarantee regulations be accompanied by reciprocal guarantees of responsible lending practices and social responsibility by financial institutions.
As argued in a previous post, a privilege granted by a government - a deposit guarantee - should be accompanied by a duty - including a risk-based fee - on the part of the financial institutions to comply with tightened regulations on lending activity and balance sheet management, something that was largely missing from the first draft of the deposit guarantee policy released to the public.
Finance companies that are rated BB or below or are unrated will now have to pay a fee set at 300 basis points each year on cumulative deposits to receive a deposit guarantee.
Non banks will also face tighter regulatory requirements, reporting standards, and be subject to government inspection.
Non-resident depositor accounts will be covered by the deposit guarantee but they will be capped at the 12 October account level plus 10 percent per year (for the two year guarantee period) to allow for interest and deposit variations. Foreign depositors note: there is, therefore, a limit to the guarantee on your deposits! Reserve Bank revised regulations press release here.
No doubt this limit on the guarantee on non-resident deposits will have a chilling effect on foreign deposit inflows into New Zealand. This is hardly a reassuring signal at a time when credit availability is tight in NZ financial markets and offshore funds are necessary to continue financing credit lines in New Zealand.
The Green Party has criticised the failure of the monetary authorities to regulate lending by finanicial institutions and the institutions themselves for profligate lending (Green Party statement here). The Greens have also demanded that deposit guarantee regulations be accompanied by reciprocal guarantees of responsible lending practices and social responsibility by financial institutions.
As argued in a previous post, a privilege granted by a government - a deposit guarantee - should be accompanied by a duty - including a risk-based fee - on the part of the financial institutions to comply with tightened regulations on lending activity and balance sheet management, something that was largely missing from the first draft of the deposit guarantee policy released to the public.
Tuesday, October 14, 2008
New Zealand Banks Flock to Deposit Insurance
As expected, the major trading banks have flocked to sign up for the New Zealand government's deposit guarantee scheme that will cover the deposits, without limits, of banks, building societies, credit unions, and finance companies for the next two years.
ANZ-National, BNZ, ASB, Westpac, TSB, SBS Bank and Government-owned Kiwibank have all indicated they will sign up. Only institutions with deposit liabilities in excess of $5 billion are required to pay a fee for the guarantee. That fee will likely run at around $15 million for most of the larger insitutions. The fee structure does not allow for any risk-based pricing.
The scheme is being criticised because it affords finance companies that have engaged in riskier behavior than other financial institutions the same level of protection without an associated hike in the insurance premium they pay. Moreover, finance companies that have gone into receivership because of mismanagement in the last few years could be revived, and if found to be in compliance with their trust deeds, eligible for new deposit insurance coverage. Reserve Bank Governor, Alan Bollard, has confirmed this but also pointed out that deposit insurance is not retrospective - it does not cover deposits lost in financial collapses prior to introduction of the guarantee.
As for the two year limit on the deposit guarantee, it would be a brave, some might save foolhardy, government that sought to remove the guarantee at the end of two years, even in prosperous economic times. It would likely have the same destabilising effect as the removal of wage and price controls has: despite all assurances, it could be expected that depositors would engage in flight to a safer haven for their funds.
ANZ-National, BNZ, ASB, Westpac, TSB, SBS Bank and Government-owned Kiwibank have all indicated they will sign up. Only institutions with deposit liabilities in excess of $5 billion are required to pay a fee for the guarantee. That fee will likely run at around $15 million for most of the larger insitutions. The fee structure does not allow for any risk-based pricing.
The scheme is being criticised because it affords finance companies that have engaged in riskier behavior than other financial institutions the same level of protection without an associated hike in the insurance premium they pay. Moreover, finance companies that have gone into receivership because of mismanagement in the last few years could be revived, and if found to be in compliance with their trust deeds, eligible for new deposit insurance coverage. Reserve Bank Governor, Alan Bollard, has confirmed this but also pointed out that deposit insurance is not retrospective - it does not cover deposits lost in financial collapses prior to introduction of the guarantee.
As for the two year limit on the deposit guarantee, it would be a brave, some might save foolhardy, government that sought to remove the guarantee at the end of two years, even in prosperous economic times. It would likely have the same destabilising effect as the removal of wage and price controls has: despite all assurances, it could be expected that depositors would engage in flight to a safer haven for their funds.
Sunday, October 12, 2008
New Zealand To Introduce Shonky Deposit Insurance
PM Helen Clark has announced the Labour government will now introduce a deposit insurance scheme that will provide coverage for the next two years. Fees for the insurance will be assessed for institutions with $5 billion or more in total retail deposits.
Update: read details released by the Reserve Bank of the "opt-in" deposit insurance scheme here.
Deposits in banks and non-banks such as building societies, credit unions, and finance companies will be covered, but each institution must choose to join.
The voluntary nature of financial institution participation underscores New Zealand misunderstandings of the policy objective of deposit insurance: it is designed to protect the financial system from systemic failure - a run on the banks; it is not designed to protect individual institutions from illiquidity, however much individual depositors may focus on that.
Permitting individual institutions to opt out of deposit insurance coverage is to turn your policy charged with ensuring financial system stability into a very leaky boat.
The major trading banks will very quickly get the message. To fail to join the deposit insurance system will tag their deposits as unsafe and uneasy depositors will start moving funds to insured accounts. Poor policy design, however, will create unnecessary and possibly costly uncertainty at the onset of the scheme. The "loan sharks", however, will be left to prey on unsuspecting depositors.
Thus, deposit insurance is a condition of obtaining a banking licence, not an option. Moreover, with deposit insurance - a socialisation of bank liabilities as the government through the insurance fund guarantees to back bank liabilities - must come tighter asset standards to be supervised by regulatory authorities, otherwise bankers or at least the shadier kind of financier has the incentive to take the depositor's money and run - into more speculative lending practices.
Let's hope someone at the Reserve Bank and the Treasury gets the picture on this and is persuasive enough to turn the policy around on this point.
Update: It appears that the policymakers were either in agreement with the politicians or were overridden because the Reserve Bank has announced the details of the voluntary system that is euphemistically being called "opt-in" insurance.
The National Party, in opposition but leading in the polls, was not consulted on the insurance proposal, according to leader John Key. But Key and National Finance spokesperson, Bill English, have welcomed the proposal. They do, however, expect a bi-partisan process to be followed in designing and adopting the scheme. English will be briefed by the Reserve Bank on Monday.
Given the critical importance of deposit insurance to maintaining the nation's confidence, and that of internatonal lenders, in New Zealand's financial system that is a reasonable and proper course for both political and economic reasons.
Blog comment: this blog pointed out the absence of deposit insurance in New Zealand and the vulnerability of New Zealand's financial system back in July soon after the blog's creation. In recent weeks we've called for deposit insurance to be introduced. Global events have made such a scheme inevitable. It is unfortunate that the insurance system is only a voluntary one. As argued above, carrying deposit insurance should be seen as a duty or obligation of obtaining a banking licence in order to promote the public interest in a sound and stable banking system.
Stay tuned...
Update: read details released by the Reserve Bank of the "opt-in" deposit insurance scheme here.
Deposits in banks and non-banks such as building societies, credit unions, and finance companies will be covered, but each institution must choose to join.
The voluntary nature of financial institution participation underscores New Zealand misunderstandings of the policy objective of deposit insurance: it is designed to protect the financial system from systemic failure - a run on the banks; it is not designed to protect individual institutions from illiquidity, however much individual depositors may focus on that.
Permitting individual institutions to opt out of deposit insurance coverage is to turn your policy charged with ensuring financial system stability into a very leaky boat.
The major trading banks will very quickly get the message. To fail to join the deposit insurance system will tag their deposits as unsafe and uneasy depositors will start moving funds to insured accounts. Poor policy design, however, will create unnecessary and possibly costly uncertainty at the onset of the scheme. The "loan sharks", however, will be left to prey on unsuspecting depositors.
Thus, deposit insurance is a condition of obtaining a banking licence, not an option. Moreover, with deposit insurance - a socialisation of bank liabilities as the government through the insurance fund guarantees to back bank liabilities - must come tighter asset standards to be supervised by regulatory authorities, otherwise bankers or at least the shadier kind of financier has the incentive to take the depositor's money and run - into more speculative lending practices.
Let's hope someone at the Reserve Bank and the Treasury gets the picture on this and is persuasive enough to turn the policy around on this point.
Update: It appears that the policymakers were either in agreement with the politicians or were overridden because the Reserve Bank has announced the details of the voluntary system that is euphemistically being called "opt-in" insurance.
The National Party, in opposition but leading in the polls, was not consulted on the insurance proposal, according to leader John Key. But Key and National Finance spokesperson, Bill English, have welcomed the proposal. They do, however, expect a bi-partisan process to be followed in designing and adopting the scheme. English will be briefed by the Reserve Bank on Monday.
Given the critical importance of deposit insurance to maintaining the nation's confidence, and that of internatonal lenders, in New Zealand's financial system that is a reasonable and proper course for both political and economic reasons.
Blog comment: this blog pointed out the absence of deposit insurance in New Zealand and the vulnerability of New Zealand's financial system back in July soon after the blog's creation. In recent weeks we've called for deposit insurance to be introduced. Global events have made such a scheme inevitable. It is unfortunate that the insurance system is only a voluntary one. As argued above, carrying deposit insurance should be seen as a duty or obligation of obtaining a banking licence in order to promote the public interest in a sound and stable banking system.
Stay tuned...
Friday, October 10, 2008
Roundup on the Economic Crisis
Former Governor of the Reserve Bank & former Leader of the National Party, Don Brash, on the current global financial crisis, its impact on New Zealand, monetary policy settings, deposit insurance, and fiscal policy.
The second interview is with John Yeabsley, Director of the New Zealand Institute of Economic Research, the premier economic research institute in the country, on the Institute's latest set of forecasts and business survey.
Video is from the TVNZ breakfast show, October 8 or 9, 2008.
A virtual chocolate fish or buzz bar for the first commenter to identify who the figure is looking over Don's shoulder...
The second interview is with John Yeabsley, Director of the New Zealand Institute of Economic Research, the premier economic research institute in the country, on the Institute's latest set of forecasts and business survey.
Video is from the TVNZ breakfast show, October 8 or 9, 2008.
A virtual chocolate fish or buzz bar for the first commenter to identify who the figure is looking over Don's shoulder...
Manufacturers Call for Deposit Insurance in New Zealand
Echoing some of the policy changes called for on this blog in recent weeks, the New Zealand Employers & Manufacturers Association (Northern) has called upon the Reserve Bank to do the following:
"While the recent tax cuts will help, the Reserve Bank now needs to:
* Cut the Official Cash Rate (OCR) by at least one percent;
* Ensure NZ banks have access to sufficient Reserve Bank credit to ensure responsible lending can continue;
* Reassure business, depositors and lenders that our banks are safe and fully able to keep on lending.
"The Government needs to assure depositors that, should it be required, it will guarantee them even though all our banks are rated amongst the top 26 in the world.
"Now is not the time to maintain and overly narrow focus on inflation. Restoring confidence to ensure the recession does not deepen must take priority."
Tuesday, October 7, 2008
New Zealand Needs Deposit Insurance
New Zealand will be the only member country of the OECD area that does not have deposit insurance for bank customers once Australia introduces a scheme it announced in June to guarantee up to A$25,000 of bank deposits.
With European countries such as Germany extending a blanket guarantee to all personal deposits in recent days, the pressure on countries without deposit insurance schemes will mount to introduce some form of guarantee to reduce the risk of capital flight to banking systems where deposits are insured.
In New Zealand's case, the risk is of trans-Tasman capital flight to Australian insured deposits in times of financial instability that could further squeeze the availability of credit in New Zealand's banking system. Such disparities in deposit insurance schemes has seen British funds transferred into guaranteed deposits in Ireland. Moreover, since New Zealand's major banks, referred to as "the trading banks", are Australian-owned, an uneven deposit regime would likely create perverse incentives for the parent companies in relation to their NZ subsidiaries.
Deposit insurance in the United States has prevented runs on banks since the mid 1930s. Recent financial collapses in the US have occurred in those parts of the financial sector outside the FDIC-insured deposit sector. Banks holding insured deposits are subject to greater regulation than the investment banks and others that have become insolvent after trading rashly, and some fraudulently, in off-balance sheet financial derivatives that are poorly regulated.
The US policy error in the early 1980s was to socialise the liabilities (deposits) of savings & loan associations (saving banks) by escalating the amount insured per account but to deregulate or privatise the assets side of their balance sheets. The ensuing mayhem in the casino economy that US policymakers created ended in the savings & loan crisis in the mid to late 1980s.
Many of the current crop of bank failures were among those who scavenged the insolvent thrifts and turned them into peddlers of financial innovations encompassed under the umbrella term financial derivatives. The Federal Reserve under Greenspan helped things along by weakening the application of Glass-Steagall Act controls on asset management of commercial banks put in place to prevent some of the excesses of the Great Depression. Glass-Steagall was ultimately repealed by the Gramm-Leach-Bliley Act in 1999 wherein some of the seeds of the current US financial crisis may be found.
In the US, the solution is to re-regulate asset management. In New Zealand, the Reserve Bank apparently exercises effective prudential supervision of the trading banks, but the solution to minimizing the risk of systemic financial instability likely involves a deposit insurance scheme.
The Reserve Bank and other policymakers are supposedly concerned about the moral hazard problem if deposit insurance were to be introduced - that knowing deposits were guaranteed, bankers would engage in reckless lending activity. First of all, in the New Zealand banking culture, banker behaviour is relatively conservative given the dominance of the trading banks. Second, worrying about moral hazard when the horse has bolted from the global banking stable is not the time, as financier George Soros says, to be concerned about it: the systemic crisis must be dealt with decisively and effectively now to avoid deflation and broad economic collapse.
Finally, New Zealand has a long and undistinguished history of strategy switching when it comes to policy. The economic tsunami of the Great Depression, THE crisis of modern times, precipitated - eventually - a Labour-led welfare state of economic "insulation" - regulation & trade protection - combined with the broad development of social services. In the mid 1980s, a balance of payments and currency crisis unleashed free market reforms and fiscal & monetary austerity not seen since the 1920s. In short, policy development in New Zealand has been all too often ad hoc and reactive in nature to some economic or political crisis. The real challenge of strategy switching is to shift policy regimes when economic times are prosperous, when policy can be developed with reflection and full participation, not in haste, under the gun.
Central banking and financial regulation have been of that nature too. The Reserve Bank was only established in 1934, relatively late in the piece for developed countries, with New Zealand's own currency being issued for the first time in that year. The free market policies of the past twenty-five years combined with the Reserve Bank being charged with the primary responsibility of achieving price stability, have exposed the New Zealand economy to the full winds of the global market economy. In a curious irony, policymakers that have championed free markets ignored the fact that however well the New Zealand economy might perform - and it has continued to be mediocre by international standards - as a small, open economy it would have to respond to whatever policy regimes larger nations might follow.
An obsolete ideology has entrapped the nation in an economic web that exposes it to periodic systemic destabilization of the economy, polity, and society. The lesson learned by Kiwis in the 1930s has been forgotten by those in the early 21st century. Kiwis today are about to be taught the lesson once again because a careful knowledge of history is not something ideologues are known for.
With European countries such as Germany extending a blanket guarantee to all personal deposits in recent days, the pressure on countries without deposit insurance schemes will mount to introduce some form of guarantee to reduce the risk of capital flight to banking systems where deposits are insured.
In New Zealand's case, the risk is of trans-Tasman capital flight to Australian insured deposits in times of financial instability that could further squeeze the availability of credit in New Zealand's banking system. Such disparities in deposit insurance schemes has seen British funds transferred into guaranteed deposits in Ireland. Moreover, since New Zealand's major banks, referred to as "the trading banks", are Australian-owned, an uneven deposit regime would likely create perverse incentives for the parent companies in relation to their NZ subsidiaries.
Deposit insurance in the United States has prevented runs on banks since the mid 1930s. Recent financial collapses in the US have occurred in those parts of the financial sector outside the FDIC-insured deposit sector. Banks holding insured deposits are subject to greater regulation than the investment banks and others that have become insolvent after trading rashly, and some fraudulently, in off-balance sheet financial derivatives that are poorly regulated.
The US policy error in the early 1980s was to socialise the liabilities (deposits) of savings & loan associations (saving banks) by escalating the amount insured per account but to deregulate or privatise the assets side of their balance sheets. The ensuing mayhem in the casino economy that US policymakers created ended in the savings & loan crisis in the mid to late 1980s.
Many of the current crop of bank failures were among those who scavenged the insolvent thrifts and turned them into peddlers of financial innovations encompassed under the umbrella term financial derivatives. The Federal Reserve under Greenspan helped things along by weakening the application of Glass-Steagall Act controls on asset management of commercial banks put in place to prevent some of the excesses of the Great Depression. Glass-Steagall was ultimately repealed by the Gramm-Leach-Bliley Act in 1999 wherein some of the seeds of the current US financial crisis may be found.
In the US, the solution is to re-regulate asset management. In New Zealand, the Reserve Bank apparently exercises effective prudential supervision of the trading banks, but the solution to minimizing the risk of systemic financial instability likely involves a deposit insurance scheme.
The Reserve Bank and other policymakers are supposedly concerned about the moral hazard problem if deposit insurance were to be introduced - that knowing deposits were guaranteed, bankers would engage in reckless lending activity. First of all, in the New Zealand banking culture, banker behaviour is relatively conservative given the dominance of the trading banks. Second, worrying about moral hazard when the horse has bolted from the global banking stable is not the time, as financier George Soros says, to be concerned about it: the systemic crisis must be dealt with decisively and effectively now to avoid deflation and broad economic collapse.
Finally, New Zealand has a long and undistinguished history of strategy switching when it comes to policy. The economic tsunami of the Great Depression, THE crisis of modern times, precipitated - eventually - a Labour-led welfare state of economic "insulation" - regulation & trade protection - combined with the broad development of social services. In the mid 1980s, a balance of payments and currency crisis unleashed free market reforms and fiscal & monetary austerity not seen since the 1920s. In short, policy development in New Zealand has been all too often ad hoc and reactive in nature to some economic or political crisis. The real challenge of strategy switching is to shift policy regimes when economic times are prosperous, when policy can be developed with reflection and full participation, not in haste, under the gun.
Central banking and financial regulation have been of that nature too. The Reserve Bank was only established in 1934, relatively late in the piece for developed countries, with New Zealand's own currency being issued for the first time in that year. The free market policies of the past twenty-five years combined with the Reserve Bank being charged with the primary responsibility of achieving price stability, have exposed the New Zealand economy to the full winds of the global market economy. In a curious irony, policymakers that have championed free markets ignored the fact that however well the New Zealand economy might perform - and it has continued to be mediocre by international standards - as a small, open economy it would have to respond to whatever policy regimes larger nations might follow.
An obsolete ideology has entrapped the nation in an economic web that exposes it to periodic systemic destabilization of the economy, polity, and society. The lesson learned by Kiwis in the 1930s has been forgotten by those in the early 21st century. Kiwis today are about to be taught the lesson once again because a careful knowledge of history is not something ideologues are known for.
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