11 Apr 2013

Reserve Bank stands by new bank collapse rules

1:39 pm on 11 April 2013

The Reserve Bank is continuing to back new rules to deal with a bank collapse, saying it's the best way to ensure the financial system runs as smoothly as possible following such an event.

The Open Bank Resolution scheme will start in June and is designed to minimise the disruption to the wider economy by allowing people to use their accounts as soon as possible if a bank collapsed.

The central bank says it is another tool for the Government to use if a bank collapses, and it doesn't rule out other measures, including introducing deposit insurance.

The Cyprus banking crisis, which resulted depositors losing part of their savings, sparked alarm that the OBR would unfairly penalise small depositors' savings here.

Its also been criticised by banks, while some analysts argue deposit insurance is a better alternative.

While depositors are likely to lose out, the Reserve Bank is adamant the OBR scheme will send the right signal to banks and their shareholders to manage the business prudently, because all their money would also be at risk.

It has previously said such a move could save New Zealand $1 billion in the event of a banking collapse.

The Reserve Bank's head of prudential supervision, Toby Fiennes, says the introduction of the OBR doesn't rule out the future use of deposit insurance, which can operate with or without the scheme.

The Government decided not to pursue deposit insurance in 2011, because it could weaken the banks' incentive to manage their risks properly, is difficult to price and not always effective in preventing bank runs.