21 Mar 2013

Reserve Bank defends bailout policy

11:28 am on 21 March 2013

The Reserve Bank is defending new rules to deal with a bank collapse and said its policy is nothing like moves to tackle a banking crisis causing chaos in Cyprus.

New Zealand's central bank is in the final stages of introducing an "open bank resolution" policy to be used if a commercial bank fails.

Such a bank would immediately be placed in statutory management and customers would have an unspecified amount of money taken out of their accounts to help fund the bailout.

The Reserve Bank says the measure is designed to minimise the disruption to the wider economy and could save New Zealand $1 billion in the event of a banking collapse.

The Green Party has accused the Reserve Bank of trying to adopt a scheme similar to one just rejected in Cyprus.

Banks in Cyprus remained shut on Wednesday as the country's government tried to find an alternative after rejecting the terms of an EU-IMF bailout deal.

Conditions of the deal included a levy on bank deposits which infuriated Cypriots and prompted residents to withdraw cash.

Deputy governor Grant Spencer said the New Zealand policy bears no resemblance to the solutions for Cyprus where he said there was a systemic collapse and not a case of just one institution failing.

The central bank argues its open bank resolution (OBR) policy would facilitate a rapid and orderly resolution of a collapsed bank and would actually help depositors, because the bank can reopen the next working day, giving customers full or partial access to their accounts.

However it admits some of their deposits could be frozen, while the rest would be available and government guaranteed.

Mr Spencer said depositors' money has never been guaranteed, apart from temporary periods such as under the Deposit Guarantee Scheme from late 2008 to December 2011.

He said the alternative to the bank's policy would be for the Government to bail out failing banks with taxpayers' money or to close them.

Responding to calls for a deposit insurance scheme, Mr Spencer said the Government believes the schemes blunt incentives for investors and banks to properly manage risks.

He said deposit insurance is widely used in Europe, including Cyprus, but hasn't prevented banking failures.

The deadline for New Zealand banks to ensure they can implement the policy is 30 June.