The OECD Is Wrong About Deposit Insurance

The OECD has been hard at work preparing a fancy report that tries to impose globalist policies on New Zealand. One of their suggestions is that New Zealand should move to implement bank deposit insurance over the Open Bank Resolution model which would impose haircuts on bank depositors and wipe out shareholders in order to eliminate or significantly lower the cost of a big bank bailout.

The problem with globalist agencies trying to tell a sovereign country what policy options it should pursue is that it does so without any consideration of that country’s unique experience with that policy in the past is.

Remember the Crown Deposit Guarantee Scheme? That enabled our banks and finance companies to survive the worst of the “global financial crisis”. It also cost taxpayers billions of dollars – and led to our largest ever fraud trial coming to you soon in the form of South Canterbury Finance.

Deposit insurance, in the aftermath of Cyprus, which showed that all bank deposits are fair game in a bail-in, is nonsensical. The immediate reaction of South Canterbury Finance after getting into the Crown Deposit Guarantee was to ramp up its risky lending. Why? Because the cost of failure had been shifted from bondholders and shareholders to taxpayers.

In the case of the big banks, an argument can be made that, along with lower levels of syndication (shorter distance between borrower and owner of that mortgage) and absence of deposit insurance, our banking sector is slightly more risk averse than other banks around the world. When you add in recourse lending (you can’t walk away from an underwater mortgage without risking bankruptcy), New Zealand’s financial stability plan is working just fine thank you very much.

Already, the market is confused because there is no telling how the NZ government would react to a major bank getting into trouble. While Open Bank Resolution is quite explicit as to what the process is, political reality and convenience dictate that it would provide an optimal chance for a government to grandstand and “save the day”.

Bank depositors still do not understand that they are in a debtor/creditor relationship with their bank. Standard risk management principles apply even to regulated and well capitalised banks in this country. The OECD is wrong about deposit insurance because the marginal banks would be able to expand their loan books at a higher rate than their fundamentals would justify.

As economic thinkers, we want the taxpayer to be liable for the least amount of risk prudent in a risky global environment. The commentary written by globalist organisations like the OECD, IMF and World Bank aren’t that helpful in working towards sensible policy in New Zealand.

We have our own bundle of preferences that the median voter wants that are bad enough, adding dumb ideas that increase moral hazard risks and asymmetric information between regulators and the regulated does not help sensible bank regulation at all.