Bank policy plan could cause widespread hardship

The Reserve Bank’s suggested approach to dealing with banks in financial difficulty has been criticised as unrealistic in submissions by the Director of Massey’s Centre for Banking Studies, Dr David Tripe.

The Reserve Bank’s suggested Open Bank Resolution policy would have everyone with a bank account in credit – even those with only a few dollars in their account – lose a proportionate amount if that bank was considered to be in such financial trouble that it needed to have a statutory manager appointed.

Dr Tripe argues that this approach, although theoretically pure, is completely unrealistic in practice.

“Such a policy, if implemented, would impose financial hardship on large numbers of New Zealanders, including those with the least ability to bear the cost," he says. “A much more realistic approach would be to guarantee some amount in people’s accounts, say, up to $50,000, which would mean that the people impacted by bank distress would be relatively few.”

Dr Tripe believes the healthy track record of New Zealand banks and their strong financial position means that any problem is extremely unlikely, but it is still prudent to have a policy in place to cover the unlikely event that something goes wrong at some time in the future.

“We need to make sure that any policies put in place do not have major cost effects for the public, as depositors, or for taxpayers, as the people who ultimately have to bear the cost if a bank were to get into trouble."