Call for bipartisan move to insure bank deposits

Media release by www.interest.co.nz, October 6, 2008

www.interest.co.nz calls for bipartisan move to insure bank deposits

Financial news and information website www.interest.co.nz has called on the major political parties to work with the Reserve Bank to create a bank deposit insurance scheme that gives further reassurance to savers as the global credit crunch worsens.

“Back in March we called for New Zealand to debate the adoption of a bank deposit insurance scheme before a crisis robbed us of the time and flexibility to have a considered and public discussion,” said Interest.co.nz editor Bernard Hickey.

“Action is now required across New Zealand’s political and economic leadership to ensure New Zealand is no longer the only country in the OECD without any form of bank deposit insurance or deposit guarantee,” Hickey said.

www.interest.co.nz is today calling on the National and Labour parties to work with the Reserve Bank of New Zealand to neutralise this issue before it becomes a political football and before banks are anywhere near where they might need it.

“This leadership group should announce a deposit guarantee scheme to guarantee up to NZ$100,000 person in any licensed bank or registered building society. This would be a government guarantee until an insurance scheme can be created,” Hickey aid.

Several events since March and in recent weeks have increased the urgency of this issue.

Firstly, Australia has announced plans for a “Financial Claims Scheme” that would guarantee A$20,000 in any account per person.

Obviously our major banks, ASB, BNZ, Westpac, ANZ and National, are owned by Australian banks. In any crisis this disparity will become destabilising. New Zealanders wanting some protection will open Australian accounts with the parents of their New Zealand banks. We are nowhere near this stage yet, but reducing the risk of a Trans-Tasman exodus should be a top priority.

Secondly, governments around the world are rapidly beefing up their deposit insurance schemes and deposit protection in response to the risks posed by the rapidly deteriorating credit crunch. America has just increased its deposit insurance scheme from US$100,000 per account to US$250,000 per account. Last week the Irish and Greek governments took the extraordinary steps of guaranteeing all bank deposits to forestall banking collapses.

Overnight the German government guaranteed all private savings accounts as it fights to rescue the second biggest mortgage bank, Hypo Real Estate, in Europe’s largest economy.

Meanwhile, credit markets remain frozen and banks in the Northern Hemisphere don’t trust each other. The commercial paper market which allows large corporations to fund their daily cash flows has also frozen. Many corporates are relying on emergency bank lending facilities and the banks in turn are relying on money they are borrowing from central banks.

There are not the same extreme levels of dislocation in Australasia yet.

“We agree with the Reserve Bank that our banks are sound and that they in a much stronger shape to cope with this disruption than many European and US banks,” said interest.co.nz publisher David Chaston.

“New Zealand’s banks are well capitalised, have extremely high credit ratings, are well regulated and are not materially exposed to the US sub-prime crisis,” Chaston said.

“If international credit markets remain frozen for months rather than weeks and if the European and US banking systems have an extended catastrophic breakdown then our banks will not be immune from these stresses,” he said.

“If this crisis goes beyond the next few weeks then our banks will have to sharply curtail new lending, particularly housing lending. Credit rationing of shorter term credit to businesses will intensify. Regardless of the fundamental soundness of our banks, this will make people nervous about the NZ$100 billion of deposits in our banks.”

“That’s why we need deposit insurance in place ahead of any risk of a loss of confidence.”

ENDS

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