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Bank savers' funds now vulnerable to 'haircuts' - Greens

Bank savers' funds now vulnerable to 'haircuts' - Greens      30 June, 2013 - 15:34

A new Reserve Bank tool for managing bank failure comes into force today, meaning that, if needed, savers’ bank deposits can be taken to bail out their bank, the Green Party said today.

Open Bank Resolution, which came into force on June 30 2013, gives the Government the ability to apply immediate ‘haircuts’ to savings accounts in troubled banks to help bail them out.

"The National Government has chosen to make everyday savers liable for partly funding a bank bailout while simultaneously giving greater security to large investors," said Green Party Co-leader Dr Russel Norman.

"The Government has ignored best practice overseas by rejecting deposit insurance - the kind of protection enjoyed by savers in every other OECD country except for Israel.

"National is moving to protect the interests of large investors, by introducing a new law on covered bonds giving wholesale investors’ first preference over a failing bank’s best assets.

"Small depositors in New Zealand don’t have any of the protection large bank investors are being given by National.

"Small depositors, who have no ability to assess the soundness of their bank, could instead be protected by deposit insurance like they are everywhere else.

"We think $100,000 is a fair level of protection for New Zealand savers and most would be willing to pay the very small premium required to insure their savings from loss."

Both John Key and Bill English have consistently rejected deposit insurance saying that it is "difficult to price" and creates a moral hazard because it "blunts incentives for both financial institutions and depositors to monitor and manage risks properly". When Australia moved to insure the deposits of small investors, the Australian Treasury found the exact opposite was the case.

"The Australian Treasury’s advice on deposit insurance contradicts our own Government’s," Dr Norman said.

"The Australian Treasury found that deposit insurance is preferable to a caveat emptor approach, that it contributes to the overall stability of the financial system, and that any moral hazard can be limited through risk-based pricing.

"On the important issue of equity, the Australian Treasury said deposit insurance protected those least able to assess the risk of a bank and cost very little to implement.

"John Key’s arguments against deposit insurance show a remarkable similarity to the lobbying of the big Australian banks when deposit insurance was introduced over there.

"Banks can and do fail so small investors rightly deserve some protection from the risks they have no control over."

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