20 Mar 2013

Govt dodges clear answers on bank bailout policy

8:15 pm on 20 March 2013

The Government is refusing to be drawn on how much money might be taken from depositors' savings to bail out a bank that looked like failing.

The Green Party is accusing the Reserve Bank of trying to adopt a scheme to bail out banks which is similar to one just rejected in Cyprus.

The 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.

In a letter to banks, the Reserve Bank says it would expect them to be complying with the new policy by the end of June.

Questions in Parliament on Wednesday from Green co-leader Russel Norman elicited more heat than light on the matter.

Replying on Finance Minister Bill English's behalf, government minister Steven Joyce said that in the highly unlikely event of a New Zealand bank failing, the scheme would actually help depositors, because the bank in question would open the following day and depositors would have full or partial access to their funds.

Mr Joyce said the alternatives were that the bank would go into liquidation with depositors having no access to their funds for a long time, or taxpayers would have to fund an expensive bailout.

Dr Norman sought with further questions to establish exactly what amount would be taken from people's accounts, but an increasingly rattled Mr Joyce refused to be pinned down.

Opposition parties urge alternatives

Earlier on Wednesday, the Government said the policy would only be used in a worst-case scenario.

"At the end of the day we're talking about emergency provisions," Prime Minister John Key said. "These banks are heavily regulated, they have significant oversight and lender-of-last-resort facilities at the Reserve Bank.

"This is really in the event that a bank got itself in such a terrible mess that it fell over and had to restart again."

The Green Party says the policy would hit all bank depositors and a deposit insurance scheme in which banks pay a levy to insure against collapse would be much better.

Labour Party finance spokesperson David Parker says the Government should consider guaranteeing the first $30,000 of bank deposits in line with Australia.

David Tripe from the Centre for Banking Studies at Massey University says having a plan in place in case a bank goes under is a good thing, but the Reserve Bank policy is too complicated for most customers to understand, and might put people off using banks.