Open Bank Resolution - you deposit used to help out faulting banks

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Forums › Finance and wealth management › Open Bank Resolution - you deposit used to help out faulting banks

testha

116 posts

Master Geek

#115291 20-Mar-2013 15:43

While support the general idea of making sharehodlers liable, I do not agree that my deposit should be used to help out a faulty bank. Might as well use tax payers money...

Also TIL that there NZ is one of teh very few OECD countries that dont have a deposit insurance scheme. :/

Links:

http://www.rbnz.govt.nz/finstab/banking/4430900.html
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10872361
http://www.greens.org

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1688 posts

Uber Geek

#784549 20-Mar-2013 15:51

I'm torn on the subject - on one hand, why should my money go to prop up a bunch of fat-cat bankers.

On the other hand, putting money on a savings account is a form of investment, and like any other, has a risk. Investing in a bank savings account is a low interest, low risk investment, but low risk isn't no risk.

On the gripping hand, I have wayyyyy more debt in the shape of my mortgage than any form of savings, what are the odds of noone calling in my mortgage if the bank goes titsup?

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wellygary

7384 posts

Uber Geek

#784560 20-Mar-2013 16:05

Open Bank Resolution is a system that allows for a bank to remain open - by using a % of depositors funds as capital to enable the bank to continue to function,

It is designed to prevent the situation where a bank fails and closes its doors to everyone, the receivers take over and it takes months or years for customers to get they money( if they do get anything)

If you move to a "insurance" type system the banks just include the levy through lower interest payments for deposits or higher charges, + it leads to the situation of small institutions like finance companies go nuts with dodgy lending knowing that money will still flow through the door as customers will be saved by a government payout if it all goes bad..... have a look at South Canterbury Finance if you think Bank insurance promotes a stable financial system....

@Blueshift, If a large bank goes tits up in NZ, they are not going to call in your mortgage if you keep up the payments. A mass call in of mortgages would facilitate a huge glut of property on the market and a crash in prices, meaning the bank got even less money back..

The most likely situation is that the loan book would be sold on to another bank and things would continue as normal for the customer..

BlueShift

1688 posts

Uber Geek

#784577 20-Mar-2013 16:27

wellygary:
@Blueshift, If a large bank goes tits up in NZ, they are not going to call in your mortgage if you keep up the payments. A mass call in of mortgages would facilitate a huge glut of property on the market and a crash in prices, meaning the bank got even less money back..

The most likely situation is that the loan book would be sold on to another bank and things would continue as normal for the customer..

Short answer - if (reasonably big if) bank goes titsup, my money invested with them is at risk, theirs lent to me isn't...

ajobbins

5050 posts

Uber Geek

Trusted

#784583 20-Mar-2013 16:35

BlueShift:Short answer - if (reasonably big if) bank goes titsup, my money invested with them is at risk, theirs lent to me isn't...

Receivers would sell that debt to another lender who would take it over from there. Proceeds from sale of debt would go towards any debts the failed bank had itself.

Twitter: ajobbins

testha

116 posts

Master Geek

#784643 20-Mar-2013 18:20

If you move to a "insurance" type system the banks just include the levy through lower interest payments for deposits or higher charges, + it leads to the situation of small institutions like finance companies go nuts with dodgy lending knowing that money will still flow through the door as customers will be saved by a government payout if it all goes bad..... have a look at South Canterbury Finance if you think Bank insurance promotes a stable financial system....

The insurance works quite well in the rest of the world and besides the OPR is only for bigger banks anyway (locally incorporated banks with retail deposits over $1 billion).

I think it is a good idea as you never know what will happen to the economy with the Euro crisis still going on and the Aussie mining sector slowly going downhill.

mattwnz

19389 posts

Uber Geek

#784659 20-Mar-2013 18:46

Having your money in the bank isn't really considered an investment as it basically makes enough interest to keep up with inflation. Some account s don't. If you invest money, you don't put it in the bank. It is used by many as just a safe place to keep their money. Otherwise people would be safer to keep their money in their own safe. Thus it should be covered by some form of guarantee scheme, as it should be zero risk. The problem is that banks are lending to people buying overpriced houses, with very small deposits, which is a bubble that will burst.
I think this latest move makes it far more likely there could be a run on the banks when another financial crisis hits, which may not be that far off, seeing what is happening in europe, as it is a bit like watching a slow car crash.
I believe that is one reason why the last bank guarantee was introduced back in 07-08. Pretty much everyone has a bank account, so I don't see any problem with the tax payer bailing out banks weith some form of deposit insurance scheme, as long as the banks aren't doing risky lending. The last one was successful, apart from the fact they also insured a few finance companies, which was a big mistake, as many people put their money in those when they had a guaranteed 7% return at no risk.
Also remember that NZ is one of the only countries in the OECD now that doesn't have some form of insurance. People have insurance on their houses, so why would keeping your money in the bank be any different. It is really not an incentive to save anything, and instead spend.

bfginger

1237 posts

Uber Geek

#784682 20-Mar-2013 19:35

Couldn't this system encourage the Australian banks to outsource their losses to their NZ subsidiaries in the event of a failure?

Wouldn't making depositors liable for banking failures encourage greater risk taking from the banks than if they had to pay insurance premiums where their profit margins would be skimmed by the best financial insurance analysts in the business who would recognise their risk profit better than members of the public?

DaveDog

336 posts

Ultimate Geek

#784792 21-Mar-2013 08:08

I cannot fathom why anyone has a problem with this. You invest money and there is a risk. Simple as that. I'm a taxpayer - why should I carry the risk for someone else's investment?

Kyanar

3877 posts

Uber Geek

Trusted

Subscriber

#784797 21-Mar-2013 08:23

DaveDog: I cannot fathom why anyone has a problem with this. You invest money and there is a risk. Simple as that. I'm a taxpayer - why should I carry the risk for someone else's investment?

My transaction account is not an "investment". It returns ZERO interest to me. Why should I be on the hook for the bank's investments?

Byrned

453 posts

Ultimate Geek

#784801 21-Mar-2013 08:28

DaveDog: I cannot fathom why anyone has a problem with this. You invest money and there is a risk. Simple as that. I'm a taxpayer - why should I carry the risk for someone else's investment?

Completley agree with this. Any investment (especially one with a return) carries risk. Risk can often be defined by the amount of return.

BlueShift

1688 posts

Uber Geek

#784827 21-Mar-2013 10:16

Byrned:
DaveDog: I cannot fathom why anyone has a problem with this. You invest money and there is a risk. Simple as that. I'm a taxpayer - why should I carry the risk for someone else's investment?

Completley agree with this. Any investment (especially one with a return) carries risk. Risk can often be defined by the amount of return.

So an account with 0% interest, that you also pay account fees on should be negative risk?

DaveDog

336 posts

Ultimate Geek

#784829 21-Mar-2013 10:21

Kyanar:
DaveDog: I cannot fathom why anyone has a problem with this. You invest money and there is a risk. Simple as that. I'm a taxpayer - why should I carry the risk for someone else's investment?

My transaction account is not an "investment". It returns ZERO interest to me. Why should I be on the hook for the bank's investments?

Because as a depositor, you make a conscious decision to use that particular banks services - As soon as your money hits your account... Interest or not - You're an investor. It's your responsibility to check out their potential status and weigh up the risk...

DaveDog

336 posts

Ultimate Geek

#784830 21-Mar-2013 10:22

BlueShift:
Byrned:
DaveDog: I cannot fathom why anyone has a problem with this. You invest money and there is a risk. Simple as that. I'm a taxpayer - why should I carry the risk for someone else's investment?

Completley agree with this. Any investment (especially one with a return) carries risk. Risk can often be defined by the amount of return.

So an account with 0% interest, that you also pay account fees on should be negative risk?

Not at all. The account may pay no interest - but you are receiving services in lieu of interest anyway.

Dairyxox

1591 posts

Uber Geek

#784896 21-Mar-2013 11:53

What if you want to use banking services, but not be an investor?

I dont agree that banks should do this, believe it is barely legal stealing.

The way i see it, you probably shouldn't even be using a bank that is faulting. Put the money elsewhere.

I think that banks make (most of their) money doing too many 'odd' things (like derivatives investments) when most people only need the basic services.

testha

116 posts

Master Geek

#784915 21-Mar-2013 12:32

Because as a depositor, you make a conscious decision to use that particular banks services - As soon as your money hits your account... Interest or not - You're an investor. It's your responsibility to check out their potential status and weigh up the risk...

A bank offers a service, they get my money to keep it save and can work with it till I want it back. Since they need cash to do other business (loans) they are not interested in me withdrawing my money. That is why they offer an incentive to me to keep it deposited for longer. You get a higher interest the longer you deposit it. This is not an investment. A normal teller can do this for me. If I do want to invest my money I have to talk to a different branch of that bank.

Besides, a normal customer of a bank does not have the ability to check a banks potential status. Most banking experts didnt even see the last financial crisis coming. How am I supposed to do this?

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