How would you feel if someone muscled in front of you in the queue at the bank? How would you feel if the manager actually encouraged queue-jumping?
That is what has happened to hundreds of thousands of New Zealanders who have more than $110 billion in term deposits. Until a few years ago, term depositers had priority over other bank creditors. They would be paid out first if the bank was to collapse.
But in mid-2010, New Zealand's big four banks started issuing covered bonds to mostly European investors. These are securities that are "covered" by the assets owned by banks, which in this case means mortgages.
Covered bond-holders have first dibs on the rubble after a bank collapse, and the mortgages underpinning covered bonds are often the best quality. Westpac excluded earthquake-struck postcodes from its cover pool.
These bondholders, mostly pension funds in Europe, have jumped the queue ahead of Kiwi term-deposit holders.
Now Parliament is considering a bill to enshrine this queue-jumping in law.
The Reserve Bank has been relaxed about this move by the big four banks (Kiwibank is also planning to issue covered bonds). The Reserve Bank imposed a 10 per cent limit on the issue of covered bonds as a percentage of total assets. This is above an 8 per cent limit in Australia, where they had been banned, and above a 4 per cent limit in Canada.
The Reserve Bank argues covered bonds make banks safer because they secure a more reliable source of funding than "hot" commercial paper funding on wholesale markets.
ANZ New Zealand raised $1.2 billion this month through an issue of five-year covered bonds in Europe with an effective interest rate of about 2.4 per cent. That is certainly cheaper than the offer of 5 per cent by ANZ, and its soon-to-be subsumed sister brand National Bank, for five-year term deposits to investors in New Zealand.
The big four banks have issued $11 billion worth of covered bonds since 2010 and have room to issue another $20 billion worth.
Parliament's Finance and Expenditure Committee has given covered bonds the big tick, suggesting that the lower funding costs could be passed on to Kiwis in the form of higher term-deposit rates. That hasn't happened, given the lower funding costs have helped boost bank profit margins by about 20 basis points.
The National-led committee even suggested the 10 per cent limit could be relaxed if the banks needed it.
This issue has received little public attention. Yet issuing covered bonds has shunted almost $110 billion of savings back down the queue, without any compensation in the form of higher term-deposit rates for the slightly higher risk.
Refinancing the "hot" foreign money with "cold" foreign money also reduces the incentive for New Zealand to cut its foreign debts. If the Reserve Bank had encouraged banks to raise more long-term funds from savers, term-deposit rates would have risen and there would not have been so much upward pressure on the New Zealand dollar.