New Zealand's Open Bank Resolution (OBR) policy is "markedly different" from proposals to resolve the banking crisis in Cyprus, Reserve Bank deputy governor Grant Spencer said today.
Spencer, in a statement, said OBR would help to facilitate a "rapid and orderly" resolution of a collapsed bank.
He pointed out that depositors' money has never been guaranteed, apart from temporary periods, such as under the Government's deposit guarantee scheme from late 2008 to December 2011.
"If their bank fails, depositors have always needed to understand that deposits are not guaranteed," Spencer said. "What OBR does is facilitate a rapid and orderly resolution of a bank failure - it does not change the fact that depositors and other creditor funds are at risk," he said.
New Zealand banks are readying their IT systems for OBR - a Reserve Bank policy that in extreme cases like insolvency would see a bank's losses shouldered in part by its shareholders and creditors - including everyday depositors.
The Reserve Bank has the power to freeze bank deposits but up until now has lacked the technical infrastructure to implement it - hence their requirement for banks with retail deposits of more than $1 billion to change their systems and meet their requirements by July 1.
Bank failures in New Zealand are rare and the main banks operating here are among the most highly rated in the world.
Spencer said the OBR policy bears little resemblance to proposals to resolve the banking crisis in Cyprus.
He said the alternative to OBR is for the government to bail out banks with taxpayers' money - which comes with potentially enormous fiscal costs - or to close the failing bank, which comes with large economic costs.
"The Cyprus situation is very complex, it is a systemic collapse and not a case of just one institution failing," Spencer said, adding it needed to be seen in the context of the broader European sovereign debt and banking crisis.
The Cyprus banking system is dominated by a large foreign deposit base, from Russia in particular.
Spencer said deposit insurance is not a substitute for OBR or any other resolution tool.
The New Zealand Government had looked at deposit insurance schemes and concluded that they blunt the incentives for investors and banks to properly manage risks, and may even increase the chance of bank failure.
"Deposit insurance is widely used in Europe, including Cyprus, but hasn't prevented banking failures, as we saw during the global financial crisis," Spencer said.
Overnight, Cyprus rejected a proposed levy on bank deposits as a condition for a European bailout, throwing international efforts to rescue the latest casualty of the euro zone debt crisis into disarray.
The vote was a big setback for the 17-nation currency bloc, angering European partners and raising fears the crisis could spread. Lawmakers in Greece, Portugal, Ireland, Spain and Italy have all accepted austerity measures over the last three years to secure European aid, Reuters reported.
On Tuesday, the New Zealand Green Party seized upon the opportunity to draw parallels between OBR and the initial Cyprus proposal.