Q: On TV recently, it was reported that from July to August this year, the banks would be able to repurpose a person's money in their savings account, for the bank's own needs. Is this correct, and if correct could you give us more information, as I think this is quite important, don't you?
A: It's important, but not quite correct - and not a reason to panic.
What you're referring to is a policy called Open Bank Resolution or OBR. Reserve Bank Deputy Governor Grant Spencer has described it as "a process for dealing with a failing bank quickly, to enable the bank to reopen for business the next business day". Hence the name.
"Your bank can't just choose to use the money in your account for its own purposes," says a Reserve Bank official. "If a bank gets into financial distress, then the Minister of Finance is responsible for deciding whether or not to place the bank into statutory management - appoint someone to run the bank.
If this happens, most people want the bank to remain open rather than shut its doors for days or weeks while the issues are sorted out."
If a statutory manager is appointed and OBR is applied, a portion of the money in your accounts might be frozen and - probably months later - you could lose all or part of that money. But the majority of your deposits will be available from the next day, and the government will guarantee that no further amounts will be frozen.
As the situation is resolved, the bank's shareholders' funds - money from the bank's owners, not customers - and subordinated debt will be used first to pay debts the bank owes. But if that's not enough, bondholders' funds and the frozen deposits from customers will be used. "If not all of the frozen deposits are needed, they will be released back to depositors," says the official.
All locally incorporated banks with more than $1 billion in retail deposits, which includes all the big banks, have to have their IT and other systems set up to be "OBR-ready" by June 30 - tomorrow.
Why do this? "Without OBR, the options for responding to a bank failure are liquidation, government bail-out or takeover by a competitor," says Spencer.
If no "takeoverers" emerge, the other two options aren't appealing, says Spencer. "Government bail-out carries with it potentially huge costs to taxpayers. Liquidation is complex and time-consuming and results in the bank's customers not having access to any of their money for a lengthy period. In the case of a large bank, this could lead to serious disruption of the wider economy."
How likely is a bank failure in New Zealand? Read on.
Q: Considering that New Zealand is run by a man held to be part of the group responsible for the global financial meltdown, head of the only government in the OECD that will not insist on bank deposit insurance, at a time when banks are lending vast amounts to almost anyone to help fuel the tax-free profits to be made in house trading, do you think now would be a good time to take any savings out of the banks, and stuff it in the mattress? I think so.
A: I don't. Mattresses have their risks, too - such as burglary, fire and hungry bed bugs. And bank interest rates beat the mattress rate.
So how risky are banks? "Bank failures are very rare in New Zealand and we do not expect this to change," says Grant Spencer.
This reflects, "the low-risk nature of the business that New Zealand banks undertake relative to many other financial institutions", says the Reserve Bank. "However, banking failures can and do happen. One of the key objectives of the OBR scheme is to reduce the costs of allowing a bank to fail and minimise access to taxpayer funds or bailouts."
On your comments about the Prime Minister, I think they might be a bit far-fetched. On bank deposit insurance, see the next Q&A.
Spreading the risk
Q: I have been reading a lot lately about the Australasian banking system and the risks that we may be facing with them being in an "asset bubble". This combined with the Reserve Bank's Open Bank Resolution is making me nervous about where I have put my savings.
I have shares, managed funds and bonds. But I also have my first home deposit and other savings with one bank. When I purchase a home my risk will reduce. However, I want to know what options I have with regards to spreading the risk of where I save my money.
Also, can one get "deposit insurance" in New Zealand?
A: Deposit insurance is not offered to individuals - it's nationwide. As our previous correspondent noted, every OECD government but New Zealand has bank deposit insurance - reimbursing some or all of depositors' losses in a bank failure. The OECD has recommended that New Zealand joins the club.
This country did briefly guarantee retail deposits in banks and some finance companies during the global financial crisis, but no longer does so. Nor does the Government favour compulsory deposit insurance - which has much the same effect. "This is difficult to price and blunts incentives for both financial institutions and depositors to monitor and manage risks properly," Minister of Finance Bill English said in 2011.
He has a point. A few years back, under the short-lived deposit guarantee scheme, some people piled into finance company debentures that paid significantly higher interest than the banks. "I know they're risky," one woman said to me, "but if the company goes belly up, the Government will look after us." It did, and it did. And guess who paid up? You and I and every other taxpayer.
Without a guarantee or insurance, depositors take more notice of who they deposit with, and financial institutions have to reduce risk to attract depositors.
But how do we know how risky a deposit taker is? One indication is their credit rating.
Of the main banks, ANZ National, ASB, BNZ and Westpac have the highest Standard & Poor's rating, AA minus. Next comes Kiwibank with A plus, and then TSB with BBB plus, followed by Co-operative Bank and Heartland with BBB minus. For other financial institutions, see interest.co.nz or depositrates.co.nz.
The main banks' ratings are all "adequate" or better, but that's no absolute guarantee. The quality of ratings has been challenged recently. And they change over time. You might want to spread large deposits around two or three banks.
Tax credit alerts
Q: My wife received a letter from ANZ KiwiSaver recently alerting her to what she had contributed and how much more she would need to contribute by June 30 to get the maximum government tax credit.
From my Mercer scheme I received an email saying that I should log into my account to see how much I had contributed and also explained what was needed to gain the maximum credit - which I don't think was quite as effective as having the total amount needing to be contributed spelled out.
Overall good to see these providers engaging with their customers. They are going to make a reasonable amount of money out of us in the long term.
A: That raises another point about why a provider should offer this notification service. They get more money from members and the Government! Still, it's good for members too. Thanks to everyone who answered my request last week to hear about providers who offer this service.
In addition to ASB (mentioned last week), ANZ and Mercer, other providers named are: Craigs Investment Partners, Fidelity Life, Fisher Funds, Medical Assurance Society, Milford Asset Management, OnePath and SuperLife.
As noted above, some providers give each member an estimate of how much more they need to contribute to reach the $1,043 total, while others just tell them how to get that info.
One reader commented: "I switched provider some months ago in part because Fisher Funds had previously failed to tell me" how much more to contribute - even though it had reminded her to look into it.
Says a spokesman for Fisher Funds, "Unfortunately, we cannot (and I doubt any other provider can!) guarantee the accuracy of the member contribution amounts." He cited problems such as delays in payments from Inland Revenue. But some members ring Fisher Funds for the information, he says. "It's been much easier to explain the ins and outs of member tax credit top-ups over the phone."
One reader was particularly pleased with his provider's service. "My KiwiSaver is with Craigs. It wrote to me estimating how much I needed to contribute to maximise my entitlement, then followed up with a phone call!"
Not everyone is happy, though. "I have cashed in my ASB KiwiSaver account, after five years, as I am over 65, after making only minimal contributions. I knew nothing about this tax credit until two years ago, I think from reading your column! It is not difficult to rustle up $1,000-odd, when the benefit is so great.
"I feel very aggrieved that I have missed out on three years of this credit, it would have come in very handy."
ASB started its notification service only this year, but it says it has always highlighted KiwiSaver benefits to members. And I would add, where have you been? I and many others have been going on and on - and on - about the KiwiSaver incentives from the start.
From another reader: "Not only has AMP not sent me a letter advising me to ensure I have contributed enough, when I contacted it a few weeks ago by email asking it to provide a breakdown, with totals, of contributions (employee, employer, etc), it emailed me back saying it does not have the facilities to provide that information, and directed me to its website which lists every entry (including fees, IRD interest, etc) by date.
"I had to export the 'statement' to Excel and pick out my contributions myself and add them up. I would have thought I had a relatively simple request."
AMP apologises and would gladly follow up with you on this, says a spokeswoman. "Our dedicated customer services team can provide details of contributions and of the member tax credit process, noting that if members make regular contributions from their salary or wages, the most current record of total contributions is available via kiwisaver.govt.nz."
She adds that this year AMP contacted people who made a contributions top-up last year. But it seems that didn't include you.
Finally, some inspiration to those who say they can't afford KiwiSaver. Says one reader: "I'm doing $3 per week - not much I know but all I can spare from an already tight budget, as I'm on an invalid's benefit. I want to contribute more but can't afford to drop health insurance." Good on you!
Q: May I respond to last week's shares versus property discussion?
You said, "It's true that property prices don't plunge over mere hours". Don't homes affected by earthquakes, slips, storm damage, fire, etc, lose their value in two shakes of a duck's tail?
A: Indeed they do. And unfortunately, we've seen too many examples in recent years. But you've got to admit they are the exception.
The shares versus property debate just won't end. More next week.
• Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.