Your Money and careers writer for the NZ Herald

Diana Clement: Bank failings show savers should look to diversify

As we have no deposit insurance, it makes sense to spread savings around

Cypriots have really taken a 'haircut' on savings in their troubled banks. Photo / Thinkstock
Cypriots have really taken a 'haircut' on savings in their troubled banks. Photo / Thinkstock

It all starts with school banking. We get into the habit of depositing money in savings accounts and soon there is a sizeable amount in the bank.

But just how safe are those savings? Not 100 per cent, that's for certain. Small savers' money in particular isn't as safe as it would be in any other OECD country because we don't have a deposit guarantee scheme (aka deposit insurance).

Such schemes are an insurance designed to protect savers' money if the bank fails.

It's unlikely that a New Zealand bank would fail. As Reserve Bank of New Zealand head of prudential supervision Toby Fiennes says, the banks are in good health, have robust balance sheets and are well positioned to withstand pretty severe stresses.

You can, however, never say never. A truly safe investment is a myth. There is always some risk and, as has happened for many financial institutions in recent years, worst-case scenarios do happen.

Many bank customers who complained to the banking ombudsman during and after the global financial crisis didn't fully understand the risks they had exposed themselves to through their investment choices.

"All investments carry a degree of risk, whether the investment is made through a bank, an independent adviser or some other way," says ombudsman Deborah Battell.

"Despite signing investment applications that clearly stated that investments can fluctuate and that you can lose capital, many customers did not believe this would happen."

At the height of the financial crisis, banks failed in other well regulated countries.

In Britain, Northern Rock and Bradford & Bingley collapsed. In that country savers had their money returned by a Government-backed compensation scheme. It covered savers for up to £85,000 ($162,000) each per financial institution. Even Cyprus insures the first €100,000 ($165,000) of any savings. We have nothing. Here you'd get zip.

As New Zealand finance companies folded, the Government offered a short-lived guarantee, which has now expired.

The OECD recently called for New Zealand to relaunch deposit insurance but the Government hasn't been interested.

Deposit insurance isn't the only relevant factor in the safety of your savings.

The country's regulatory oversight is also important. In New Zealand that's a work in progress. It's being beefed-up bit by bit, having been comparatively weak before the financial crisis.

One of those changes is the launching of "open bank resolution" (OBR), which could allow for a proportion of Kiwis savings to be appropriated to keep an at-risk bank afloat.

The idea is that if one of our banks fails some of your savings are frozen instantly and the money could be used to keep the bank running.

The Minister of Finance would decide whether to put the bank into statutory management and a portion of savers' money would be frozen and used if need be to keep the bank running. They may never see that money again.

For savers it could be a blessing and a curse. The blessing is that the bank is open for business the next day and savers don't have to wait for liquidators to give them some crumbs a few months down the track. The curse is the potential loss of a portion of their savings.

The OBR scheme would give a government guarantee on the portion of the saver's funds that wasn't frozen, which is better than if a bank went into liquidation and your funds were controlled by the liquidator with no guarantee at all.

The RBNZ has a simple fact sheet for anyone who wants to read more at

OBR is not that different to what happened in Cyprus when local banks failed.

The poor Cypriots have really taken what they call a "haircut". They have seen 37 per cent of any savings over €100,000 converted into shares in their troubled banks. Another portion of their money remains frozen. It's more of a scalping than a haircut. "They cut off our legs above our knees," one Cypriot commented in a video I watched.

Whatever the promises from governments, the Cyprus haircut shows that savers everywhere should diversify. No one should be wedded to one bank.

Most Kiwis would be happy to spread their money between several locally or Australian-run banks. The high street banks, plus BankDirect, HSBC and RaboDirect, all have relatively high credit ratings.

Even so it could be argued that keeping all your money in banks in the same country is risky. The Cyprus example shows that all a country's banks can be affected by economic malaise. It's worth noting, as well, that Cyprus was a member of the European Union with its allegedly civilised rule of law; not some tin-pot third-world backwater.

With that in mind, the spread of money might need to be wider than just the banks. As well as the banks there are other relatively conservative savings organisations such as building societies and credit unions. It's worth noting, however, that building societies and credit unions generally have lower credit ratings than banks, which means they are less likely to withstand adverse trading conditions.

There are many other alternatives to banks for people who want cash or cash-like investments. For the super cautious the Public Trust has a Moody's credit rating of Aa3 (which means it's at the lower end of "very strong") and New Zealand Government Kiwi Bonds, have an AA+ rating. Both have a lower interest rate than many of the banks' term deposits because of the greater level of security associated with a government investment. Being public entities one would hope that the Government would bail them out in a crisis.

Another option for receiving a near-fixed return is to buy debt securities (bonds) in major New Zealand companies such as Auckland International Airport, Infratil or Z Energy. Think of it as lending money to these companies and being paid a fixed return. The price of these debt securities does fluctuate a bit because they're bought and sold on the open market, but it's a fairly stable return, which is often higher than paid by the banks on term deposits.

Some investors hold their cash in financial advisers' or fund management companies' cash management accounts.

Each will be run differently, but the Craigs Investment Partners cash management account, for example, holds the money in a pooled account with the ANZ.

That should be safer than being in the coffers of the company itself.

There will no doubt be people who are now only willing to invest in gold and other precious metals and have it in a safe deposit box or under the mattress.

One person posting on said he had decided to pull his savings out of New Zealand in favour of a country with deposit insurance. That could be a tad extreme.

Diversifying, or spreading your money around, needs to be planned, not executed as a knee-jerk reaction to a financial crisis or change in legislation. As well as savings and bonds it's a good idea to have shares and property - although the property could be your own home.

The more different types of assets you have the less likely it is that you will lose money.

When one investment does badly another might be doing well, says the RBNZ.

Another risk to savings that I haven't mentioned is the banks' abilities to help themselves to your savings if a mortgage, business loan, or any type of guarantee goes sour. Read the paperwork and you'll find that the bank can dip into your savings any time it wants if the loan falls into arrears.

If it's you own mortgage then this would probably be fair, although it may not be timely for you. If, however, it's a business loan shared with others or a guarantee on someone else's mortgage or personal loan then your money might be grabbed out of proportion to the risk you thought you were bearing.

The moral to this tale is to keep your savings and your borrowings with different banks. You may still be liable to pay any debts, but the bank can't dip in at an inconvenient time for you.

- NZ Herald

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Your Money and careers writer for the NZ Herald

Diana Clement is a freelance journalist who writes about personal finance and careers. She has worked as a journalist for more than 25 years in both New Zealand and the UK. Diana has contributed to a large number of local and international publications. Her pet topic is the secrets of saving money.

Read more by Diana Clement

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