Q: Late last year, I was advised by ANZ, BNZ and Westpac that except in dire emergency situations a 31-day notice period would apply in future if I wanted to break a term deposit before the end of the term.
While in Australia last month I read an article about the "liquidity coverage ratio", where the Reserve Bank of Australia has introduced new regulations requiring banks to hold enough liquid assets to cover their lending outflows for a month during financial turmoil. These regulations have resulted in the 31-day notice period.
I understand the New Zealand Reserve Bank has not introduced similar regulations but instead provides Open Bank Resolution (OBR). If a bank were to fail, the OBR system allows the Reserve Bank to shut it down and reopen it the next day, after the potential for "haircuts" on term deposits. Incidentally, unlike term deposits in Australia, our New Zealand term deposits are not protected by the insurance guarantee scheme that applies over there.
As we now have all of our retirement cash in term deposits, we would be grateful if you can answer the following questions:
Why has this Australian Reserve Bank regulation been applied to term deposits held in New Zealand, when the banks here are supposed to be operating independently from their parents in Australia?
I realise (under OBR) that our term deposits are not guaranteed and can be given a haircut by the New Zealand Reserve Bank. But are our term deposits totally protected from the Australian parent bank taking some of our funds if that parent bank gets into financial difficulty?
A: You've got a pretty good handle on the situation. Here's how the Reserve Bank of New Zealand answers your first question: "From January 1, the Australian Prudential Regulation Authority (APRA) introduced a liquidity coverage ratio, which means the banks must have a certain amount of money in their coffers that can't be instantly withdrawn, potentially threatening their liquidity.
"The banks have responded by introducing a 31-day notice period for term deposit withdrawals. The four major banks are regulated in Australia by the Australian regulatory authorities and in New Zealand by the Reserve Bank of New Zealand. As long as compliance with rules in Australia does not contravene our regulations, then we have no cause for concern."
My interpretation: the notice period doesn't break any rules here, so there's no reason for our Reserve Bank to prevent it.
On your second question, the Reserve Bank spokeswoman says that in the unlikely event that the parent bank gets into financial difficulty, that shouldn't affect New Zealanders' deposits in the New Zealand subsidiary of that bank.
She adds: "In the unlikely worst-case scenario that the Australian parent was in strife to the extent that the New Zealand operations were affected, then the Reserve Bank of New Zealand would exert control over resolution of the New Zealand operations, including disposition of depositors' funds."
That means the OBR that you refer to. More in the next Q&A.
Deposit guarantees Does New Zealand have any legislation that guarantees deposits made with New Zealand-registered banks, and if so up to what amount?
We currently have savings accounts (ones with bonus interest) with one bank and are wondering if we should split them between banks as protection.
The New Zealand Government doesn't guarantee deposits in banks — as noted in the previous letter. But the Open Bank Resolution (OBR) policy gives depositors some protection if a bank gets into trouble.
OBR "provides access to depositors' funds that does not exist in a normal liquidation process, when depositors may not be able to access their accounts for extended periods", says the Reserve Bank's website.
"Under OBR, if a bank fails, it can be reopened the next day under statutory management. Customers have immediate access to most of their money. Under OBR, this money will be government-guaranteed.
"If losses cannot be covered by shareholders and the bank's available capital, then in addition a proportion of depositors' funds are set aside and frozen for the purpose."
This is the "haircut" our previous correspondent referred to. Whether it's a trim or something more radical will depend on the circumstances of the bank failure.
And you might get that money back eventually. "Depositors still have a legal claim to their frozen funds as unsecured creditors, and if any money can be returned to depositors after the bank's financial situation has been worked through, it will be," says the website. For more detail see tinyurl.com/obrmadesimple.
One way to get an idea of a bank's financial strength is to look at its credit rating. Currently, ANZ, ASB, BNZ and Westpac all have Standard & Poor's ratings of AA minus, while Kiwibank has the slightly lower A plus. For other banks' ratings, see tinyurl.com/creditratingsnz.
On that page there's a link to another page called "Explaining Credit Ratings". This tells us our main banks are regarded as strong to very strong financially. Nonetheless — as we saw in the global financial crisis — credit ratings can be wrong.
If you have substantial bank deposits, it's not a bad idea to split them among two or three banks. It also helps you keep tabs on which banks offer the best interest rates.
Q: I'm afraid I have to disagree with your response to the "sibling rivalry" correspondent two weeks ago. I'm in a similar situation in that my daughter also presents me with arguments (constantly) as to why she should be given money without providing anything in return.
Her arguments are not as sophisticated though. My favourite: "All my friends' parents give them money all the time for whatever they want." But then she is only 15 and still learning how to be financially responsible and independent.
To state the obvious, money represents value, and 99 per cent of the time it changes hands as part of a mutually beneficial value exchange between two or more parties. The other 1 per cent of the time it's many other things, one of them being welfare.
In the letter in your column, the older daughter and her parents want to exchange value for their mutual benefit (the daughter borrows at a lower interest rate than the bank charges, and the parents lend at a higher rate than the bank pays.) The younger daughter is just looking for an angle to argue for welfare.
What was required here was parental advice, not financial advice. My suggestion: the parents should tell their younger daughter to get off her chuff and earn the money she receives — a concept I thought every adult had grasped long before they reached their late 40s.
A: "But," the younger daughter might say to her parents, "my older sister isn't earning the break she gets by borrowing from you. She's just lucky that you'll lend to her. So why should I have to earn anything?"
The way I see it, this is not about money for nothing, but equal treatment of siblings.
But you've got an ally in the next correspondent.
Q: What a money-grabbing younger daughter.
My answer to the letter would be: The older daughter's loan agreements are just that, private and her business. The parents' situation is slightly different and therefore the younger daughter thinks she is entitled to half.
Well the older daughter is giving the parents a higher interest rate. The younger daughter should be doing the same, not demanding money from the parents.
A: Fair point — although I don't think it makes for harmonious family relationships to say the older daughter's agreement with her parents is no business of her sister.
For more harmony, see the next letter.
Sharing Dad's funds
Q: About the two daughters and ways to borrow their Dad's money, I think it is more about the "opportunity cost" that irks one daughter (in that the other daughter will benefit from borrowing all of Dad's money), and she is probably justified in feeling that way.
I think Dad should decide how much he wants to keep in the bank at a relatively low return and risk and offer to lend his two daughters the rest, evenly split between the two. Let's say Dad decides to keep $200,000 of his $500,000 in the bank. That leaves $300,000 for his two daughters to borrow, up to a maximum of $150,000 each.
If the daughters decide to proceed, it is at an interest rate halfway between the mortgage and term deposit rates. All carefully documented, of course.
If one daughter decides not to borrow money, that is tough — at least he offered! But he should not lend any more to the other daughter than $150,000. He should accept the lower rate at the bank for the balance. But the offer is still open to the other daughter to take up later.
This would spread the risk on Dad's hard-earned savings, and avoid one sibling borrowing the bulk of his money then potentially losing it all on a bad investment, which usually does not go down well with the rest of the family!
Should Dad die (heaven forbid) then this approach may also help in terms of distributing his estate evenly, and minimise any conflict at that time.
Dad has said there is so much friction in the world and he does not want to create any more. He is right — these matters should be out in the open, and kept as fair as possible — while also maximising his return and minimising risk. Tough ask. The best option may be to not lend money to his daughters at all.
A: That seems overly negative. I prefer your $150,000-each proposal.
On your comment about the father's estate, that's a complex issue. See next week's column.
Why not Taupo?
Q: The first letter from last week was the niece who couldn't use her deposit for the Auckland house market. Can you pass on the message for her to consider here, at Lake Taupo?
There are a lot of properties for sale here. Nowadays you would be lucky to buy into a $250,000 property, but most affordable properties are in the $300,000 to $450,000 range. Taupo is a great place to live and raise children. And people here do need homes to live, thus renting out is very feasible. And it's only three-and-a-half hours' drive to the land of Auck. Food for thought?
A: Whenever this column includes Q&As about ridiculous Auckland house prices, readers send letters like yours. And you're always making a good point.
Many Aucklanders respond that they can't move because of their job, or ties with family and friends. But it's good to challenge that thinking every now and then.
• Mary Holm is a freelance journalist, 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. Send questions to email@example.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.