Did you know the Reserve Bank this week revealed its plans to manage the failure of one of the big four banks?

The release of any other disaster plan for a major part of New Zealand's economy would be big news, but not for banking. No one wants to highlight the risks involved in our big four banks, which make up the most concentrated banking system in the developed world with liabilities worth 180 per cent of gross domestic product.

Also, the Government doesn't want too much of a debate about how it would deal with a bank failure. The last time our Government guaranteed the big four banks, there was no debate.

The deposit guarantee scheme imposed over that mad weekend in October 2008 left a dangerous legacy. New Zealanders now believe that if one of the big banks fails, the Government will step in.


The Reserve Bank this week has done its best to indicate that we shouldn't expect that. The regulator has been working hard to come up with a way to allow a bank to fail and be reconstructed without a government bailout.

The Reserve Bank is calling this Open Bank Resolution (OBR) and has released its impact assessment of pre-positioning for OBR. This forces any bank with more than $1 billion of retail deposits to make sure its computer systems can flick the switch on OBR.

Under this scenario, a statutory manager would be able to shut down a bank, freeze a proportion of its unsecured liabilities and reopen for transactional business the next day.

The bank would be able to close all its access channels (online, branches, ATMs) and then reopen for business. This allows the bank to keep operating while the statutory manager works out who will take losses. The assumption is shareholders will be wiped out first, but unsecured term deposits may also take a haircut.

Reserve Bank Governor Graeme Wheeler has pointed out that OBR is not set in stone and it only provides a "very real alternative to bailout" by the Government.

So the moral hazard remains, as does the uncertainty for voters with $111.4 billion in term deposits at the end of September.

Unfortunately, it means the banks have the best of both worlds. They still have the implied guarantee from the Government, which effectively reduces the interest rate they have to pay savers, which is not paid for in the form of any deposit guarantee fee to the Government.

Taxpayers still face the risk of seeing bank losses socialised in future while today's profits are privatised.


A more honest solution would be for the Government and the Reserve Bank to openly state that a bailout would not occur. Term depositers would demand a higher return to compensate for the higher risk, and it would remove the moral hazard that currently subsidises the profits of Australian banks.