Did you know your money in a bank term deposit is not guaranteed by the Government?

Most term depositors still think there's a guarantee, or that there has always been one.

A guarantee for retail bank deposits was introduced at the worst point in the Global Financial Crisis in October 2008 but quietly dropped once global markets had settled down in December 2011.

It was replaced by a system called "Open Bank Resolution". If a bank fails, the Reserve Bank shuts it and manages a capital restructure overnight so it can re-open the next day.


One way a bank's capital could be restructured is through a "haircut". Essentially, the Reserve Bank would slice, say, 10 per cent off the value of term deposits to allow the bank to re-open with enough capital.

No one thinks it is remotely likely any time soon. New Zealand's banks have stored away a lot more capital over the past eight years and are well regulated and very profitable. They also have very large parents in Australia expected to help in a crisis and who demonstrated that support in 2008-09.

But if there was a more extreme version of the GFC and the Australian parents went AWOL and the local banks' capital reserves were wiped out, the last resort would be for the Reserve Bank to haircut deposits. The Government would come under enormous pressure to intervene before term deposits were cut.

However, there has been one exception. Deposits in Kiwibank were guaranteed by New Zealand Post, but that will lapse once the deal proposed this week to sell 45 per cent of Kiwibank to New Zealand Superannuation and ACC is completed. It will then not be guaranteed, although the Government has offered to inject up to $300 million if needed.

One of the reasons NZ Post wanted to sell the stake is it couldn't afford the guarantee and, as Bill English pointed out this week, it wasn't very credible.

"You had an entity worth $1billion guaranteeing $17b of banking assets. It wasn't really an effective guarantee, but now that has been replaced by an arrangement where the Government underwrites any capital requirements related to the bank coming under pressure so depositors know that if anything went wrong with Kiwibank, then the Government is able to stand behind it," he said.

He compared the Government's role behind Kiwibank to that of the Australian parents of ANZ, ASB, BNZ and Westpac, which is not the same as a Government guarantee.

The problem remains that most New Zealanders wrongly believe their $152b worth of term deposits is guaranteed.

The Commerce Commission would demand any other product properly advertise its features, or lack thereof. If a seller of torches failed to put "batteries not included" on the packet there would rightly be questions about its compliance under the Fair Trading Act.

It's time the Reserve Bank and the banking industry ran a public education campaign for savers. It would reduce the pressure for politicians to act in a crisis and help investors think more clearly about the risks and returns from different types of investments.

A "guarantee not included" label on their advertising would help, but a proper industry publicity campaign would be good, too.

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