Theoretically any NZ bank could go belly up - although it doesn't seem likely currently

Key Points:

Q. I contacted you a few years ago about selling a lifestyle block. Took your advice, did well and moved to the city. Didn't want another property so we've rented. The nest egg is in the (National) Bank at 8.5 per cent, which is adequate.

Adequate and, we thought, safe. Then Adam Bennett gave us a fright in a recent Weekend Business lead story, "Are Our Banks Safe?"

His was not a reassuring perspective. Maybe it would be better under the mattress. Care to offer a second opinion?

A. I decided to take your question, and the next two, to the institution that presumably knows more about our banks than anyone else, the Reserve Bank.

Its response: "New Zealand's banking system is sound, and the public can have confidence in it. New Zealand's banks are profitable and well-capitalised, meaning that they carry a financial buffer for unforeseen circumstances.

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"They have not had the direct exposure to the US sub-prime crisis that some of the US banks have, nor engaged in the kinds of practices that some of the US sub-prime lenders have."

Still, the Reserve Bank acknowledges that global conditions "have resulted in an increased cost of funds for the New Zealand banks when they are borrowing abroad, and some global funding markets have been harder to access."

This has led to higher interest rates on both loans and deposits. "However, these developments do not mean that the New Zealand banks have become unsafe."

The Reserve Bank adds that it has taken steps to make it easier for New Zealand banks to borrow from it. It's watching the situation closely and says it has lots more capacity "to support the liquidity of the banking system".

Okay, you might say, but the Reserve Bank would say that, given that it doesn't want to undermine confidence in the banking system. And it is possible that things aren't as good as they say. But I'm leaving my money in a bank.

After all, under the mattress carries its own risks - of theft or fire. Also, the value of your money will fall because of inflation, in stark contrast to in the bank, where interest rates are historically high relative to inflation.

PS. That's great to hear that my earlier advice proved useful.

Q. Can you tell me how safe our money is here in the NZ banking system? If I have money in the ASB, for example, could the ASB go belly up and I would lose my savings deposit?

Should I break my deposit up and put smaller amounts into two or three other banks like TSB, Kiwibank or another Australian-owned bank? They say one should not have all their eggs in one basket.

Are banks that are more commercial and rural safer than banks like ASB, which are more into house loans and maybe credit cards?

A. Theoretically any New Zealand bank could go belly up - although it doesn't seem likely currently. And, unlike some other countries, there's no deposit insurance scheme in New Zealand, so your deposits aren't guaranteed.

You could certainly reduce your risk by splitting your money among several banks. It's a bit more hassle, but if it would reduce your worries, it's probably worth it.

As for which types of banks are likely to be riskier, the Reserve Bank won't comment on that. It does, however, note that all banks must have a credit rating, "which is a summary of a depositor's risk of losing money and (in principle) takes into account all the factors cited by the rating agency and any others that are relevant".

A list of all the banks' credit ratings, on www.rbnz.govt.nz/nzbanks/, shows that Rabobank has an AAA Standard & Poor's rating, and most of the rest, including ASB, have AA ratings. The exceptions are: ABN Amro, Deutsche Bank and Kiwibank, all with AA minus; Bank of Tokyo-Mitsubishi with A plus; Kookmin with A; and TSB with BBB plus.

While recent history shows that the Standard & Poor's rating agency doesn't always get it right, any kind of A rating generally suggests a company is sound.

Q. My question is related to the article in a recent Herald regarding the security of deposits with overseas-owned NZ banks that may be exposed to the sub-prime fallout.

My partner and I are a risk-averse, near retirement age couple, who have considerable funds on deposit in a single New Zealand bank (not overseas-owned) earning a satisfactory return.

We are, however, concerned about the lack of diversification using a single trading bank, but are reluctant to spread the risk by placing funds in overseas-owned banks given the evolving offshore situation.

I would welcome your thoughts on whether the risk of diversifying among several overseas-owned banks outweighs the risk of our present arrangement?

A. As you may have noticed in the previous answer, Kiwibank has a slightly lower rating than New Zealand's big offshore-owned banks, and TSB's is lower still.

I wouldn't jump to the conclusion that you should avoid those banks. The lower rating probably largely reflects the fact that they are smaller. Nevertheless, it suggests that there's no need to avoid the offshore-owned banks.

Indeed, the Adam Bennett article that has you worried quoted Australian banking expert Professor Kevin Davis as saying that Australian banks - including the ones that own many New Zealand banks - have been "enormously profitable" for quite a few years.

"While you wouldn't expect to see their profit rates staying where they are, because they'll obviously have to book some provisions for various losses, I don't think anybody would be expecting they'd be even making losses, let alone getting into problems of losing capital," said Davis.

Sounds pretty comforting. So you, too, might want to spread your money around several banks if it helps you to sleep better.

By the way, the Reserve Bank website has lots more info - some of it in fairly non-technical language - on what banks' disclosure statements mean to the ordinary customer, how the Reserve Bank monitors the banks and so on.

Q. I've resumed reading your column now that it is not totally KiwiSaver. My problem with KiwiSaver is that I see the opportunity cost of having one's money tied up for a long time as more serious than many of your readers.

Having been reasonably successful in my own businesses, I can see that the (sometimes fine) balance between success and failure could have been pushed the wrong way if any of my money had been tied up.

Looking back from semi-retirement, this would have been a large loss - to me, my family, and also to all the people whose highly paid jobs were created by their and my joint efforts.

It's easy to see that those who struggle all their lives will be better off in retirement with KiwiSaver. What's not so obvious is that many of them might have broken free to financial freedom if they had the use of all of their money at a critical time. Not everyone under 65 should join because, fortunately, not everyone wants the same life.

Ultimately it comes down to whether you see the future as full of opportunity or full of risk. Whether you see yourself as buffeted by fate and requiring assistance by "experts" directed by a wise and benevolent Government, or master of your own fate, with the Government and its helpers being a mindless bureaucracy to be carried on your back.

A. Stirring language. And I go along with you to a considerable extent. I have often said that the tying up of people's money is the big negative of KiwiSaver - except for those who lack willpower and would otherwise spend their savings.

But the choice is not nearly as stark as you suggest. You can have your cake and eat it - or at least most of it. Nobody has to tie up much money in order to get at least some benefit from KiwiSaver, and many people can tie up nothing.

I suggest anyone who thinks they might start a business or need the money later for some other purpose should join but contribute minimally at this stage.

If you are not an employee - including the self-employed, beneficiaries, people at home looking after children or other dependants and retirees under 65 - you can join KiwiSaver and contribute nothing at all. Several providers will accept zero contributions. You'll get the $1000 kick-start and $40-a-year fee subsidy. Chances are that that will grow to more than $1000 by the time you retire. Not bad for no input.

If you are an employee, you have to contribute at least 4 per cent of your total pay, but only for one year. After that you can take contributions holidays. You'll get the kick-start, fee subsidy, a year of the member tax credit, and a year of employer contributions. All of that is likely to grow to several thousand dollars - and you've tied up just a small portion of your pay for just one year.

For most people, it's a great idea to take a second step, contributing more than the minimum. If non-employees put in anything up to $1043 a year that will be matched by the Government - except in the first year when the maximum tax credit depends on what month you signed up.

And employees do well out of either:

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Continuing to contribute 4 per cent of pay.

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Taking a contributions holiday after a year but continuing to contribute up to $1043 a year.

That will be matched by the Government and perhaps also by a kind employer, who doesn't have to contribute to employees on a contributions holiday but still might put in up to $1043, knowing the Government will reimburse them.

But the important point here is that you don't have to take that second step. If tying up money is a concern for you, don't take it.

By all means continue to save, but do it in a non-KiwiSaver investment. Then you can use it to "break free to financial freedom" if you wish to.

Mary Holm is a seminar presenter and author. Her website is www.maryholm.com. Her 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 mary@maryholm.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.