Imagine this: it's a Saturday afternoon in 2018, and Prime Minister Steven Joyce has called an urgent news conference in the Beehive.
This follows rumours that Bank XYZ, one of the big four, was unable to refinance its 90-day Commercial Paper in global markets because of concerns about a 30 per cent house-price slump and unemployment at more than 15 per cent.
Joyce steps up to the lectern and announces that Bank XYZ will close immediately, and will reopen on Monday after an open bank resolution (OBR) process. The bank's systems were changed in 2013 to allow it to close for a day and reopen after some term deposits had been frozen, and then given a "haircut", to help the bank recapitalise.
Joyce says term depositors will have their deposits shaved by 8 per cent, and the Government will not use taxpayers' funds to bail out an Australian-owned bank. "We cannot allow private bankers and shareholders to privatise the profits of banking while the losses are socialised," Joyce says.
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The press release says bond-holders in Switzerland and Germany will not be subject to the haircut because their bonds are secured by the bank's best mortgages.
Everyone knows this would never be allowed to happen. Firstly, our banks are reasonably well capitalised and have passed stress tests for such scenarios of house-price slumps and unemployment spikes. Secondly, their Australian parents are unlikely to let their subsidiaries fail. Finally, our Government could never impose those sorts of haircuts on depositors without unleashing chaos.
The Government would first nationalise and bail out the bank. If Joyce were to use the OBR process this would spark runs on the other three; our banking system is far too concentrated for that not to happen.
The banks' websites would crash from people trying to transfer their money. Australian executives would be on the next plane to Wellington to kick Joyce in the goolies.
We know OBR will never be used. It's a figleaf to say the big four banks are not government-guaranteed, when we know they are. It means that guarantee is not accounted for with a deposit insurance scheme that would reduce bank profits.
Labour and the Greens are right. Our banks are too big to fail and we should be honest about that by creating a deposit insurance scheme for deposits of less than $250,000. Almost every other OECD country has such schemes or is planning them. We should do the same and give up the pretence.