“Some rob you with a six gun, some with a fountain pen” – Woody Guthrie
Put your money in the bank, not under the mattress. That’s always been a mantra, especially for people who don’t want to speculate in property or the sharemarket, and who don’t want to run the risk of putting their savings into shonky finance companies. Belief in the stability of banks is one of the tentpoles of the economy – so the revelation from Green Party co-leader Russel Norman that the government and Reserve Bank are about to give themselves the power to raid the deposits of ordinary bank customers in the event of a banking crisis seems simply outrageous.
On the other side of the world, the government of Cyprus has just had to back down and retract a similar idea in the face of public outrage from ordinary bank customers. At least in Cyprus, this “steal 10% of the deposits to bail out the banks” plan could be rationalized as a way of part – financing an EU loan, in a situation where many of the people most affected would have been rich Russians using Cyprus as a tax haven. Here, there is no such justification. Even the Economist magazine has denounced the money grab in Cyprus as “unfair, short sighted and self defeating.” Want to trigger a run on the banks right across Europe? Plan to steal money from depositors, and give it to bankers.
In New Zealand, an almost identical money grab plan in the event of an emergency has been given the name Open Bank Resolution Policy (OBR).It is due to be locked into place here in June by stealth – or would have been, until Norman blew the whistle on it yesterday. Norman’s original press release is here. Interest.co.nz has more details of the OBR plan and an interesting discussion thread on the subject here. The Reserve Bank’s rationalisation of its OBR policy can be found here. The Economist’s denunciation of such actions is here. It runs along these lines:
…What would your calculation be? That you would never be treated like the people in Cyprus, or that a precedent had been set…? The chances of big, destabilising movements of money (into cash, if not into other banks) have just shot up. The second error is one of equity…There is no moral imperative for whacking Cypriot widows and leaving senior bank bondholders untouched, as appears to be the case here; or not imposing any losses on sovereign-debt investors in Cyprus; or protecting depositors in the Greek operations of Cypriot banks, as has also happened. The euro zone may cloak this bail-out in the language of fairness but it is a highly selective treatment.
But then the banks and a certain class of investors have always had ‘highly selective’ treatment from the Key government. Ordinary depositors are being treated under the OBR as fair game if things go sour – evidently, even the low interest offered by banks carries a major investment risk – but that is not how the more affluent speculators in South Canterbury Finance were treated. They were bailed out. The difference of approach is being reflected in the response to the alternative idea Norman has tabled: that the banks should be required to insure themselves against failure, such that in the unlikely event of an emergency, the depositors’ funds would be protected.
Yesterday, the Prime Minister rejected that insurance idea as being too costly for the banks and their customers. No, he wasn’t joking. Think for a moment about the obscene levels of profit that the Aussie banks have been taking out of New Zealand in recent years. Yet they can’t afford an insurance premium and would be duty bound to pass the cost onto their customers? Wow. I thought these banks were supposed to rock stable – if so, surely the insurance premiums for such robust institutions against the unlikely event of failure cannot really wipe out those healthy profit margins, can they? So far, the Reserve Bank or the government are not saying how big a slice from our bank deposits they are planning to take if a bank happens to fail – in Cyprus the planned grab was nearly 10% levied from every bank account. In New Zealand, the intended ratio seems to be: whatever it takes, will be taken.
The politics of this issue have been interesting. The revelation about the OBR has been a real coup for the Greens. Meanwhile Labour – as usual – has been slow out of the traps, and short on the principles involved. Ultimately, Labour’s shadow Finance spokesperson David Parker has reportedly come up with the idea of exempting the first $30,000 of deposits in the event of an emergency bank bailout – as apparently, they do in Australia. (All that would mean is that wealthier people would split up their acccounts to get themselves under the $30,000 ceiling.) More to the point, Parker’s solution ignores the issue of fairness raised by Norman – as to why depositors should be carrying the burden at all, when the insurance option is on the table.
That’s the bottom line. Surely, the Aussie-owned banks that can see fit to extract extortionate fees, can afford to set some of their profits aside to insure themselves against failure, and thereby show that they treat the protection of the remaining monies that their customers have in their accounts as a prime part of their duty of care? I wouldn’t mind betting that the first bank that said: “We’re bailing out of the OBR and taking out our own insurance against the unlikely event of a failure” would see a stampede of new customers onto their premises. But that’s not how cartels work.