Site Designed By Airnet
Bank failure policy shouldn’t alarm
 
Q.   I have been reading about this Open Bank Resolution policy that the Reserve Bank will introduce later this year. It sounds like anyone with money in the bank could lose a percentage of their deposits in the unlikely event that the bank failed. Would this affect cash in KiwiSaver accounts?
 
A. What is the Open Bank Resolution policy or OBR? This is one of several tools for responding to a bank failure. According to the Reserve Bank, they have asked banks “topre-position their IT systems by the end of June 2013 so that OBR can be a feasible option in the Government’s failure resolution toolkit. Nothing changes for depositors on that date.” 
 
KiwiSaver investors and indeed anyone with money in the bank should not be alarmed by OBR. Our banks are much stronger than those of Cyprus which have been in the news lately. However, neither bank deposits nor KiwiSaver investments are guaranteed. Every KiwiSaver investment statement makes that clear. No investment is entirely without risk just as getting out of bed in the morning is not entirely without risk. It is how we manage risk that is important – and whether we are a ‘climbing Everest’ or ‘staying on the footpath’ kind of person.
 
If you read an investment statement for any investment including KiwiSaver you will find a chapter entitled ‘What are my risks?’ It is often the most interesting part of the investment statement. Even a term deposit with a bank comes with an investment statement which will probably tell you that holders of term deposits are unsecured creditors in the event of a bank failure. 
 
However, a term deposit with any of our major banks is regarded as a low risk investment. We have 22 registered banks in New Zealand. Their credit ratings can be found on the Reserve Bank website. Our major banks (such as BNZ and ANZ) are rated AA- while KiwiBank is rated A+. Don’t let that plus sign fool you. AA- is actually a higher rating than A+. An AA rating is described by S & P as ‘Very strong capacity to meet financial commitments’ while an A+ rating is described as ‘Strong capacity to meet financial commitments.’ Some of our smaller banks have a BBB- rating indicating ‘an adequate capacity to meet financial commitments’. Our Australian-owned banks are among the strongest in the world. 
 
But no matter how strong a bank is, it is necessary to have a risk management process in the event of bank failure, no matter how unlikely. Our Reserve Bank has to ensure the safety of our banks both to protect individual investors and the wider economy.
 
Once the IT systems have been adjusted at the end of June, OBR can be a feasible option in the Government’s ‘failure resolution toolkit’. Alternatives strategies for dealing with bank failures are liquidation or Government bail-out. The former would result in significant losses to customers and economic disruption while the latter carries potentially huge costs to taxpayers. 
 
According to a Reserve Bank spokesperson “The aim of the Open Bank Resolution policy is to allow a distressed bank to be kept open for business, while placing the cost of a bank failure primarily on the bank’s shareholders and creditors, rather than the taxpayer. It would also allow customers to be able to gain full or partial access to their accounts and other bank services, whilst an appropriate long-term solution to the bank’s failure is identified.”
 
Cash is required in all KiwiSaver funds to allow for withdrawals and switches to other funds. There are KiwiSaver funds which invest only in cash, usually for those investors who have little tolerance for volatility or risk. Most funds (including most bank-managed ones) diversify their cash holdings across multiple banks as part of their risk reduction strategy. If one bank failed and all deposits with that bank ‘took a haircut’ the effect on the KiwiSaver fund should be minimal.
 
While KiwiSaver investors should not worry about OBR, they should have some idea where their money is invested and how well diversified their fund is. Diversification is described in financial circles as the closest thing that investors will get to a ‘free lunch’ and this applies to KiwiSaver as well. Most KiwiSaver funds are invested in a very wide range of shares, bonds and other financial assets both in New Zealand and overseas. This is a good time to find out just where your KiwiSaver money is invested.
 
 
 
 
Shelley Hanna is an Authorised Financial Adviser FSP12241.  Her disclosure statement is available on request and free of charge by calling 8703838.  The information contained in this article is of a general nature and is not intended to provide personalised advice.  If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.