Why we need a parliamentary enquiry into the best methods of making banks stable

Submission of Deirdre Kent in support of petition 2011_78 to Parliament This submission is substantial. It outlines why banks are unstable, includes charts on banks assets compared with their exposure to derivatives and on housing bubbles. In a hyperconnected world New Zealand's four Australian owned banks are not going to be immune to shocks. Now instead of taxpayer bailouts, it seems depositors will bailout the banks. The Reserve Bank has in place a system called Open Bank Resolution. We would rather the banks were stable in the first place.

Haircut anyone? Saver bailout is coming to New Zealand

images-1 On 1 February when I received a letter from the Minister of Finance on the matter of the Chicago Plan Revisited I learnt that New Zealand banks were working quietly behind the scenes with the Reserve Bank of New Zealand on a depositor bailout scheme probably unique in the world. ‘Open Bank Resolution’ was its bland and harmless name and it had apparently been discussed during 2011 when public submissions had been invited.  Registered banks with $1 billion or more in assets were required to work with the Reserve Bank to put their IT systems in place by 30 June, 2013. If a bank was in distress, accounts would be frozen overnight, while liquidators decided how much of a ‘haircut’ to give the accounts before releasing them the next day. Yet we had seen nothing in the news media. Nothing. Suddenly we woke up to the fact that as depositors we were to bail out a failing bank. At the height of the 2008 Global Financial Crisis, the New Zealand government guaranteed all bank deposits and this scheme stopped at the end of 2011. But during 2009 many South Canterbury Finance investors greatly benefitted from it. Their finance company, into which investors had poured money after the government guarantee, had gone belly up and the taxpayer coughed up to the tune of $1 billion. This experience turned the government against guaranteeing bank deposits. They didn’t want private deposit insurance either, arguing it was a cost to investors. So the Reserve Bank of New Zealand set about inventing a new scheme (or rather revisiting one they started formulating a few years earlier), but when they finally told the public about OBR in November 2012, their one media statement sank without trace. Perhaps they naïvely believed mum and dad bank customers would read their website, on which they now have plenty of information on Open Bank Resolution. Banks, naturally, didn’t tell their customers. On 8 February therefore the New Economics Party launched a petition.  We decided it was best to ask for a Parliamentary Enquiry into the best methods of making banks stable. We added that New Zealand could consider The Chicago Plan Revisited. We said we didn’t want either taxpayer bailout or customer bailout of a failing bank. We believe banks should be stable in the first place. Such radical monetary reform  has to be done internationally and simultaneously. Those who have collected petition signatures have found it relatively easy. In promoting this petition we cooperated with members of the Green Party, the Awareness Party, Positive Money NZ, the Democrats for Social Credit, The Maori Party and the Mana Party. We created a Facebook page at http://tinyurl.com/ab9qc7w and started an online petition. For five weeks it was an uphill battle to get any publicity. imagesBut on the weekend of March 16-17 the Cyprus news broke.  Suddenly depositor bailout of banks was in the news. Over the next two weeks I was completely obsessed with the daily dramas in Cyprus and Brussels, I tweeted relentlessly to inform my twitter friends that depositor bailout was also planned for New Zealand. Our Facebook page became very useful to share news. It is wonderful how networks work. When the newsletter editor of our local Transition Town group put our information about Open Bank Resolution in their publication, a friend rang me for more information. She then penned an excellent letter to the Dominion Post, which was published as the top letter on March 18.  The following day the Dominion Post published a comprehensive article on Open Bank Resolution, and more facts emerged. The New Zealand Herald and the Press followed, then radio and TV. On March 19, the Greens, who had a policy opposing Open Bank Resolution sitting quietly on their books, called for the Government to drop their Cyprus style solution. Saver bailout became the focus of a series of questions in Parliament from Russell Norman, leader of the Greens, where it emerged that the Government was fully behind the scheme and didn’t want a bar of taxpayer bailout or government guarantees. The Minister standing in for the Minister of Finance that day described OBR as “a brilliant policy.” He emphasised it would be a one off haircut overnight, enabling the bank to open the next day. The depositors in the troubled bank would then have the rest of their money Government guaranteed. The Minister couldn’t be pinned down on what percentage would be confiscated. The Greens also came out in favour of Government guarantees. The Labour Party, who often follow the lead of the Greens, said they would guarantee the first $30,000. They said if it was good enough for overseas lenders of covered bonds to be protected it was good enough for NZ households too. NZ First reiterated their long held interesting policy they would only guarantee deposits in New Zealand owned banks. In answer to my letters, I am told the TSB and the Co-operative Bank have no covered bonds or other protected assets. Kiwbank, however is getting in to both covered bonds and mortgage backed securities (RMBS). The letter said “In addition to the covered bond assets Kiwibank has transferred approximately $600m into a RMBS programme.“ The small credit union sector won’t be required to comply. Academics have not been inactive in this matter. Geoff Bertram and David Tripe wrote an article in the November 2012 edition of Policy Quarterly journal of Victoria University’s Institute for Governance and Policy studies (http://bit.ly.10c3750) shows how secured creditors are gaining more protection for themselves should a bank collapse. Among these are holders of Covered Bonds, now legal in New Zealand and used by the four major banks. These bonds are ring fenced high quality housing loans. New Zealand's big four banks have borrowed more than NZ$11 billion through covered bond issues, mainly to overseas institutional investors, since BNZ became the first to do so in 2010. Even the publicly owned bank Kiwibank is now getting into them, with the selling of their first covered bonds on March 25.  Interest.co.nz reports “Kiwibank has turned to Switzerland for its first covered bond issue, borrowing 150 million Swiss francs (about NZ$188 million). Covered bonds were made legal in 2012." Gareth Vaughan of the same website wrote an excellent article (Mar 25, 2012) on what it means for your mortgage. Tripe and Bertram list five other types of assets which would not be available to bank liquidators. These include loans sold back to the parent bank, residential mortgage backed securities sold to third parties, repos, assets pledged as collateral for derivatives, other derivatives and intangible assets not available to liquidators.  Their calculation for a typical bank is that after allowing for secured depositors, approximately only  58% of deposits could still be available to liquidators. Such an alarming figure indicates the study needs repeating. Whatever the figure for the actual bank in distress, it means unsecured creditors bear a large share of the losses. There is something else the Reserve Bank appears to have overlooked. Business commentator Rod Oram has pointed out that, after a bank had been liquidated and deposits government guaranteed, bank customers from other banks would transfer to the bank where their deposit was safe. The Reserve Bank tells us there is no need for legislation to authorise Open Bank Resolution. But is it legal? Apparently when you deposit money in a bank you forfeit ownership of money and gain ownership of a claim against the bank – a claim for instant repayment of money but a claim nonetheless. Here is a quote from a House of Lords decision Foley v Hill (1848). The money paid into the banker's, is money known by the principal to be placed there for the purpose of being under the control of the banker; it is then the banker's money; he is known to deal with it as his own; he makes what profit of it he can, which profit he retains to himself, paying back only the principal, according to the custom of bankers in some places, or the principal and a small rate of interest, according to the custom of bankers in other places. The money placed in the custody of a banker is, to all *1006 intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal, but he is of course answerable for the amount, because he has contracted, having received that money, to repay to the [37] principal, when demanded, a sum equivalent to that paid into his hands. Sue Hamill of Positive Money NZ asked the Reserve Bank if this decision is the common law in New Zealand who confirmed that the common law she had quoted was still standing. The email (27/3/2013) from Sonia Speedy of RBNZ said "Our legal advice is that the case you mention is part of the common law in New Zealand. In essence it confirms that a bank/customer relationship, in respect of a deposit, is a contractual one of debtor/creditor. In that sense the bank is liable to repay the customer the sum of the deposit. The case confirms there is no fiduciary relationship between the two parties. It also confirms the customer/creditor has no right to challenge the use put by the bank to the money deposited with it." UnknownBecause New Zealanders are dependent on the four big Australian owned banks, ASB, ANZ, Westpac and BNZ, I thought it interesting to investigate their ownership and their directors. (The ASB is owned by Commonwealth Bank and the BNZ is owned by NAB). It seems in each case four of their major shareholders are HSBC, JP Morgan, NAB Holdings and Citigroup. Their directors come from banking, real estate, infrastructure, contractors, building, aluminium, communication, computing, investment, asset management, gambling, alcohol, aviation, food and beverages, fossil fuels, mills, clothing and mining. Their lawyer directors are in the field of tax, litigation or mergers and acquisition.  And they have their fair share of academics and former government regulators and Central Bankers. One can’t help but get the feeling that the interconnectedness of all this is overwhelming.  If banks go down, the pension funds of the world go down and so does the economy. But how likely is it that a bank will fail in New Zealand? Financial adviser Chris Lee has told a friend who asked, “In my opinion a major bank wipeout would rank in likelihood with global nuclear war – possible but hopefully unlikely. The chance of one lesser bank failing is more realistic.” (3 April private email) But according to an IMF working paper[1] on the vulnerability of NZ banks (Jan 2013), the big four banks have 90% of the bank assets in New Zealand and together their assets amount to 160% of our GDP.  “The banks’ large exposure to highly indebted household and sizeable short term offshore borrowing are key vulnerabilities.” The big four account for 95% of the residential mortgage market. A rise in mortgage rates together with an increase in unemployment could lead to an increase in nonperforming loans. A large fall in commodity prices would impair the quality of agricultural loans. It says our house prices are 10-20% too high. Since that paper the Auckland house prices have risen again. The big four are all making healthy profits. In November it was announced that the BNZ, ANZ/National, Westpac and ASB had made a combined $3.4 billion profit after tax in New Zealand, up an average of 20 percent on 2011. This is an average of $772 profit for every person in New Zealand, with a large chunk of it heading across the Tasman. So New Zealand is an interesting case. As at the end of 2012 there were total deposits of $115.2 billion in our banks.  Will a crisis in one of our banks test out the political viability of our Open Bank Resolution proposal as did the first Cyprus/Brussels solution? Will our small depositors have their savings confiscated? We watch of course the unfolding drama in Europe and see whether the Cyprus solution is going to be a blueprint for other countries in crisis. Those who have the stomach for it might be at this moment monitoring Slovenia. Or Greece, or Spain, or France or Lichtenstein.  Obviously each country is different. The banks operating in New Zealand are part of a larger global system. While their capital adequacy is high at 13 percent in 2012 and the big four have proved resilient in the past, speeches and articles from our Reserve Bank indicate there is no certainty. They even point out that few foresaw the Global Financial Crisis  either and we are in new territory nowadays. According to IMF data, there were 145 banking crises, 208 monetary crashes and 72 sovereign debt crises between 1970 and 2010. This represents a total of 425 systemic crises, an average of more than 10 countries getting into trouble every year. This was even before the Global Financial Crisis and illustrates the fragility and structural flaws of the banking system. Time for 100% backing for deposits, as the Chicago Plan Revisited explains. We will have to watch our house prices, and dairy and meat prices. The IMF paper says, “A hard landing in China, and thus Australia, would consequently reduce demand for New Zealand exports, worsen terms of trade and could trigger a sudden decline in house prices.” So my concerns about Open Bank Resolution are:
  1. While it is fine to argue that it is preferable to a bank closing after failure and preferable to taxpayer bailout, it frightens bank depositors and is a political lemon. The idea of confiscating the money of small bank depositors has been tested in Cyprus and found wanting.
  2.  The Reserve Bank doesn’t appear to have thought through the situation that would arise when the failed bank becomes the only one to have Government deposit guarantees. More homework boys and girls!
  3. In the case of Westpac, ASB, ANZ and BNZ, depositors will bear the main brunt of the loss, as there are many types of bank assets unavailable to liquidators. This whole field needs more discussion and clarification and bank customers should write to the CEO of their bank to find out who is ahead of them in the event of liquidation.
  4. It could become an election issue in 2014.
  5. The common law on this topic needs to be known and the law needs to be obeyed.
Deirdre Kent, author of Healthy Money Healthy Planet –Developing Sustainability through New Money Systems  

[1] New Zealand Banks’ Vulnerabilities and Capital Adequacy by Byung Kyoon Jang and Mashiko Kataoka. IMF Working paper/13/7. January 2013

Stealing money from savers in Cyprus

Anti-bailout protesters raise their open palms showing the word "No" after Cyprus's parliament rejected a proposed levy on bank deposits in NicosiaYou will have noticed the banking crisis in Cyprus. It has absorbed my twittertime for 24 hours. I understand Iceland activist  Hordur Torfason, currently on a speaking tour of NZ, is going to Cyprus after New Zealand. It should be interesting. As a condition for a massive loan from the ECB, their government is required to tax ordinary savers from 7-10%. This is ground breaking policy. ‘What is different this time is the nakedness of the Cypress heist’, writes Adita Chakrabortty in the Guardian. His article explains how the European powers pushed Cyprus into a politically suicidal pact. They demanded an impossible deal and it is no surprise when the politicians see how unpopular this measure is, they delay doing it. As I write this, the banks are closed in Cyprus for another two days and heaven knows what will happen when they open. See Guardian article, for example Senior bondholders (and it looks as though there aren’t many) will be exempt. This is not true in New Zealand, where Open Bank Resolution only touches deposit holders. As Geoff Bertram and David Tripe pointed out in their Victoria University article, there are at least six classes of creditors who are ahead of us in the queue to be reimbursed. They include holders of Covered Bonds held mostly by pension funds. These are illegal in South Africa and were so in Australia until recently. All this makes it doubly important for us to get behind our petition asking for a Parliamentary Enquiry into the best ways of making banks stable. We want a lasting durable banking system not one which gets into such crises.  So why not write to your MP, the Minister of Finance and the Prime Minister about this? Jill Abigail has led the way in having her letter on the subject lead the Dominion Post letters today.  Here it is: As a superannuitant dependent on interest from term deposits to top up my pension to a livable level, I am horrified to learn that the Reserve Bank is planning to set in place a process (called “Open Bank Resolution”) where ordinary bank depositors will – without notification and without our consent – have our savings used to bail out a bank in financial distress.  If a banking crisis arises, your bank will be able to freeze your bank account overnight and release it the next day. But the account will have been “shaved”, and you will have less money than you had yesterday. A nameless amount will remain frozen while liquidators examine the financial state of the bank and then some or all of it will be used to bail out the bank. This process, which readers can check out on the Reserve Bank website, will all be in place by June 30. There has been no public warning of this undemocratic proposition.  Is it legal?  Isn’t it theft? Those of us who suffered loss of retirement savings in the finance institutions’ crashes in 2008 thought we would be safe by keeping the remainder in our banks, especially the Kiwi-owned bank.  What a shock now for us to learn that our money is not safe after all. This is a terrifying prospect for those of us who have no means of replacing any losses because our days of being able to earn are long behind us. Jill Abigail      

You could always change to a Credit Union

Unknown-1Today I phoned the CEO of the NZ Association for Credit Unions, Henry Lynch. I told him that feedback we had had from our members about our petition on Open Bank Resolution had included people who said they banked with a credit union anyway so didn’t have to worry about Open Bank Resolution. It seems there are three big credit unions in New Zealand. Baywide Credit Union based in Hawkes Bay has 15 branches. First Credit Union in Hamilton has 50,000 members and NZCU South covers the South Island. No limit on deposit size. And there are other smaller ones. They are owned by their members and you can go to their AGM etc. They do have mortgages, but only at floating rates. They don’t have credit cards but their debit cards, where you preload your money, uses your own money and is fine for all online payments like Amazon etc. That is a relief for those wanting to change. I also learnt by listening to a Radio Live interview with the CEO of the Co-operative Bank that people don’t have so many problems changing banks these days. The only situation in which they have problems is if they have a fixed rate mortgage and it costs them to break it. Credit Unions in New Zealand are champing under controls which don’t exist in Canada, where almost one in three people bank with a credit union.  Last Sunday the Sunday Star-Times had an article which outlined the various laws and regulations which constrain credit unions or impose unnecessary costs on them. Obviously the New Economics Party would develop policies which address these concerns.  

We launch a petition for Chicago Plan and against bank bailouts

Petition on Banking Reform  Petition extra information  (This is the all in one information a backed A4, which condenses the three which follow into one) Stop-the-banks-from-stealing-your-money The Chicago Plan Revisited summary Who owns the Australian Banks (Click on the above links for the petition form, the sheet of explanation you can hand out or sign the online petition) The online petition is at http://www.avaaz.org/en/petition/Reform_the_banking_system_so_that_no_more_bailouts_are_ever_needed/?cHHSRcb. It has kindly been created by one of our supporters, Lewis Verdyn. Remember online petitions don't count in the actual numbers for the NZ Parliament as many will come from overseas, but they are noted in the cover sheet. __________________________________________________________________________ Following the letter from the Minister of Finance, Hon Bill English regarding his opinions of The Chicago Plan Revisited, and where he said they were working on Open Bank Resolution, we have decided to launch a petition. We decided it was best to ask for a Parliamentary Enquiry so that New Zealand could take initiative to implement The Chicago Plan Revisited. We don't want either taxpayers or bank customers to have to bailout the banks in the event of a bank failure. We believe banks should be stable in the first place. That will take radical monetary reform and this has to be done internationally and simultaneously. Our petition is attached, along with a sheet of explanation. Because we are liaising and working with other organisations wanting the same thing, we have created a Facebook page at http://www.facebook.com/pages/Petition-for-a-Parliamentary-Enquiry-into-making-banks-stable/420764948002065. Please like it and contribute to the discussion and information sharing there. We also have an online petition (although it isn't officially counted, the Parliamentary Office says to mention the number of online signatures we get on the cover page.) These signatures of course will come from all over the world. It is here Also if you would like to see a 35 minute explanation of The Chicago Plan Revisited by one of the authors, Dr Michael Kumhof, you might like to visit http://youtube.googleapis.com/v/YnAtHbDptj8&hl=en_US&fs=1&

If you have term deposits in a NZ bank watch out!

Yes the "levers are in place" as Minister of Finance announced earlier. In the event of a banking crisis, part of your term deposit could help bail out the bank . Listen to Radio New Zealand interview by Kathryn Ryan today at http://podcast.radionz.co.nz/ntn/ntn-20121112-0908-banks_making_record_profits-048.mp3. Bernard Hickey says banks ought now to give you a higher interest rate in your term deposit because the Reserve Bank now has in place what is called the Open Bank Resolution. This means that those who hold assets with a bank will be called on to help bail out the bank in a bank crisis. What is so disturbing in this interview is that the size of a banking crisis can be 35% if GDP and an expert being interviewed told us that this figure is common. Nicole Foss reminded us that Government bonds are much safer. Personally I have moved my term deposits to Government bonds and I know others who have taken Nicole's advice. If you don't want to do this then take Bernard Hickey's advice. He says that because your term deposit is now at more risk due to the Open Bank Resolution being in place, you should go to your bank and demand a higher interest rate. All of which reminds me of what Bernard Lietaer has been saying for decades. If banking crises happen that often there must be something systemically wrong with the system itself. Read his website or any of his books, including the Club of Rome book Money and Sustainability, available from Triarchy books.  He lists the number of banking crises, sovereign debt crises and currency crises which have happened round the world in the last ten years. It is horrifying. He says the on-going financial crisis results not from a cyclical or managerial failure, but from a structural one: more than 96 other major banking crises occurred over the past 20 years, and these crashes have happened under very different regulatory systems and at different stages of economic development.