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19 Mar, 2013 09:59

New Zealand considers Cyprus-style banking failure solution

New Zealand considers Cyprus-style banking failure solution

New Zealand depositors could face a Cyprus-style tax on their bank accounts, as the government is planning to impose a similar strategy on its banks warns the country's Green Party.

New Zealand is facing a similar bank failure to Cyprus, is likely to adopt open bank resolution (OBR), which will see small depositors lose part their savings in favour of a big bank bailout, Green Party co-leader Russel Norman said. The country’s Finance Minister Bill English supports the open bank resolution. 

"Bill English is proposing a Cyprus-style solution for managing bank failure here in New Zealand," said Norman, adding that the Reserve Bank is in the "final stages" of implementing an OBR system.

New Zealand banks’ depositors will have their savings cut by a certain percentage needed to keep their bank afloat.

The Green Party however has major doubts, that OBR tactics is appropriate here. Norman underlined, that few depositors can reasonably evaluate the reliability of their bank. “Not even sophisticated investors like Merrill Lynch saw the global financial crisis coming,” he added.

Norman believes that OBR policy is too radical saying few OECD countries use it, preferring deposit insurance schemes. 

"A deposit insurance scheme is a much simpler, well-tested alternative to open bank resolution. It rewards safe banks with lower premiums and limits the cost to taxpayers of a bank failure… [They] protect people's deposits up to a maximum ranging from $100,000 to $250,000," he said.

Cyprus announced last week that it plans to impose a 10 per cent tax on bank accounts as part of a 10 billion euro bailout by the European Union. The news caused panic across the island as people rushed to cash machines to withdraw their savings. The Cypriot parliament will vote on the deposit levy on Tuesday.