The Reserve Bank's Open Bank Resolution (OBR) policy supports the stability of the banking system, and incentivises bank management and shareholders to prevent a bank from getting into a crisis, Standard& Poor's says.
In a report on the OBR policy the credit rating agency also says the apparent weakening of intent by the Government to use taxpayer money to bail out a bank in crisis has no impact on its bank ratings.
Introduced last year, OBR is a tool the Government could use - if a bank failed - as an alternative to a liquidation or taxpayer funded bailout that would keep a bank open for business.
All locally incorporated banks holding retail deposits worth more than $1 billion must be "pre -positioned" for OBR. This means they must have systems and plans in place for a statutory manager to take over the bank and implement the OBR process within a day of a crisis event.
In this scenario customer access channels would be closed and a portion of customer funds frozen. All of cheque, savings and other transactional accounts, plus term deposits, would potentially face haircuts. The idea is access channels would then be reopened for business no later than 9am the next business day, which the Reserve Bank says will allow customers to access the available, or "good" portion, of their funds.
(See our story on how the OBR policy would work if implemented here. Also see how New Zealand is the only OECD country without an explicit deposit insurance, or guarantee, scheme here).
S&P says the freezing of customer accounts would trigger an issuer credit rating default under its rating definitions and rating criteria.
"OBR provides the New Zealand government with the ability to ensure that bank shareholders and creditors carry losses in a crisis. It is a structure that should help minimise disruption to the payment system if a bank fails, and potentially minimises the impact of a bank failure on the economy," S&P says.
"We believe that New Zealand's implementation of OBR supports the stability of the country's banking system, in that it creates strong incentives for banks' management and their shareholders to prevent a bank from getting into a crisis in the first place, and to resolve an emerging crisis before government intervention is required. This said, the implementation of OBR itself did not result in any changes of bank ratings in New Zealand."
S&P goes on to say it doesn't expect adoption of the OBR policy to impact any of its New Zealand bank ratings in the next two years. However, there's a "growing prospect" of S&P revising its assessment of the New Zealand government's supportiveness toward the banking sector to "support uncertain" from the current "supportive." S&P also says, however, the big four Australian owned banks and Kiwibank all get greater "rating uplift" from the support of their respective parents than would hypothetically be the case from government support, with no New Zealand bank ratings currently benefiting from government support.
Last resort & increased risk of a flight to quality
The credit rating agency suggests OBR would only be used virtually as a last resort.
"We believe the New Zealand regulator would use almost all other measures at its disposal, such as appointment of a statutory manager, seeking additional capital support from shareholders, allowing hybrid capital instruments to convert to capital, instituting management changes, and so on, well ahead of triggering the OBR process," S&P says.
"In this context we note that a bank appointing a statutory manager by itself would not be expected to lead to a bank being placed in OBR under all conditions. Rather, OBR would be exercised only in the event of a bank's failure."
S&P also suggests the threat of a bank being placed in OBR, whereby creditor obligations are frozen and losses could be enforced, could increase the risk of a flight to quality at a bank that came under stress ahead of it formerly being placed in OBR, adding to system instability.
New Zealand, meanwhile, is well ahead of many other countries when it comes to putting in place a mechanism to resolve a banking crisis without a government funded bailout, according to S&P.
"Growing global sentiment to limit the expectation of taxpayers bailing out banks in crisis supports our opinion that there is a moderating likelihood of timely government support in countries where some form of powers are being created or have been created to enforce creditors to absorb losses by way of haircuts, delayed payments, or conversion to equity. The New Zealand government is showing strong signs it shares this sentiment."