How Safe Are Your Bank Deposits?

Events in Europe have caused many investors to question the safety of their bank deposits due to fears of a global collapse of banking systems. In fact, the New Zealand banking system has continued to perform strongly despite the challenging international environment. There are 22 registered banks in New Zealand, of which around 16 offer retail banking services. All banks carry a credit rating, and one of the most important steps when investing in a bank is to find out what this is. The larger banks – ANZ, ASB, BNZ, Westpac, BankDirect, HSBC and RaboDirect all have credit ratings of AA-, which places them amongst the most highly rated banks in the world. At the other end of the spectrum, Co-operative Bank, Heartland Bank, Bank of Baroda and Bank of India have credit ratings of BBB-, the lowest investment grade.

Despite the strength of our banking system, failures can occur. Unlike many other countries, New Zealand does not have a deposit insurance scheme, which means that potentially depositors could lose all or part of their funds in the event of a failure. In June, 2013, the Reserve Bank is aiming to implement a policy called Open Bank Resolution (OBR). Under this policy, a statutory manager would be appointed to an insolvent bank. Deposits would be frozen overnight to allow the manager to assess the situation and the following day a portion would be unfrozen. Potentially, some of the frozen funds could be retained by the manager to cover the banks losses. The outcome is likely to be less disruptive than if the bank went into receivership or liquidation. While this new approach has caused some consternation with depositors, the reality is that, providing deposits are held with a bank with a high credit rating, the likelihood of losses is extremely low.