Bank haircuts, insurance holes
02 Feb 2018
OPINION - Rob Stock:
The last decade has taught us a lot about breathing life into dead banks, finance companies and insurers.
When people are under water too long, rescuers attempt to bring them back through artificial respiration and chest compression.
Oxygen is the stuff of life to a person.
To a bank, insurer, or finance company, and the fate of all those ordinary people whose wealth depends on them, the stuff of life is money.
Financial resuscitation money has come from taxpayer bailouts, government guarantees, and central banks suppressing interest rates.
When it comes to keeping them alive, money is to banks what oxygen is to human beings.
Taxpayers pay because governments fear negative impacts on the economy (and their future job prospects) when a "too big to fail" financial services company fails.
These days should a bank fail, however, it's more likely a "statutory manager" would be appointed, and tasked with getting it open again in a few days.
This bank resuscitation mechanism is called OBR, or Open Bank Resolution.
In an OBR bank resuscitation, depositors (who are unsecured creditors) may find a portion of their money (say 10 per cent) taken to recapitalise the bank.
This is known as giving them a "haircut".
If a bank survives, and is sold, the depositors stand a chance of getting their money back.
The moral argument for OBR is that depositors invest for profit. They are taking risks, and should, like good capitalists, suffer the losses should things not go well.
The argument against is that ordinary people aren't able to police banks, and that it's the job of government regulators to keep them on the straight and narrow.
Once OBR was conceived of, however, it became the likely way New Zealand would deal with a failing bank.
And, there's just been a suggestion we should now create an OBR for insurance companies, with policyholders being the ones to foot the bill for recapitalising them should they go bust.
AMI failed after the Christchurch earthquakes because it had inadequate reinsurance.
Taxpayer will end up spending about $1.5 billion rebuilding AMI policyholders' houses.
That's a lot of money, and economics think tank The New Zealand Initiative thinks we should consider an OBR for insurers.
In the case of AMI, which had around half a million customers with 1.2 million policies, that'd be around $1230 per policy.
Less OBR than OMG to people already in a financial hole as a result of their homes and belongings being damaged by the earthquakes.
It's one thing giving bank depositors a haircut. It's quite another putting families in dire financial straits into deeper holes.
I can see how people could argue AMI policyholders paid too little for their insurance, and failed to act like good capitalists by not realising it.
But I don't think Parliament would pass the laws necessary to create an insurer OBR.
Big general insurers fail after natural disasters, which really isn't the time Kiwis will feel comfortable asking victims to stump up more money.
It also fails the fairness test.
How was any ordinary householder supposed to recognise AMI's lack of reinsurance if expert regulators didn't?