Retirement Life
11 April 2023

Safe banking in troubled times


Banks have always been a safe haven for investors during times of economic downturn, but recent bank failures around the world have shaken investor confidence. There are two important questions on the minds of investors. Are banks as safe as they used to be? Will we see bank failures in New Zealand?


We are fortunate in New Zealand to have a very strong regulatory system

The Reserve Bank keeps a close eye on the financial stability of the banking system and publishes a financial stability report every six months, which is available on its website. The next report is due in May 2023. The key theme of the November 2022 report was that global economic stress will test the resilience of New Zealand’s financial system. Rising inflation and rising interest rates are the critical areas of concern. Around the globe, central banks have had to increase interest rates in order to curb high inflation. Higher interest rates have the effect of reducing economic activity, which, on the plus side, reduces inflation, but on the negative side, creates financial stress for businesses and households struggling to meet their borrowing costs in the midst of an economic downturn.


The challenge this creates for banks is that there is a higher risk of borrower default and lower demand for mortgages and business lending. As we have seen offshore, rising interest rates have also impacted the value of bank assets. Banks are required to hold reserves, and typically these include holdings of bonds. When interest rates rise, the value of bonds falls. In recent months, this led to concerns about the financial stability of some banks, causing a run on bank funds. Those banks were forced to sell bonds at their lower value in order to pay out depositors wanting their money back, and as we have seen, some failed.


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Steps towards more certainty

So in these challenging times, what is the outlook for New Zealand banks? The Reserve Bank is continuing to increase the intensity of its supervision of banks. A recent development is the introduction of the Deposit Takers Bill, currently under consideration, which would provide a deposit guarantee up to the amount of $100,000 in the event of a bank failure. This is expected to be in place by late 2023. Such a scheme will bring New Zealand into line with most other developed countries, which already offer deposit guarantees.


Additional security

In addition to the deposit guarantee, New Zealand has an Open Bank Resolution policy which is used in response to a bank failure. This is designed to prevent a run on bank funds. In the event that a bank gets into difficulty, it will close temporarily and put a freeze on a portion of each depositor’s funds. A statutory manager will then be appointed, and the bank will re-open, with customers being able to access the non-frozen portion of their deposits, which will then be Government guaranteed. The frozen portion of the deposits will be used by the bank to resolve its issues. Once the issues are resolved, all remaining deposits will be fully accessible by customers. Under this system, all depositors would lose an equal share of their deposits, sufficient to get the bank out of difficulty. This is sometimes referred to as a deposit ‘haircut’ – that is, deposits are trimmed back across the board. This is a much more equitable system than a ‘first in, first served’ approach where the first depositors to withdraw get all their money out and the last get nothing.


Do the research

During these difficult times, the credit rating of the banks you use becomes very important. Credit rating information is easy to obtain. For example, lists all the banks along with the interest rates they offer and their credit rating. When times are tough, it is best to use banks with the highest credit ratings, which for New Zealand is AA-. Some of our banks have a credit rating as low as BBB- and BBB. While these credit ratings might sound reasonable, they represent a significantly higher level of risk than a bank with an AA- credit rating. For a full explanation of credit ratings, there is a very useful guide on the Reserve Bank website.


Investing safely

Every investor needs a certain amount of money in bank deposits to provide ready access to cash. As a general principle, it is a good idea to have sufficient cash in the bank to cover your cash needs for at least the next two years. That’s because bank deposits offer certainty of value as well as liquidity. Keep in mind that money in the bank is primarily there to provide those benefits more so than investment return. Money that is not needed in the short term can be invested elsewhere in less liquid investments offering a higher return.

To invest safely and effectively in bank deposits, follow these tips:

1. Check the credit rating of your bank.

2. Make sure you understand the level of risk that is associated with your bank credit rating.

3. Consider depositing funds with more than one bank.

4. Invest your funds in several deposits with different maturities to match the time frame in which you may need to access your funds.

5. Don’t chase after high bank interest rates.

Calculate what you could draw in retirement.

Along with the comfort provided by the Reserve Bank’s supervision of our banking system, you should then have little to worry about.


Liz Koh is a money expert who specialises in retirement planning. The advice given here is general and does not constitute specific advice to any person.


Photo of Liz Koh
Written by:

Liz Koh

Liz Koh is a money expert who specialises in retirement planning. The advice given here is general and does not constitute specific advice to any person.

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