Why banks aren’t as safe as you may think
You might think that they are very safe – after all no bank has ever gone under in New Zealand. However, humans seem to have a distinct optimism where they think something bad will never happen. In reality, it’s a different story.
The BNZ nearly went under in 1990 after sustaining major losses and was only saved after being recapitalised by the government. In more recent times, banks all over the world have suffered a nz-bankssevere financial crisis with Asia, Europe and the United States all impacted. In theory, it could happen.
Also, bear in mind that the majority of our banks are Australian-owned. Whilst we have a robust banking system here in NZ, we would be especially vulnerable if the New Zealand economy sustained severe and long-lasting shocks at the same time as Australia.
What happens when a bank fails?
In most countries, if a bank fails, small depositors are protected from loss. Worryingly, here in New Zealand, there is no protection if our banks went south. In fact, New Zealand is the only OECD country that has no government-backed bank deposit guarantee scheme. This essentially means that us Kiwis have very little protection compared to other nations.
Another facet people are often unaware of is the fact that the Reserve Bank has a policy called ‘Open Bank Resolution’. This essentially forces depositors to bear losses in a bank failure by having some of their money taken to recapitalise the bank and get it open for business again quickly (under statutory management).
Customers would then be able to access a portion of their deposits, but the rest would remain frozen, and potentially used to absorb the bank's losses. New Zealand's OBR is based on the idea that those who invest in, or deposit money at a bank, are earning a return, and should accept the consequences of the risks they are taking to get that return.
Any investment involves risk and depositing money in a bank is no exception. The reality is most people have no idea about this and see the banks as a completely safe haven for their hard earned money when in reality, it’s not the case.
The point of this article is not to try to convince you to withdraw all your cash from the bank. Rather, it is to highlight the fact that the perception we have of banks, is not 100% accurate. Working in financial planning and investments, I often recommend people have their wealth spread out in multiple assets and investments. Rather than having 80% of your wealth sitting in your bank, I prefer less (eg 35%) with the rest being tied up in other areas or growth funds.
If this is something you would like to chat about or are considering, please do not hesitate to get in touch for a free, no-obligation chat.