Tripe on OBR de minimis

Today's news article Freezing deposits plan slammed, David Tripe criticises the RBNZ's Open Bank Resolution policy as causing 'widespread hardship'. This is fairly surprising, as the proposal incorporates a facility for a de minimis that would shelter small depositors from taking any losses. The figure I've heard suggested was $20k, but David Tripe suggests a figure of $50k which he suggests would 'ring-fence 30 per cent or 40 per cent of the bank's assets'.

The problems with a discretionary, political and de facto de minimis are numerous:

• The impact of the policy in shifting risks and losses, if David Tripe's suggestion of 30-40% of bank assets, is far more than de minimis. This amounts to a major redistribution of the bank's losses and would very substantially reduce recoveries for large creditors.
• The discretionary and political nature of the de minimis is a licence to screw institutional investors to save 'mum and dad investors.' In this environment the bank's capacity to raise money in wholesale markets at reasonable costs could be compromised.
• The pre-positioning policy, especially with the Settlement Before Interchange system for retail payments, means that it is feasible to apply the haircut to all deposit accounts en masse with minimal disruption to bank customers and the financial system.
• The policy lacks a sound legal basis. Bank customers and depositors are creditors of the same class and rank, and must, according to law and equity, be treated equally, i.e. according to the pari passu principle. It is necessary to change the de jure ranking of small depositors in order to safely implement the de minimis scheme.
• Even Allan Hubbard's statutory managers, who are not directed to consider preserving the ranking and position of creditors (under the Companies (investigations and management) Act rather than the Reserve Bank of New Zealand Act), recognise that they cannot play favourites with creditors of a person in statutory management (see http://www.lostsoulblog.com/2011/07/statutory-managers-no-longer-playing.html )
  

See section 5 of my submission to the RBNZ for more on this.