Prior to the recent financial crisis, New Zealand (“NZ”) and the Reserve Bank of New Zealand (“RBNZ”) prides itself as one of the more progressive thinkers in the regulation of financial institutions. NZ is an early adopters of minimal “regulation” approach to supervising financial institutions, after having deregulated and restructured it’s financial regulation system in the 1990′s. Turner, J.D. (2000:1), commented that NZ has one of the least regulated banking system in the world. Instead, NZ rely on a regulation regime through market discipline approach with the use of self disclosure, provision of quarterly financial information and off-site monitoring. Essentially, leaving the job to market investors to “supervise” and influence the behavior of financial institutions towards a higher standard of self governance and avoiding the problems associated moral hazard.
The new framework retained the role for the RBNZ to provide emergency liquidity assistance and act as a Lender of Last Resort (“LOR”), but have effectively removed the provision of any form of deposit guarantees. In this regard, New Zealand became the only country in the Organization of Economic Co-operation and Development (“OECD”) that do not have deposit guarantee in its financial safety net. Dr. Don Brash (the ex-RBNZ Governor) in his speech given to the International Monetary Fund (“IMF”) conference in 1997 said …“the regime is actually more likely to promote prudent banking behavior than do the more traditional approaches, but with a lower likelihood of moral hazard and regulatory distortion”. Turner, J. and Oyelere, P. (1999:254) argues that the removal of deposit guarantee by NZ is a worry. Deposit guarantees are not the cause of banking instability but a cure instead.
All bets were off in 2008, as the financial crisis intensify. The government and the RBNZ reversed their “hands off” approach and intervened in the financial system. As a result, the Crown’s Retail Deposit Guarantee Scheme (“DGS”) (Refer: Annex 1) was introduced to provide “blanket” coverage of nearly all deposits of financial institutions in NZ.
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