Deposit insurance: Was it necessary in NZ

We have Deposit insurance in NZ now.

I’m not sure. Even if it is the right thing to have (as Bernard Hickey on the Rates Blog suggests) I still fear that this sort of action leads to a signaling problem.

The act of committing to deposit insurance could suggest to people overseas that our banking system is also in meltdown. Fundamentally, people assume that the government may have some information that they do not. To external people our banks look safe, but seeing the fact that the NZ government has come in to offer an insurance scheme to banks may shake this view. This type of signaling issues is probably one of the reasons why the RBNZ didn’t cut rates a few days back.

I’m just a little uneasy, and I’m not sure why – I blame my educations focus on signaling models 😉

I’ll read the details and comment later tonight – if you want to comment now, yell at me in the comments section of this post 😉

Update: Good article by David Hargreaves. Note:

The decision by the Australian government (and let’s say that it WAS their decision) suggests a nervousness about the position of the Australian banks that hasn’t been indicated before. And that’s not a comforting thing.

Hmmmm

Update 2: Forget about risk – the government will pay for it.  Hmmmm.

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  • Kimble

    As to the nervousness about Australian banks, it was evident before, but just not from the government. I think this is more of a case that the government wants to be seen to be doing something/anything to reassure people/voters.

    Lots of shots of Rudd on TV with his sleeves rolled up working furiously at his desk = first clue that this might be the case.

  • “Lots of shots of Rudd on TV with his sleeves rolled up working furiously at his desk = first clue that this might be the case.”

    I love it – especially since government can’t really do very much 🙂

  • adamsmith1922

    I think it became inevitable, even if not justified economically it became a political act, especially once Australia went down the path.

    However, there are legtimate concerns over the overt politicisation of the decision and there potential for still not dealing with a key part of the problem as noted by Bernard Hickey at the Rates Blog. Hickey also comments negatively on Clark’s political game playing as well.

    We are in the ‘Gummint must do something, anything stage’ coupled with a wilful disinclination to actually try and tackle real issues – so that the voters are not frightened.

  • “We are in the ‘Gummint must do something, anything stage’ coupled with a wilful disinclination to actually try and tackle real issues – so that the voters are not frightened.”

    Hmmm, I’m concerned – I do not like the look or shape of this scheme 😛

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  • CPW

    I wouldn’t get too hung up on the signaling. Firstly, once other countries introduce these policies you have no choice if you want to avoid a flight to safety. Secondly, if other countries introduce these policies but you don’t, can this not be interpreted as a signal that you’re afraid of what insurance will cost you because you know your banks are in trouble? Finally, this credit crunch episode should have demonstrated quite conclusively that governments and central banks often have little or no information advantage as to how likely banks are to fail.

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  • Great info. Insurance can sometimes be confusing, so it’s good to have as much info as possible.