Well they really need to actually do something then – as people are forming expectations on the basis that they expect deposit insurance in the face of the failure of a bank. Even if they aren’t going to bail it out – if expectations are not set by private agents in a way consistent with that we risk an extremely harmful situation, and further generalised overinvestment.

I’d say “I hope this is in lieu of deposit insurance, and that government does more to make that credible.”

Indeed, it lowers the odds of a bailout by increasing transparency, which lowers the potential for spillover and meddling. But this is a side-effect, not the primary purpose of the OBR – the OBR is part of the management of failure in financial markets, not the entire policy.

I’d also note that, although the RBNZ helped to design the OBR, it is still the minister/government’s responsibility to pull the trigger – and to determine what other policies are put in place. I don’t believe the existence of an OBR is sufficient to avoid government bailouts when they are occurring overseas, or when it is one of the big 4 banks that are in trouble. If that is indeed that case, this is something that should be accounted for over and above OBR regulation.

Just to be clear, I wasn’t criticising anything you’ve written – as I don’t believe you put it as “one or the other”. I just saw that Bernard was starting to do that, and had seen Cowen’s post being interpreted on other blogs as suggesting an almost full replacement, and wanted to point out that this wasn’t the case.

Maybe they intervene, but looks like it would be after they burn the assets of those who should have been monitoring. So odds of any bailout drop.

But I would welcome something going into the Reserve Bank Act saying the Bank can’t bailout beyond what’s in OBR and into Fiscal Responsibility Act saying the government can only bail out the banks if the Minister of Finance and Prime Minister are shot in the face as part of the process.

My view was simply that this is saying the OBR is irrelevant when looking in the space of deposit protection – it does not tell us anything about the implicit guarantee given by government.

It is a scheme that makes the process of winding down institutions more transparent, it doesn’t define the full government response – the OBR is part of the story, not the whole policy framework.

And this is key – if a large bank fails, the government will intervene. Unless they find some way to commit to not intervening, I want them to acknowledge this.

There will be a set of financial institutions that would not have been shut down, but now will due to the organisation. However, there are a set of financial institutions that will not in either case, and a set that will be shut down in both cases.