NZ’s Open Bank Resolution: a new option for bank reform?

Author: Ashley Lee | Published: 10 Apr 2013

KEY TAKEAWAYS

· New Zealand’s Open Bank Resolution, which includes provisions for haircuts on bank deposits in distressed bank situations, has attracted media attention since Cypriot banks agreed to a similar resolution plan;

· However focusing on deposit haircuts is simplistic; the Open Bank Resolution aims to mitigate risks to the financial system stemming from a bank failure;

· The plan freezes creditors’ funds to cover potential losses so that the bank can reopen the next day, reducing the impact on the financial system;

· Some aspects of the OBR policy may be replicated in EU bank resolution proposals to deincentivise risk.

The resolution to impose haircuts on Cypriot banks’ depositors drew attention to New Zealand’s Open Bank Resolution (OBR), which operates under a similar principle. But it might provide a better model for bank resolution.

The Reserve Bank of New Zealand (RBNZ) has...