Smith DamienDAMIEN SMITH (ACT): Thank you. As the Minister of Finance said this is part of the trilogy. Today we wanted to focus on the other side of the equation in this second reading: that when not done carefully or explicitly well deposit insurance can fuel bank crises by giving banks perverse incentives to take risks. And the country that adopts explicit domestic deposit insurance can also have to grapple with not just the stabilisation of the economy but the destabilisation effects of that insurance on a country's financial system as well. New Zealand is now going down the road of providing a financial safety net at the expense of the taxpayer. A proper and full safeguard against this would have been asking the banks—within their activities—to hold more capital. This would have been a more powerful mechanism.Moral hazard by banks and increases in the likelihood of financial crises due to excessive risk-taking is something that is directly linked to deposit insurance. So that the House is clear: in reality deposit insurance is not really insurance at all; it's but a guarantee against loss. It should be covered by the banks holding a greater risk of enterprise capital and the social and regulatory capital that a Government has called upon and the taxpayer has called upon—in terms of a bank failure—cannot match that. We should have learnt from South Canterbury Finance and the BNZ examples. And I'd just like to correct the Minister on the use of the Silicon Valley Bank scenario: they had depositor insurance of $250000. It wasn't the retail investors there that caused that bank run; it was actually the wholesale investors—plus they weren't subject to the Basel rules. In New Zealand we're not subject to those either but to rules set by the Reserve Bank and so we have an isolated system here that allows these types of laws and the trilogy to be adopted.This legislation is claimed to close the gap between New Zealand and international practices. Mr Robertson said it provides economic security for eligible New Zealanders if their bank or other deposit-taking institutions fail while helping protect the country's financial system. The $100000 limit interestingly was doubled after consultation and now will fully protect 39 percent of depositors. The scheme according to the bill will be funded by levies on deposit takers and supported by a Crown backstop. It's our opinion in the ACT Party that the New Zealand banks are really well capitalised and are becoming even better capitalised thanks to the Reserve Bank of New Zealand's (RBNZ) new rules which phase in over seven years from 1 July last year. The big four" banks are each owned by Australia's "big four" banks and have long been better capitalised than their parents—and that's just on a superficial level. But New Zealand's capital rules are more conservative than Australia's and are becoming even more conservative.Years ago the Australian Prudential Regulation Authority decided that they'd set common ratios and they are all risk-weighted against assets and seem very healthy to us. Explicit guarantees have immense political appeal because they assuage citizens' concerns about the safety of their deposits and thus increase the flow of funds into banks without requiring any fiscal expenditure. Deposit insurance as defined in this bill seeks to reverse the psychology of bank runs by reassuring depositors that if the bank fails for any reason their funds will be protected up to the limits on coverage. We have generally opposed deposit insurance but there are viable arguments on both sides. Those favouring deposit insurance believe de facto unpriced insurance already provides if the Government will be likely to let depositors eat the losses in any operation of the Open Bank Resolution (OBR) framework. It isn't crazy to believe that it could be the case for some deposit takers. I think it's really better for the Government to clearly signal that it will not provide bailouts; that the OBR framework will be allowed to run its course; and that with depositors having some proportion of deposits frozen while the banks are sorted out the Government will not provide compensation for total losses.The RBNZ has already set very high prudential reserves to make failure less likely and I worry that it will be impossible for the Government to get the risk premiums right on any insurance product when banks and non-bank deposit takers are all lumped into the same framework. Setting the insurance premium on riskier outlets too high and you can crash the industry as depositors leave. Set it too low and deposits flood in in pursuit of higher gains. In normal insurance markets if one sector's being sharply overpriced by an existing insurer a competitor has some incentives to go in and offer a better premium. This can't happen within Government-provided deposit insurance. So countries considering explicit deposit insurance should watch out for what they wish for. Unless a country has a strong banking regulation a strict full-banking regime carefully designed deposits depositors while holding moral hazard in check can suffer the consequences.Let's be honest with the people of New Zealand that a lot of people are financially illiterate and time poor and they don't really understand what a Moody's or S&P rating means to the consumer and their deposits. If you make a bank deposit today under this framework it is essentially an unsecured loan where the depositor is the first to take a 100 percent haircut with no recourse. Depositors are at the bottom of the food chain. The deposit is the property of the bank. So have we learned from South Canterbury Finance and the BNZ in relation to this bill? It's questionable but the Finance and Expenditure Committee tried to bridge that gap.So really insurance deposits—it's just another tax. Where is the increase in capital and adequacy anyway? Banks can lend recklessly going forward. So if they go bust taxpayers pick up the tab. Bailing out the highly profitable New Zealand retail banks must have much moral hazard. Cyprus had deposit insurance: the cash was frozen. It turned out that it wasn't worth the paper it was written on. It will also lead—these costs—to lower term-deposit rates. There's no such thing as a free lunch and yet the system will continued to be allowed to live on at the edge. It's time for the banks and their shareholders to manage this risk and their activities appropriately and for the taxpayer of New Zealand not to be on the hook in a serious financial situation."