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A sensible look at New Zealand Open Bank Resolution Policy

I find it rather odd that so many in the DP community would forget what free banking means. It means that when a bank fails those who invested in the bank, including through deposits, will suffer a share of the losses.

Mish has a great review of New Zealand's OBR Policy that I agree with completely:

Readers who are unfamiliar with my overall stance on deposit guarantees, especially in light of my posts on Cyprus may be surprised to learn that I commend the Reserve Bank of New Zealand's policy for precisely the reasons it stated:

"Deposit insurance is difficult to price and blunts incentives for both financial institutions and depositors to monitor and manage risks properly."

Consider a US example.

In buildup to the housing bubble crisis, investors flocked to shaky institutions that paid the highest yields on deposits simply because the deposits were guaranteed. The FDIC guarantee enabled hundreds of banks such as now-bankrupt Corus to secure funds used to build condos in Florida and Las Vegas.

No one in their right mind would have placed money in Corus and other such banks without those guarantees. In essence, deposit insurance helped fuel the housing bubble.

Read more here: http://globaleconomicanalysis.blogspot.com/2013/03/fraudulen...

I don't mean to be rude, but with liberty comes responsibility, right?

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