The recent EU bailout negotiations are a good example of how not to bail out a bank. Three things seem obvious, with the enormous benefit of hindsight:
- It should never have been allowed to get this bad
- Having main banks closed is really bad for the economy
- Deposit insurance only means something if the guarantor can meet the obligation
Focus on the deposit insurance: originally the European negotiators simply swept this aside, requiring a haircut. Although deposit insurance has now been reinstated, in return for a tougher haircut on uninsured deposits and some other conditions it is still far from ideal. Euros 100,000 is not that big a number. Think of a couple saving for a house. Think of a retired couple having just sold a house... and the rules are different for commercial accounts.
Imagine the chaos at present: no banks are open or have been for two working days. It is unsure what will occur when they re-open.
Far better to try to supervise for prevention rather than cure, and supervise through the process. Yes, it will be more complicated than simply saying 'everyone will get to keep their money' but life is like that. New Zealand may not have the money to fulfil that guarantee.
Hat tip: Rob Dowler.