The speech and Bulletin put out by the Reserve Bank yesterday made much of the importance of market discipline in the financial sector. The two documents have slightly different lists of conditions which the respective authors think make it more likely that market discipline will be effective, but a common element is “market participants [must] have incentives to monitor financial institutions”. Toby Fiennes argues that in the New Zealand context:
“some aspects of the regulatory framework, such as Open Bank Resolution (OBR) and no deposit insurance, reinforce these incentives.”
and O’Connor-Close and Austin, in the Bulletin, add in
“nor is there any policyholder protection scheme for insurance firm customers.”
This has been a longstanding view held by the Reserve Bank. I’ve long thought it was wrong.
Of course, if you were confident that, were a bank to fail in which you were holding deposits or other interest-bearing securities, you would…
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Utopia, you are standing in it! 
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