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Deposit Insurance Is Moral Hazard Madness

“The Government’s deposit insurance scheme is the kind of moral hazard madness that led to the GFC,” says ACT Leader David Seymour.

“This is the socialisation of banking.

“The Minister of Finance is saying 93 percent of bank customers don’t care about bank stability because the taxpayer will bail them out.

“Deposit insurance puts New Zealand taxpayers on the hook for banks’ risk-taking and increases instability in our financial system. It creates a moral hazard, that is banks and savers will take bigger risks because they’re insured.

“The OECD reported ‘a study of banking crises from the beginning of the 1980s to the mid-1990s’ found the presence of an explicit deposit insurance scheme tends to increase the probability of such events’ and can ‘increase the risk of imprudent behaviour by individual banks’.

The World Bank and the International Monetary Fund say deposit insurance ‘tends to be detrimental to bank stability’ and creates a ‘lack of market discipline’.

“Putting himself in charge of financial stability of the banking system continues Robertson’s pattern of megalomania.

“Not content to dictate what routes Air New Zealand should fly, he’s now telling the Reserve Bank how it should lend.

“If the goal is more accountability for financial stability in the banking system, Robertson should have vested power in the Reserve Bank’s board, much like is the case with the Financial Markets Authority.

“Instead of shifting regulatory power for financial decision making powers from the Governor to the Board, he's shifted the power to himself. He has correctly identified the problem of too much power being vested in one individual, the Reserve Bank Governor, and incorrectly solved it by transferring the solution to himself.”

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