In response to the financial crisis, a number of countries have sought to boost liquidity and confidence by guaranteeing bank debt and consumer deposits. Eagle-eyed Amol Agrawal notices that New Zealand did so with a behavioral economics twist: It used an opt-in strategy for participation in the government program. (Australia used a similar approach.) Agrawal argues that the opt-in strategy is a signal to investors about the relative health of the New Zealand banking system.
(New Zealand’s Ministry of Finance) believes its financial system is safe and hence has used opt-in. In fact, (the New Zealand government) is trying to signal the same to the markets. If the risks from financial system were higher, it would have instead used a opt-out strategy.
That may true, but the opt-in approach is also a signal about the relative health of individual banks. Contrast it with the U.S. FDIC program to guarantee bank debt, which was “voluntary” in name only – at least for the nine major banks that initially participated. The U.S. government’s argument against true voluntary participation was that banks that did take part would be considered weak by investors and other lending institutions. New Zealand banks that choose to opt-in will face this very dilemma. So while New Zealand sought to showcase the health of its financial system at the expense of a few weak banks, the U.S. sought to shelter the extent of the damage to its financial system at the risk of undermining some of its strongest performers (ie. Wells Fargo and JPMorgan Chase).
So far, the New Zealand government has not announced which banks are participating in its opt-in program, but stay tuned.
Tags: financial crisis