New Zealand applies lessons from behavioral economics

I have posted quite a bit on behavioral economics and have often wondered why policymakers continue to ignore it. However, times seem to be be changing slowly.

New Zealand and Australian Governments have issued guarantees on the bank deposits. Their financial system is under deep stress and this was always coming. Guarantee on bank deposits provides signal to the public that there is nothing to worry and avoids any bank runs.  Australian government additionally also guarantees wholesale funding. Retail funding is deposits given by public to banks and wholesale funding is inter-bank borrowing and lending.

The wording used by NZ caught my eye. It says:

The Minister of Finance announced today that the Government has introduced an opt-in deposit guarantee scheme.  The scheme covers deposits for New Zealand-registered banks and eligible non-bank deposit-takers (including banking societies, credit unions and finance companies).

This opt-in strategy is straight from behavioral economics. It is nothing but the defaults used strategy to increase savings. The default here is opt-in which means banks would have to opt for the guarantee scheme and then only it will be covered by NZ Finance Ministry. The opposite is opt-out under which all banks would have been covered and if a bank didn’t want it it could have opted out from the scheme.

The NZ believes its financial system is safe and hence has used opt-in. Infact, NZ govt 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.

Australia also uses opt-in but is not as explicit as NZ:

Eligible ADIs (Authorised Deposit-Taking Institutions ) must apply to the Government for a guarantee to attach to new and existing issuances of debt securities. 

 

2 Responses to “New Zealand applies lessons from behavioral economics”

  1. A behavioral economic approach to the financial crisis « Says:

    […] to boost liquidity and confidence by guaranteeing bank debt and consumer deposits. Eagle-eyed Amol Agarwal notices that New Zealand did so with a behavioral economics twist: It used an opt-in strategy for […]

  2. Opt-in strategy not working in Germany « Mostly Economics Says:

    […] strategy not working in Germany I had posted how NZ seems to be using lessons from behavioral economics to protect its financial system. […]

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