New Zealand to Introduce Deposit Guarantee Scheme by 2023

The NZBA’s Roger Beaumont says banks should pay lower levies compared to non-bank deposit takers because they are less likely to call on the scheme.

New Zealand’s Cabinet has adopted a package of measures that includes a NZD 100,000 guarantee on deposits at financial institutions in the country.

Deposit protection is part of Phase 2 of the government’s Review of the Reserve Bank Act, as part of measures to make the banking system safer for customers and bring it in line with other developed nations.

The government sought feedback on the introduction of a deposit protection regime in June 2019. A limit between NZD 30,000 and 50,000 was initially proposed.

According to Finance Minister Grant Robertson, the higher deposit guarantee limit of NZD 100,000 is the result of feedback from the consultation, and will fully protect about 93 percent of depositors.

The deposit guarantee scheme, to be included in new legislation known as the Deposit Takers Act, is aimed at protecting consumers and the financial system from damage that could be caused by excessive risk-taking by banks and any failures that could result.

The new Deposit Takers Act will create a single regulatory regime for all bank and non-bank deposit takers – such as building societies and finance companies.

It will introduce a new deposit insurance scheme that will protect up to NZD 100,000 per depositor, per institution in the event of a failure. The reforms will also include a new process for setting lending restrictions, such as loan-to-value ratios.

“This new Act will broaden and clarify the scope of our role, which has evolved significantly since the Reserve Bank began prudentially regulating banks more than 30 years ago,” said RBNZ Governor Adrian Orr. “It also modernises our regulatory processes and instruments.”

According to Orr, the reforms provide new enforcement tools that will help the RBNZ manage emerging issues and an enhanced crisis management framework to effectively respond to any failures and “minimise the impact on the financial system, the economy, and society”.

Drafting of the Deposit Takers Act will now get underway. The Bill is expected to be introduced to Parliament towards the end of the year.

The RBNZ will lead the implementation of the new Deposit Takers Act, with a view to having deposit insurance up and running in 2023.

In a statement, the NZBA (New Zealand Banker’s Association) welcomed the deposit guarantee scheme, though noting that there are still some details to address, such as how the levies to fund the scheme are applied to participating entities.

“We support a risk-based approach to setting levies where lower risk entities, such as banks, pay lower levies because they are less likely to call on the scheme,” said NZBA chief Roger Beaumont.

Critics of this approach have previously argued that such an approach would give banks an unfair advantage over non-bank competitors. Deposit protection schemes are typically funded with levies calculated based on the amount of protected deposits individual institutions hold.

Beaumont also said the deposit protection scheme needs to take into account the higher minimum capital requirements to be phased in for banks, which he says will come at a high cost and is intended to help banks withstand a one-in-200-year shock.

He also said it is important to work through how the scheme fits in with the broader crisis management frameworks, including the RBNZ’s Open Bank Resolution policy, which can draw on deposits to help keep a bank afloat in the case of a potential failure.

“We look forward to working with the government on the proposed legislation,” Beaumont said.

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