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Government takes feedback on board and doubles coverage of proposed deposit insurance scheme to $100k per depositor, per institution

Government takes feedback on board and doubles coverage of proposed deposit insurance scheme to $100k per depositor, per institution

The Government is committing to doubling the coverage of a proposed deposit insurance scheme to $100,000 per depositor, per institution.

Cabinet in December 2019 made an “in-principle” decision for the cap to sit at $50,000, but following public consultation during 2020, decided to increase this limit.

Once implemented by mid-2023, the scheme will see registered banks and licensed deposit-takers like building societies, credit unions and finance companies, pay levies into a fund that can be drawn upon if an institution collapses. 

If someone has $200,000 of savings at a bank that fails, for example, the scheme will see them get $100,000 back. If they have $200,000 spread across two banks that both fail, they’ll get $100,000 back from each bank.

If two people have a shared account with $300,000 in it at a bank that collapses, they will get $200,000 back altogether - $100,000 each.

The scheme will be fully funded by deposit-takers, but if there isn’t enough money in the fund to cover the cost of a collapse, the scheme can get a loan from the Government.

The deposit insurance scheme will cover transactional, savings and term deposits currently offered by registered banks, and the equivalent products offered by non-bank deposit takers. Bonds, debentures, capital notes, equities and KiwiSaver funds are among the products that won't be covered. 

Finance Minister Grant Robertson said a $100,000 limit would "fully protect” 93% of depositors.

However, 60% of deposits by value would remain uninsured. This reflects the fact a small number of depositors - around 7% - hold about 60% of total deposits. 

Those who made submissions during the consultation, as a part of Phase Two of the Reserve Bank Act Review, noted a $50,000 limit was low by international standards. The cap on an equivalent scheme in Australia is A$250,000, for example.

Small banks, credit unions, building societies and finance companies also raised concerns they would lose a significant amount of deposits if the cap was set at $50,000, as customers would divvy up their money among institutions.

However, higher coverage will likely cost deposit-takers more, and potentially see them share the cost with their customers through higher fees and lending rates or lower deposit rates.

The Treasury and Reserve Bank (RBNZ) estimated that if it took 10 years to establish a fund big enough to cover 2% of insured deposits, deposit-takers would need to pay $22 per year for every $10,000 of insured deposits.

In the unlikely event of a deposit-taker absorbing all the costs of the deposit insurance scheme, industry profits would fall by around 5% every year while the fund was being established.

New Zealand has been an outlier among OECD countries in not having deposit insurance.

It has been decided the deposit insurer will be located within the RBNZ, but will likely be structured as a separate legal subsidiary of the RBNZ. 

The Minister of Finance will be able to bring products within the scope of the deposit insurance scheme via regulation. The Minister will also have the power to define detailed eligibility rules, for example for the treatment of trusts, sole proprietors, unincorporated and incorporated societies, partnerships and custodians.

The Treasury and RBNZ are still working through some of the scheme's details, including how levies will be charged. Higher risk deposit-takers could be charged higher levies.

The New Zealand Bankers' Association supports risk-based pricing. CEO Roger Beaumont hoped this would see banks pay lower levies.

Where insured depositors will rank in the hierarchy of creditors in the event of a collapse is also still being decided. 

A Deposit Takers Bill will be drafted by the end of the year. It will take much of 2022 for it to go through the parliamentary process. The Bill will create a single regulatory regime for all bank and non-bank deposit takers.

Beyond establishing a deposit insurance scheme, the bill also gives the RBNZ a wider suite of tools to monitor deposit-takers and take enforcement action. It will also aim to strengthen New Zealand's financial crisis framework.

For more on what the insurance scheme will cost, see this story.

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47 Comments

Lot's of thought going into how we'll deal with the crash when it comes, as we continue to follow The Fed into the jaws of hell. One good thing out of all this: Bretton Woods will be dead & buried when it's over.

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I suspect that's the plan. Great reset.. build back better.. you'll own nothing and you'll be happy etc.

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Largely agree with what you write Tom. But Bretton Woods died in 1971 when left Gold standard?

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it died .. but it has been haunting us ever since .

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It died because the supply of a physical resource couldn't keep up with exponential growth.

That is what will increasingly haunt us.

I just remember AIG in 2008 - how long can belief be maintained?

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Fiat currency is nothing more than a confidence game PDK, the idea is you swap actual work for a bit of paper. Its worked right up until the present day and I believe it will just keep on going for the foreseeable future. When failure looks inevitable, digital will come in but the only question really is will it be capped ?

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Bretton Woods established a system of payments based on the dollar, which defined all currencies in relation to the dollar.
The US went off the Gold standard, but 'we' were still stuck with their dollar as the global reserve currency.

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Agree completely. In other media coverage of this announcement I read:
"While New Zealand's financial system is sound and well positioned to withstand the stress posed by Covid-19, these reforms ensure the Reserve Bank is better equipped to protect and promote financial stability in the future," Robertson said.
Not entirely sure what that exactly means re. the RBNZ but me-thinks Grant Robertson is starting to get a little twitchy about the economic balls that are being juggled here in NZ at the moment. I know this cover has been signaled for some time but is it another warning sign that things are starting to worry even this government.

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So does this mean even lower TD rates to fund the levies? Or will the bill have to be passed through to borrowers as lending rates are more or less zero now...

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This is a key question.
Should the depositors take the hit of a premium/levy against returns based on risk management of the bank/RBNZ and/or real risk of the borrowers?
Or should the borrowers pay additional?

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Best levied on borrowers. In the fractional reserve system, there far more dollars on the borrower side of the ledger for any levy to be spread over and at the end of the day, that's where the risk lies.

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The fractional reserve system is long dead. Banks are simply required to hold various tiers of capital to back their operations.

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Great article and looking like a good position to be in is debt free with diversified portfolio of funds over the coming years.

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Diversified portfolio of funds?

Everything is connected to everything; never more than now. If RE tanks, so does everything else, shares therein. If the banking system tanks (2008 the curtain-raiser and we've done nothing but can-kick since) so to does every other 'fund'.

In a decade's time, we are unlikely to still have pensions, or anything like the collection of forward bets (on a future supply of energy and resources) we currently hold. I've seen Randwick 20 minutes after Race 8; discarded bets littering the ground.

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pdk,

"In a decades's time, we are unlikely to still have pensions". And your evidence for this is?

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Better than 50k. Most Auckland boomers when they cash up will only need 10 banks now lol

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This sort of thing is part of the reason crypto is going bonkers. These muppets cannot be trusted to store value. They'll inflate it away, go bust (having spent years pocketing massive bonuses), the governments will tax it or worse just confiscate it.

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Ah yes, boomers are buying crypto en masse in search of a safe investment...

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This sort of thing is part of the reason crypto is going bonkers. These muppets cannot be trusted to store value. They'll inflate it away, go bust (having spent years pocketing massive bonuses), the governments will tax it or worse just confiscate it.

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You are not wrong about the muppets ... but I do not think crypto is immune either.

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Just get on with it, why does it take 4 years to implement?

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Yes speed would help.
This govt policy will change what I do. Currently I have a lot in Kiwi bonds. Once this change is enacted I would slowly transfer some back into a range of trading banks. So any lowering of TD rates from what they would have been would not affect me due to the pitiful sums that Kiwibonds currently offer. So for me, overall this is good.
But I will favour Kiwibank because I think that it in particular, would be the strongest because being govt owned is a big big advantage in terms of backing.

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Savings are a drag on the economy though. Need to keep saving risky to them to keep the debt levels up.

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Debt is a drag on the economy too. Unless it keeps growing of course.....

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Then make it so that I don't have to save money for years to buy a house.

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Savings are the oil of the economy. Savings are supposed to provide the pool of capital for productive investments. Instead we get the state muscling in and distorting everything via interest rate suppression and 'money printing', and consequently you get chronic malinvestment & zombie corporations.

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Some study of 'sectoral balances' would be helpful to you. Only the government when it runs budget deficits are 'net financial assets' created which provide for our savings. Also banks do not lend out our savings, these are held as their reserves, they create new money when they lend.
https://www.economicsjunkie.com/sectoral-balances-and-private-saving/
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creati…

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This will be great news for some of the B rated institutions that will now be safe for investors. I can think of one starting with H that will do very well, and wants to grow.

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7% hold 60% of deposits = v revealing. No doubt will not be commented on by our supine MSM
Also, by time they get it in, the stock markets will already have crashed and banks, if they DO get into liquidity crunch on co-co bonds (where counterparts risk explodes in a crisis) will already be looking at existing rules in Z where depositors are scripted to lose money.
As so often with this government, one is led to the weary question: what the hell are you waiting for??

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An Inflation adjustment.

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I'd make a condom joke, but the world is probably too woke.....

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The detail will be interesting and the planning will start....
"If someone has $200,000 of savings at.."
What is someone?
Is a company someone or is it only a 'person'?
Is is each shareholders (and ma and pa company V public coy) or just the company?
How about the family Trust? Is it the trustees (if so let's add a few dozen) or the beneficiaries (add some more)? (a trust is not a legal entity).
Dads account - can we add mum mum to it under Relationship law.
Should we add all the kids to the bank account to create more persons?

End of the day crony capitalism. . Billions gone into the pockets of the banks and executives and the public/individual left to cover the shambles.

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https://www.nzherald.co.nz/business/government-could-give-finance-minis…

Talk of giving the Minister of Finance a role in determining which types of lending the Reserve Bank is able to directly restrict.

“One economist immediately warned the move appeared to "seriously" undermine the operational independence of the Reserve Bank of New Zealand.”

Well, in some respects I think Orr has equally undermined the quality of decision making at the RBNZ and has enabled/encouraged some very foolish financial behaviour – it shouldn't be allowed to continue.

Orr seems completely out of touch with reality.

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So what happens if more than one bank gets into trouble at the same time? Let the bank(s) go bust and replace your cash held on deposit with a central bank digital currency?

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Exactly, no need to have a run on the banks to get out your bits of paper, it will just switch to digital like Bitcoin which doesn't physically exist. Governments are never going to let society collapse when they can simply make up something to fix the problem. Whatever you have in the bank will just switch to digital, I mean it's already 90% of the way there now anyway, how many people still use cash ?

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Take hell of a time to decide and once decided will take another two years to impliment.

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They can bail-in themselves with the public's money all they want since the government gives you the assurances that your money is safe.

If I'm a home buyer and have the deposit, I'll plonk it all into real estate. They can bail-in themselves with currencies to sort their liquidity but they won't be able to bail-in with illiquid bricks and mortar (especially during a downturn).

ME bank in Australia (now acquired by BOQ) did a mini bail-in last year immediately on the announcement of lock-downs, ruining many people's lives by depriving their access to their own money at a time they most needed it. I have no doubt a similar scenario will play out if NZ get hit hard by a sudden unexpected event- although this time round it won't be limited to redraw accounts but every other account that is current.

APRA asks ME Bank to explain why it took money from redraw accounts to pay down mortgages

As for keeping up with mortgage repayments, I will only pay just in time. The reason is simple, paying too much and too early not just risk your redraw account during a bail-in, it also send your property to the top of the list for mortgagee sale post default (since financial wisdom dictates those with the highest equity gets priority during a sell off).

Fire can burn the dollars in your hands but brick and mortar were born through it.

Be quick, opportunities waits for no one.

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So. We wait for 2 years then couples need to start splitting TDs across banks. Great, so stuck with Kiwibonds for the near term. At least it is a start....

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Yep. But Kiwibank must be a goodie in the meantime.
Why people would not spread money around a number of banks after this proposal comes in would be a mystery. I doubt that there will be many TDs in banks at all which are above 100 or 200 grand after this comes in.

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Once I can get my grubby mitts on my Kiwisaver I will do so.... Its not sounding so secure any more.

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Paid for by deposit TAKERS. Anything that separates the banks risky greed driven behavious from tax payers wallet is a win in my books.

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Bank Failure. -* If this report is accurate should I be surprised that it has not been reported in NZ?
https://www.simonparkes.org/post/royal-bank-of-canada

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We won't see this on msm. Its all smoke and mirrors. Deutchebank and Bank of Japan also far from healthy. No deposit insurance in NZ currently? Do not put all your eggs in a bank basket.

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How would taxpayers ever have the capacity to bail out the banks? It would in effect mean taxpayers trying to bail out their own savings, nonsensical. Only the central bank with its currency creating powers could do so.

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I hate this
- As a taxpayer, I'm now the underwriter for a lot of bank deposits
- I'll now be paying for another type of insurance (either via the small amount we have in bank, or via increased interest on mortgage)
- They haven't said where they'll park the money in the meantime, where can you put it that it will be safe in the chaos leading up to a bank collapse, and won't be eaten by inflation?

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As taxpayers are only currency users and not currency issuers they do not have any ability to underwrite the banks. That capability must fall to the government as the issuer of the NZ Dollar. Warren Mosler had this to say on banking,
" banks are public/private partnerships, established for the public purpose of providing loans based on credit analysis. Supporting this type of lending on an ongoing, stable basis demands a source of funding that is not market dependent. Hence most of the world’s banking systems include some form of government deposit insurance, as well as a central bank standing by to loan to its member banks".
https://www.huffpost.com/entry/proposals-for-the-banking_b_432105

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No mention of how this dove-tails with the Reserve Bank's "Open Bank Resolution" (OBR).
The OBR states that a portion of your funds will be frozen in the event of a bank crisis, allowing "depositors" (or more correctly, "unsecured debtors"), access to a small amount.
I have the words of John Key inked on my mind, when he said deposit insurance was not necessary because the event of a crisis was unlikely and in that event, unsecured debtors would likely receive something closer to $500 rather than $10,000 should a bank fall into trouble.

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