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The Depositor Compensation Scheme, which insures bank and finance firm deposits up to $100,000, will take effect today, Finance Minister Nicola Willis says

Banking / news
The Depositor Compensation Scheme, which insures bank and finance firm deposits up to $100,000, will take effect today, Finance Minister Nicola Willis says
The Reserve Bank of New Zealand in Wellington, 2024
The Reserve Bank of New Zealand in Wellington, 2024

Deposits at banks and other reputable finance companies are now insured for up to $100,000 per person or institution as the Depositor Compensation Scheme takes effect from today.

Finance Minister Nicola Willis said the scheme should give New Zealanders “extra peace of mind” that they would get their money back in the unlikely event of a bank collapse. 

The scheme insures up to $100,000 for each customer and is funded through risk-based levies on eligible deposit takers—banks, building societies, credit unions and finance companies

Levies are paid into a fund, equal to 0.8% of protected deposits, which would be used to pay out if a licensed deposit-taker failed. This fund and payout process is managed by the Reserve Bank. 

Willis said including smaller deposit takers had the added benefit of promoting better competition by allowing them to compete on an equal footing with big banks. 

“Sometimes a smaller deposit taker can provide a more competitive deal, but the consumer’s confidence is undermined by that organisation’s exposure to risk. This scheme helps overcome that issue, promoting better competition, and therefore better deals for Kiwis.”

The scheme was first introduced by the Labour Government—under Finance Minister Grant Robertson—but it received broad support from all political parties, with debate focusing only on specific design issues. 

Many comparable economies established insurance schemes similar to the Depositor Compensation Scheme in the aftermath of the 2008 Global Financial Crisis, when governments were forced to bail out financial institutions with taxpayer money. 

In New Zealand, a Crown Retail Deposit Guarantee Scheme paid out $2 billion to cover losses in nine finance companies which collapsed during the crisis. The insurance scheme will shift that risk back onto the financial sector and reduce the need for ad-hoc bailouts. 

The new Depositor Compensation Scheme automatically covers money held in standard banking products, including transaction, savings, notice and term deposit accounts.

Kerry Beaumont, Director of Enforcement and Resolution at the Reserve Bank (RBNZ) says that while deposit taker failures are rare, "the DCS gives depositors extra peace of mind that their standard banking products are protected".

"This type of protection already exists in many other countries and contributes to the stability of New Zealand’s financial system.”

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1 Comments

Except the sector will recoup the 'costs' from? 

Either borrowers or lenders. 

And the government is at baseline, taxpayers. 

So it's still a bootstrap problem, made worse as growth reverses. 

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