RBNZ settlement account with interest paid at the OCR improves Nelson Building Society's competitive position, chief executive says

The Nelson Building Society becoming the first non-bank deposit taker to gain access to the Reserve Bank's Exchange Settlement Account System (ESAS) will improve its competitive position against banks, and bolster treasury management options, chief executive Gina Dellabarca says.

The Reserve Bank announced on Tuesday Nelson Building Society was up and running with ESAS, and is now listed in the ESAS member register on the Reserve Bank's website.

The ESAS is a settlement system used for processing and settling both retail and wholesale payments between banks and other financial institutions. It's owned and operated by the Reserve Bank. Interest is calculated for each account holder daily, with this paid at the Official Cash Rate (OCR).

 "It's just fantastic to get it up and running," Dellabarca said.

She said gaining ESAS access would bolster Nelson Building Society's treasury management which oversees its liquidity, funding, capital, and financial risks, and earning the OCR would make for "more of an even playing field." Currently the building society runs its treasury through five or six New Zealand banks. 

"And the RBNZ becomes our seventh, effectively," said Dellabarca.

Nelson Building Society's ESAS admission comes after lobbying from non-bank deposit takers (NBDTs) to gain access, a Reserve Bank review of the ESAS, and the parliamentary banking inquiry into banking competition, which supported broader ESAS access. 

Steve Gordon, the Reserve Bank's financial markets infrastructures and settlements director, says the review balanced the objectives of fostering innovation and competition with maintaining the safety, security, and integrity of the system. 

"ESAS membership now allows approved non-bank entities to settle payments directly in risk-free central bank money without using a commercial bank as an intermediary," Gordon says. "Prior to the completion of the review, the access criteria did not support non-bank entities obtaining an ESAS account."

Unity Credit Union chief executive Kevin Hughes told Parliament's Finance and Expenditure Committee last week that ESAS probably wasn't a realistic option for most NBDTs, with an application fee of about $8,000, and then costs of about $2,000 per month when they may only use ESAS a few times a week. Unity itself, however, is "working through a process with the Reserve Bank for its own ESAS access."

Dellabarca said it does stack up for Nelson Building Society.

"We're not going to go into the specifics of it, but it's not free. But it's something we think overall stacks up for us," she said.

"The economics are [such] that we think it should be positive for us. Whether we can leverage that against our deposits, against our other banks [used for treasury management] is another question. But obviously, we also, like anything, we value the relationships as well as the interest that they [banks] pay us."

Remunerating settlement cash at the OCR came under question when the value of money held in settlement accounts soared. This happened at the time of the Reserve Bank's Large Scale Asset Purchase (LSAP) programme during the Covid-19 pandemic, and as the OCR soared from 0.25% to 5.50% between October 2021 and May 2023 as the Reserve Bank fought inflation. 

The then-Finance Minister Grant Robertson got advice from the Reserve Bank and Treasury about potentially reducing the interest rate paid on settlement cash balances, but no changes were made. Settlement institutions' balances peaked at $56.446 billion in December 2022, having been just $7.423 billion in January 2020. As of July this year, they were at $25.819 billion.

NBDTs argued the Reserve Bank using settlement accounts for transmission of its LSAP programme during 2020-21 saw banks profit by about $2 billion. In 2023 the Reserve Bank noted; "NBDTs want direct access to an ESAS account as they currently have to hold funds with existing account holders (the large banks) which get the financial benefit." 

Earlier this year the Reserve Bank said it had decided to leave the Overnight Deposit Rate, at which it remunerates ESAS accounts, unchanged at the OCR. 

Meanwhile, Dellabarca said ESAS access would also give Nelson Building Society a more direct relationship with the Reserve Bank.

"Because at the moment we kind of deal with them indirectly as they regulate our trustee [Covenant Trustee Services] and sort of oversee us a little bit. Now they can directly look into our business a little bit more."

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