By David Chaston
One of the issues that arose from our recent review of term deposit interest rates in Australia and New Zealand is to what extent the provision of deposit insurance in Australia, and the lack of it in New Zealand, explains the rate variations.
It is of course impossible to quantify the issue, even if it is clear it will be part of the explanation.
New Zealand is an outlier in terms of deposit insurance protection.
Savers need to realise that if we do get deposit insurance in New Zealand, it will come at a measurable cost. And that cost will apply via lower offer rates. Risk will reduce and savers will have no choice as to whether they want to accept it or not. In a low interest rate environment, interest earnings will get depressed further if such a scheme was introduced here.
Deposit insurance is being considered in the current review of the Reserve Bank of New Zealand Act. Without imposing my views on the wisdom of such a development, it is interesting to compare where our rate levels stand in comparison with many other countries.
Here you go.
|One year||Maximum||Official||CPI||Govt bond|
|term deposit||deposit insurance||cash rate||inflation||one year|
|New Zealand||3.10||none (OBR)||1.75||1.5||1.22|
All investments carry risk. Imposing a risk-eliminating 'benefit' will reduce the yield, irrespective of whether a bank passes on costs that may be charged to it by the Government to provide the service. The taxpayer has every right to be compensated for providing the 'insurance'. (But of course, it is not real insurance - no private insurer would ever take on the risk; only taxpayers will accept such risk.)
The removal of risk (and transferring it to the taxpayer) will eventually mean that term deposits will only return a risk-free return. At the moment, in New Zealand, the risk-free benchmark is that offered by Treasury's Kiwi Bond, which is 1.5%. And that is a rate not dissimilar to the Australian one year insured term deposit rate (after adjusting for the Official Cash Rate variance).
Just because some people want the taxpayer to protect them or bail them out doesn't make it good public policy.