Financial consultant Geof Mortlock calls for deposit insurance to be introduced in NZ, and for a new regulator to takeover the RBNZ's financial regulation responsibilities

By Gareth Vaughan

Adding explicit depositor protection to New Zealand's banking supervision framework should be on the agenda for phase 2 of the Government's Reserve Bank of New Zealand Act review, says financial consultant Geof Mortlock.

With phase 1 of the review focusing on monetary policy, phase 2 - due to get underway in coming weeks - is expected to focus on the Reserve Bank's financial regulation, or prudential regulation of banks, insurers and non-bank deposit takers such as finance companies, building societies and credit unions.

Speaking to interest.co.nz in a Double Shot interview, Mortlock said he'd like to see an explicit depositor protection function added to the supervision role.

Mortlock is a former senior official at both the Reserve Bank and the Australian Prudential Regulation Authority. He now provides consultancy services for the likes of the International Monetary Fund, World Bank, Financial Stability Institute and KPMG.

In a recent interest.co.nz article Mortlock called for the regulatory functions to be moved out of the Reserve Bank and into a new, separate regulator. And he'd like to see the current situation, where the Reserve Bank has no explicit statutory objective to protect bank depositors or insurance policyholders, change.

"I would like to see an explicit depositor protection function woven into the supervision role so that the supervisors have a much, much sharper focus on what they're actually doing and why they're doing it. Secondly I think we do need a deposit insurance scheme in this country. We are one of the very few countries in the advanced world now without one," says Mortlock.

The Reserve Bank has its Open Bank Resolution (OBR) Policy, a tool that could be used on a failed bank. (Here's a look at how the OBR might work if it was used). Mortlock says he doesn't disagree with some aspects of the OBR, because like the proponents of the policy, he doesn't want to see taxpayers' bailout banks.

"But they [the Reserve Bank] have got the worst of all worlds. They've got an Open Bank Resolution Policy that would apply haircuts to depositors, and no protection for mum and dad depositors who have no show of really protecting themselves, let's be realistic about that," Mortlock says.

"Now, the Reserve Bank talks about a de minimis exemption from the OBR, but there they're only talking about $500, maybe $1,000, per account that would be exempt from a haircut. [Governor] Adrian Orr talks about that giving them sandwich money. I don't think they need sandwich money. I think they need money to pay the mortgage, to pay the rent, to keep the kids at school and to pay the medical bills."

"So I think that what we're talking about is something very different from the bare bones de minimis exemption that the Reserve Bank is talking about. We're talking about a properly funded and structured deposit insurance scheme that provides a meaningful level of protection to depositors," Mortlock says.

A $50k per depositor insurance scheme?

All locally incorporated banks with more than $1 billion dollars of retail deposits have been required to prepare themselves for the potential use of the OBR policy. Mortlock notes this excludes the likes of building societies and credit unions that aren't big enough to meet the $1 billion threshold, but still have thousands of depositors creating a "deeply unsatisfactory" situation.

Asked how much he believes a New Zealand deposit insurance scheme should guarantee per depositor, Mortlock suggests about $50,000. That's significantly lower than in Australia, where the Australian government guarantees deposits up to A$250,000 per person, per authorised deposit taker. Mortlock notes by international standards this is very high.

"If one looks at Europe it's €100,000 per depositor, per bank. I think that is even quite high. The figure I would be looking at would be maybe $50,000 per depositor per bank on a single customer account basis. And I stress the single customer account approach because the danger of the Reserve Bank's approach is they'll say we'll exempt a certain amount per deposit account. Well there's nothing to stop you and me and anyone else from saying 'okay we're going to create 100 new deposit accounts in the one bank spread out across those 100 accounts, be exempted from up to $100,000 or more, because they don't apply a single customer view.' Well that's crazy."

In 2013, when a haircut was imposed on Cypriot depositors, then Prime Minister John Key rejected calls for deposit insurance to be introduced in New Zealand. Key argued it would prove too costly for consumers because banks would pass on the cost of any deposit insurance levy to consumers. At the time this view, and the Reserve Bank's view that a deposit insurance scheme would increase moral hazard, were rejected by Auckland University's David Mayes.

Treasury modelling last year suggested introducing deposit insurance could see savers pay a couple of dollars a year for every $1000 of deposits up to a limit of $100,000.

New Governor Adrian Orr appears to have a more pragmatic view on deposit insurance than the Reserve Bank's strong opposition to the concept over the years. In a recent Double Shot interview Orr told interest.co.nz;  "I think that [deposit protection/insurance] is something that's going to be here in the future. We need to work our way through what it means. I think people have been talking across each other a lot."

The case for a new entity to be the prudential & AML regulator

Meanwhile, Mortlock says the idea of shifting prudential regulation out of the Reserve Bank and into a newly created entity is to give it the focus it deserves.

"The concern that I have, and I think a number of people out there have, is that the Reserve Bank is focused primarily as it should be on monetary policy and price stability because that is its primary mandate, indeed that's what the Act says," Mortlock says.

"The risk of that is that it is distracted from and not as committed to, as it ought to be in my view, the prudential supervision function. They are a broad based central bank they have in fact a broader range of functions than central banks in almost any country I can think of. And that means that the prudential function is pretty much a poor cousin to monetary policy, to the oversight of the exchange rate etc."

He points out that currently, the Reserve Bank has a very wide range of powers compared to most central banks in the OECD with responsibility for monetary policy, foreign exchange reserves management, currency intervention, operating significant parts of the payment system and securities settlement system, prudential regulation of banks, insurers and non-bank deposit takers, anti-money laundering (AML) oversight for banks, insurers and non-bank deposit takers, regulation of the payment system, financial stability oversight, macro-prudential regulation and currency management.

Moving prudential regulation into a new agency would establish a cleaner set of objectives, a stronger governance arrangement and organisational culture and focus, he argues.

"It would remove conflicts of interest with the broader range of functions that a central bank has, and it would remove, I believe, the excessive concentration of power that currently exists within the Reserve Bank," says Mortlock.

In the video he explains why he doesn't think the Reserve Bank's prudential regulation responsibilities should be shifted to the Financial Markets Authority or the Australian Prudential Regulation Authority, and why he doesn't believe adopting the Australian regulation model would see NZ import problems highlighted in Australia's Royal Commission.

Mortlock suggests this new regulator could also take over the FMA and Department of Internal Affairs' AML oversight roles, thus combining NZ's existing three AML regulators into one. The Reserve Bank currently has about 52 staff focused on financial regulation and Mortlock suggests this could be increased to about 70 under a new regulator, with the AML staff from the three regulators also shifted across.

"I would not want to see a bloated regulator, the budget would not need to be much bigger than it currently is," says Mortlock.

He notes the International Monetary Fund last year judged the Reserve Bank to be non-compliant in 13 of 29 international bank regulatory and supervision framework standards.

"So I think it is time for a change that I hope would bring about more effective regulation."

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12 Comments

I agree wholeheartedly , Deposit Insurance is a must .

Many of us Boomers have significant amounts in cash in the Banks and while we tolerate earning a pittance in interest , we cannot afford to take a haircut of our hard earned life-savings which we have accumulated
by scrimping and saving and forgone consumption , so as to ensure we are never a burden on the state or our children

The deposit interest premium will reduce the pittance of interest you receive even more. Will you also need to pay an insurance insurance premium to ensure the insurance company has sufficient reinsurance (as in AMI) to pay the insured deposits?

IMO this is buyer beware. If you are worried about your bank depsoits then buy gold and bury it in the back yard.

Australia 250K deposit protection Even more if you have more & deposit in another bank [ as long as it’s not a subsidiary]
Best protection
Canada 100K deposit protection same applies spread deposits in different banks if you have over 100K
Even better total deposit insurance cover is available in at least one place I’ve used there
USA Each ownership category of a depositor's money is insured separately up to the insurance limit, and separately at each bank. Thus a depositor with $250,000 in each of three ownership categories at each of two banks would have six different insurance limits of $250,000, for total insurance coverage of 6 × $250,000 = $1,500,000.
Of course New Zealanders bank deposits should have protection or does NZ wish a repeat of the $5Billion finance companies busts ? NZers I’m sure do not want to lose their capital like that agaiin
Perhaps the previous Nat govt wished to keep depositors interest higher by avoiding compulsory insurance on deposits thus making NZ banks attractive to foreigners seeking better interest returns ?
Time to protect all of depositors funds not just 50K which is a joke

Dear HeavyD
Gold won’t save you either my friend
When GFC2 occurs gold will not be allowed to be legally freely traded
More likely if you are known to have gold it will be confiscated by the government along with increased property taxation because in a crisis governments can and will do anything
Go read history of Gold in USA & learn

HeavyG,

I would be quite prepared to see my TD rates cut by 20/30bps for the certainty that a proportion of it would be protected in the event of the bank failing.The capital I have on deposit is not there for the income it generates,but for liquidity.Currently,that capital is spread over 4 banks and kiwibonds.

The idea that I should buy gold and bury it,is too ridiculous to be worthy of serious comment. On a wider view,I am certain that a very high proportion of Kiwis are unaware of OBR and believe that their deposits would be protected in the event of bank failure.that is the worst of both worlds,as there would be huge political pressure for the government of the day to step in,as it did with S Canterbury Finance.

Australia was able to run a bank-deposit-guarantee scheme for 7 years at no cost to the bank customer
How come the intelligentsia suggest a deposit insurance scheme that will be charged to the customer

This following post was written in 2014 and still it gets ignored
https://www.interest.co.nz/opinion/71372/bernard-hickey-says-capital-flo...

The 2018 Australian Budget implements tax cuts for the many including company tax-cuts for all, EXCEPT for the Banks who are excluded - the Australian Government is gunning for the Banks while NZ has sat up in the grandstand and done nothing while the AU government will collect rent taxes on profits made in NZ

Iconoclast, you may have your wires crossed here. In terms of this article, this is the relevant Australian scheme - https://www.fcs.gov.au/ In terms of the Aussie scheme you're referring to, that sounds like the emergency GFC era one. We had one of those too & it cost taxpayers around $1 billion - https://www.interest.co.nz/personal-finance/64279/any-new-retail-deposit-guarantee-would-incorporate-lessons-learnt-previous and https://www.interest.co.nz/news/58818/former-finance-minister-michael-cullen-says-ex-aussie-pm-kevin-rudd-blame-nzs-broad-crown

Perhaps if the RBNZ simply required adequate capital to be held in banks, then the insurance for depositors would be in the capital rather than some flakey deposit insurance scheme.
For example, if banks were required to have 15% Tier 2 capital on top of the existing skimpy and dubious Tier 1 capital requirements, the probability of an impact on "mum and dad" depositors of any crash would be almost non-existent. Tier 2 capital holders would be the insurers, and would be paid for the risk by a premium on the interest.

1) I agree there should be a bank deposit insurance scheme.

2) Alternatively the government could regulate & require government treasuries/bonds to be openly available & easily accessible for retail sale through banks (or maybe just kiwibank or maybe just online) in small denominations, say $5000 & up with no fees. Cash deposits in banks would be guaranteed up to $5,000 & those holding government treasuries/bonds effectively guaranteed by the government. Those holding term deposits with the banks directly would not be guaranteed unless the bank provided a product which switched the term deposit investment into a government treasury/bond. Obviously the % rate on the government securities would be lower than for term deposits.

That's fine but banks will have to pick up the premiums for the fund amount being guaranteed.

Better to spend your money on house upgrades, solar panels, electric cars, e-bikes, sophisticated edible gardens, all debt reduction, new wood fires, self-insure, etc rather than wasting money in the bank which is uncertain.