Kiwi savers get much higher term deposit interest rates than do Aussies. But we don't have a bank deposit guarantee scheme. Even so, the benefits Kiwis get from saving is more than the extra cost Kiwis pay for mortgages

We all know that mortgage interest rates are higher in New Zealand than many other countries. We compared ours with equivalent Aussie rates here.

We now want to look at rates for term deposit savers - are those higher here as well?

Yes, they are.

And by a substantial margin.

Further, Kiwi term deposit savers are getting a significantly better deal in January 2017 than we got in January 2016 compared with our Aussie cousins.

First up, rates in New Zealand are about 1.25% higher here than across the ditch. And this is true for most popular TD durations.

Secondly, we get a much higher premium to wholesale rates here than in Australia. Our margin-to-swap is basically +1.3% whereas Australian term deposit savers only get about +0.2%.

If you are a saver who feels you have to use bank term deposits, you are much, much better off in New Zealand than Australia.

Of course you can argue that they have a Government backed deposit guarantee scheme, and we don't. We have the OBR, which actually may involve a haircut for some larger savers.

So you can reasonably argue that the Kiwi premium is for the higher risk in New Zealand.

You many also consider this an indication of what might happen to our retail term deposit interest rates if we also adopted a Government-backed deposit insurance scheme. Would you be happy to pay the cost of that in lower interest rate returns? Of course, anyone asked whether we should have bank deposit insurance will invariably answer 'yes' on the assumption that someone else will be paying. But Australia has one, and while there is no rule that customers should pay, they do. It is a cost to banks, one they recover by offering lower retail interest rates.

Term deposit interest rates          
January 4, 2018 6 mths 9 mths 1 year 18 mths 2 years 3 years
New Zealand % % % % % %
   ANZ 3.30 3.50 3.30 3.60 3.75 3.80
   ASB 3.35 3.50 3.25 3.65 3.80 3.90
   BNZ 3.25 3.35 3.50 3.60 3.70 3.90
   HSBC 2.80 2.80 2.90   2.90 3.00
   Kiwibank 3.30 3.25 3.50   3.75 3.85
   Westpac 3.30 3.35 3.50 3.50 3.70 3.80
NZ average 3.22 3.29 3.33 3.59 3.60 3.71
Swap rates 1.89 1.95 2.01 2.11 2.21 2.39
   margin to swap 1.33 1.34 1.32 1.48 1.39 1.32
             
Australia            
   ANZ 1.70 1.40 1.70 1.75 2.10 2.05
   CBA (ASB's parent) 2.05 1.80 2.20 2.30 2.60 2.40
   HSBC 2.05 1.65 1.95 1.95 2.05 2.15
   NAB (BNZ's parent) 2.05 2.00 2.40   2.60 2.70
   Suncorp 2.00 2.30 2.30 2.30 2.50 2.45
   Westpac 2.05 1.90 2.30 2.30 2.40 2.50
AU average 1.98 1.84 2.14 2.12 2.38 2.38
Swap rates 1.79 1.82 1.84 1.92 2.00 2.15
   margin to swap 0.19 0.03 0.30 0.20 0.38 0.23
             
differential (NZ-AU) +1.23 +1.45 +1.18 +1.47 +1.23 +1.33
differential in Jan-17 +0.28 +0.13 +0.59 +0.86 +0.89 +0.94

This analysis also points out that the Kiwi advantage has gotten larger over the past year. We gained relative to the Aussies across all durations, but especially for shorter durations.

If you are a saver, you are better off in New Zealand. All New Zealand term deposit rates are here, and here.

Of course, as we saw in the mortgage comparison, borrowers here pay more too:

November 13, 2017 Floating 1 year 2 years 3 years 4 years 5 years
differential (NZ-AU) +0.89 +0.55 +0.64 +0.90 +1.33 +1.39

But it is clear that the premium savers get in New Zealand is larger than the extra cost that home loan borrowers pay, compared to Australia.

The combination of market forces, regulation, and competitive pressures all work together to give Kiwi's an overall better deal (ignoring the deposit insurance question, of course).

Banks may have gotten a better deal in New Zealand from mortgage payers in 2017, but Kiwi term deposit savers got those gains and a bit more on the other side.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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8 Comments

Want a Government Deposit Insurance Scheme? Engineer interest rates.... higher! The higher the nominal deposit rates go, the more tax-on-interest the Government collects to....cover the cost of a Government Guarantee! No extra cost to the banks at all?

1.3% less 0.2% makes 1.1% premium for deposit insurance. With OBR that implies an expected 100% haircut every 90 years, or 50% every 45 years. On a 5 year TD maybe we should expect an (average) haircut of (about) 5% which makes the (circa) 4% pa interest look paltry. Or maybe the deposit insurers are just gouging. Whichever, the RBNZ is confident that depositors will perfectly gauge the risks.

PS: I guess 1 year TD makes more sense - lose about 1% expected versus 3% interest. Still not flash.

There are no private 'deposit insurers' anywhere in the world. No insurance company would accept such risks at the prices Goverments do. No depositor would accept the premiums a private insurer would require. Globally, the only parties that will accept offering deposit insurance are Governments. It is not really 'insurance' as we know it - it is more like just socialising private losses.

If a real insurance company provided cover, the premiums would be very high. Which is why Governments step in to fudge the issue and provide the free lunch.

Remember, banks are excessively leveraged institutions. Shareholders are taking relatively small risks here. See this.

Would you go into business offering deposit insurance? If so, what sort of premium would you expect for the risks taken? The current system is like picking up pennies in front of a steamroller - eventually you (the insurer) will get crushed.

Well expressed David. I would think deposit insurance would also be part of "nudge theory" if the govt wanted to create an atmosphere of financial security. However, the absence of deposit insurance is a kind of nudge tactic....to the banks (don't behave like cowboys). But the reality is that the banks well know that they're implicitly guaranteed by the taxpayer. There is no industry in the Anglosphere that operates with such protection and support as the banking industry.

"Would you go into business offering deposit insurance?"

Sobering thought David.

Yes, these are all valid points. My main point was that depositors are unlikely to be able to assess the risks as well as the OBR regime seems to assume. If governments are underpricing the risk that means my notional haircuts are too small.

New Zealanders have total of 173 million on tern deposits. 1.5% of extra interest = $2.5 million.a year
230 billion of mortgage debt at 0.5% extra margin = 1.15 billion a year. I thinks the banks are winning this one.

Sorry make that 173 billion of term deposits. Didn't realise there was that much spare cash in New Zealand.
324 billion in total deposits.