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Parliament committee proposes making the Deposit Takers Bill more friendly to smaller non-bank financial institutions

Public Policy / news
Parliament committee proposes making the Deposit Takers Bill more friendly to smaller non-bank financial institutions
Man takes money from a Kiwibank ATM machine
Photo by Dan Brunskill

Parliament’s finance and expenditure committee has proposed amendments to the Deposit Takers Bill which could spare smaller financial firms from some compliance costs. 

The Bill, which has moved to its second reading, replaces two older acts with one law that regulates banks and non-bank deposit takers — the two currently have different regimes. 

It intends to modernise the licensing process, enable financial stability regulation, and expand the Reserve Bank’s supervisory and enforcement tools. 

Also, it would introduce an insurance scheme for depositors, which would be funded by levies, which would protect deposits up to $100,000 if an entity failed. 

The finance and expenditure committee released a report which proposed a number of changes to the bill, based on feedback it received in submissions. 

Protecting the diversity of entities has been front of mind for the committee, which was warned that onerous rules could crush smaller deposit takers.

The report said the deposit-taking sector was dominated by four Australian-owned banks that make up 85% of the sector by assets. Non-bank deposit takers—such as credit unions, building societies and finance companies make up a much smaller part of the sector. 

“However, these smaller deposit takers play an important role in providing access to financial services for New Zealanders who may struggle to access finance from the big banks,” the report said. 

“We heard from some submitters that the bigger banks tend not to be as accommodating as the non-bank deposit taking sector of less common or less conventional arrangements in how people live their lives.” 

These smaller entities provide competition to the big banks and can also be a source of innovation. It was crucial to financial inclusion to protect different types of deposit-takers. 

“A number of smaller deposit takers who made submissions told us that they were worried that the Bill could lead to them being subject to a disproportionate and highly onerous level of regulation, which could lead to smaller deposit takers going out of business.”

Even the possibility of heavy regulation has caused difficulties for some, which have struggled to attract capital to grow their business and provide more financial services. 

The overall risk to financial stability associated with smaller deposit takers was generally lower than the risks posed by large registered banks. 

And so, applying the same rules to big banks and smaller entities may be excessive. 

Softer standards 

The committee recommended the Reserve Bank should create a framework that factors in the size and risk level of different kinds of deposit takers. This means the central bank could exempt some entities from certain regulations if it protected diversity in the sector. 

One example would be giving the Reserve Bank discretion to exempt some deposit takers from having to get a credit rating — which could involve significant costs.  

This was already included in the Bill, but the committee recommended asking the Bank to consider whether the size of the deposit taker’s business required a credit rating. 

And also to assess whether the risk of not having one could be mitigated by applying other requirements such as holding extra capital. 

“We expect that the Reserve Bank will not be substantially altering the status quo with regard to credit rating exemptions. Our understanding is that smaller deposit takers that are exempt under the current regime would likely continue to be exempt under the new regime.”

For savers the deposit insurance scheme is the most important part of the Bill as it would protect them in the case of a bank collapsing. 

The committee said this was “a positive step” which would bring NZ in line with international best practice. It will be paid for by a levy on deposit takers. 

Changes proposed to this section are minor. The committee recommended removing a clause which specifically excluded “debentures and bonds” from being  protected assets. 

These securities and other “readily tradable” instruments are already excluded by other language in the Bill, which is intended to only cover cash deposits in New Zealand dollars. 

A “future-proof” amendment would allow foreign currencies to be included in the insurance scheme one day, but with less than 3% of all deposits held in other currencies it was not worth doing at this stage. 

Emergency power of the purse 

Finally, the committee proposed an amendment which would allow the Minister of Finance to approve spending public money in a crisis without needing permission from Parliament .

“Authorising the spending of public money without parliamentary appropriation is constitutionally significant,” the report said. 

“We therefore considered whether the proposed power is appropriate. We believe that it is, because it would enable serious and unexpected risks to financial stability to be addressed in a timely manner, which is ultimately in the best interests of New Zealanders.” 

A similar power exists in the Public Finance Act currently, for spending to address civil defence emergencies and public health or safety emergencies. 

In the Deposit Takers Bill, the Minister of Finance could authorise spending to rescue a financial institution that was facing insolvency or “serious financial difficulties”.

He or she would only be able to use this power on advice from the central bank and would have to be satisfied it was required to maintain financial stability.

The amount of cash required to stave off a financial crisis could be higher than other emergency situations imagined in the Public Finance Act, and could be less visible to the public.  

“Spending to support struggling financial institutions also carries a moral hazard risk not inherently applicable to the other types of emergencies,” the report said

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That's a terrible proposed amendment. I'm sure there's going to be situations when the failure of a financial institution would be a net benefit for society. Instead, the Labour majority (the article didn't say whether it was a unanimous recommendation) select committee proposes an amendment that the Minister of Finance would have to sign off and makes it look like the Minister isn't granting himself exceptional powers that could be misused by the MOF without the oversight of Parliament.


Recommendations were by majority, so presumably not unanimous. 


1The overall risk to financial stability associated with smaller deposit takers was generally lower than the risks posed by large registered banks.    REALLY?



Yes REALLY.  There is obviously risk attached to the failure of smaller financial firms, but were a large bank to fall over, financial stability - the stability of the financial system as a whole - would be in real peril.


True. But our banks are required to keep a certain amount in reserve, which poses the question - why do we need insurnace at all when we will be paying for it with lower interest rates.

Smaller deposit takers will be encouraged to take on more risk knowing that they are covered by a tax-payer funded insurance scheme.



This means risk to the stability of the wider financial system, as I understand it. Smaller deposit takers pose less systemic risk, might've been a better way to say this. 


I do not understand why finance companies would be included in the proposed insurance scheme. These companies already tend to take on higher risk loans, and also fall over fairly regularly. To suggest these highly risky companies should be more lightly regulated whilst also insuring their deposits creates moral hazard in my view.