Banking on it

If stock markets are on the turn, then putting your dough into term deposits will keep it safe if the unimaginable happens and markets collapse, right? Not quite.

New Zealand’s banks are well capitalised – meaning they hold a decent amount of assets that can quickly be converted into cash if there is a run on their funds by deposit holders. However, if the unlikely occurred and we reached the point where a local bank collapsed, there’s no formal guarantee on customer deposits.

Local regulators have shied away from imposing deposit insurance in favour of what’s called an open banking resolution policy – effectively, a living will to be used if a bank fails. A certain amount of depositors’ funds would be written off to ensure the banks could open the following day.

It’s not an ideal situation and many in the market believe the Government would stump up the difference rather than let thousands of Kiwis’ savings get written off.

The Ardern Administration is taking that a little more seriously, specifically asking that the second phase of a review of the Reserve Bank consider deposit protections such as insurance.

Similarly, KiwiSaver funds don’t have a formal Government guarantee, and although it would take a mega-meltdown for the major providers to go bust and wipe out investor funds, nothing’s impossible.