How fund scheme will protect customers

The Reserve Bank Te Putea Matua has unveiled revised indications of the costs of the planned Depositor Compensation Scheme intended to provide protection for depositors in the event of a collapse of a bank, building society, credit union or finance company.

The scheme is being created to pay compensation for losses of up to $100,000 to each depositor with money at any licensed deposit taker that hits financial trouble and collapses.

But it will come at a cost to depositors: a consultation document released yesterday by the Reserve Bank says the levies needed to build a deposit guarantee fund over the next 15 years would come at a price to depositors, if deposit takers decide not to to absorb the costs by sacrificing profit.

Annual levies would cost the safest of the big bank deposit takers the equivalent of 0.05% of their covered deposits but riskier deposit takers could have to pay up to 0.199% of the cost of their covered deposits.

The exact level of levies would depend on Treasury analysis and decisions by the Cabinet. The levies would be used to build up a large government-guaranteed fund, to be called the Depositor Compensation Scheme Fund, to pay claims, should any arise – similar to the way the Natural Disaster Fund stands behind Toka Tu Ake, the Earthquake Commission.

There may be other less directly visible costs for depositors, however, the Reserve Bank acknowledged.

As the perceived risk of putting money with smaller, riskier deposit takers falls, they may start offering lower interest on their deposits, it said.

“We expect some level of deposit rate convergence across the deposit taking industry, as the perceived risk of deposit takers who previously offered higher deposit rates falls in line with other deposit takers due to the protection now available to depositors under the deposit compensation scheme,” it said.

Interest rates offered by credit unions and buildings societies for term deposits were generally about 15 basis points higher than comparable rates offered by the major banks, it said.

Finance companies, by comparison, offered a premium of 120 basis points higher than those offered by major banks, the Reserve Bank said. “The Depositor Compensation Scheme levy is expected to narrow, but not fully close, those gaps for deposit takers covered by the scheme.”

Another effect of the scheme would be to encourage people with larger amounts deposited to split their money between different deposit takers as only $100,000 per deposit taker would be guaranteed per individual saver, the consultation paper noted.

The fund backing the scheme would have to grow to be about 0.8% of the deposits covered, the Reserve Bank said.

No figure was given for how big the fund would be in dollar terms but at the end of January, registered banks had $446 billion in deposits – however, not all deposits would be covered by the scheme.

The Reserve Bank said if banks absorbed the levy cost themselves, the impact on their profitability was not expected to be significant.

“The levy cost as a percent of past net profit has a median of 0.67%, using net profit before tax for the 12 months ending September 31, 2023,” it said.

When former finance minister Grant Robertson announced the depositor compensation scheme in April 2021, he said it would “considerably strengthen“the financial system, though it would not be the first time New Zealand has had a deposit guarantee scheme.

During the global financial crisis of 2007 to 2008, the finance minister at the time Sir Michael Cullen introduced a taxpayer-funded deposit guarantee scheme to preserve confidence in the financial system.

That provided a lifeline to some depositors in finance companies that had taken on much more risk than was apparent to depositors.

Robertson presented the permanent depositor compensation scheme as a measure to bring New Zealand into line with other developed countries, and the International Monetary Fund had suggested the country introduce one.

The law to create the scheme was passed in June last year, with Robertson saying at the time that New Zealand and Israel were the only OECD countries not to have deposit insurance . The public has until May 10 to make submissions on the consultation.