Delay in protection for depositors if bank goes bust
The depositor compensation scheme is planned to go live in mid-2025, the Reserve Bank Te Pūtea Matua says.
The central bank had intended to have the scheme up and running by the end of 2024, but has now given itself another six months to give it more time to consult and to allow banks and other deposit takers to get ready for it.
It also gave more time to develop a brand and logo, which deposit takers like banks, building societies, credit unions and finance companies will be licensed to use to identify guaranteed deposits.
Such logos were used overseas, the Reserve Bank said.
The Depositor Compensation Scheme is 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.
That was expected to produce a change in the way the public invests, and the interest they are paid, including people with larger amounts on deposit incentivised to split their money between deposit takers to get maximum protection.
But the Reserve Bank said it was also expected to see a drop in the interest offered by smaller deposit takers like finance companies which no longer be seen by the public as posing a higher risk to depositors’ capital than money deposited at a bank.
“Some people might manage their deposits in a different way in an environment where we have a Depositor Compensation Scheme, so there might be some movement of deposits around the system. We see that internationally,” said Christian Hawkesby, the Reserve Bank deputy governor, and general manager for financial stability.
However, the vast majority of the population did not have deposits over $100,000, he said.
It wouldn’t protect all the deposit exposure households have with banks, and other deposit takers as KiwiSaver funds that invest some of their money in bank deposits will not be able to make claims to the depositor compensation scheme, should a bank, or other deposit-taker go bust.
The scheme was not supposed to cover investments like bonds and tradable debentures issued by the likes of banks and finance companies, but the Reserve Bank expected to see finance companies change the terms of their debentures so they qualified for cover under the scheme.
The scheme is being developed at the recommendation of the International Monetary Fund, but part of the rationale is to avoid a repeat of having to rush in a deposit guarantee scheme on the hoof during a crisis, which happened in the global financial crisis of 2007 to 2008.
“The reality is we are standing out as missing one of those key tools to have, and the global financial crisis illustrated that when things do go wrong, which they can, in the heat of the moment, we had to stand up a temporary guarantee regime,“said Hawkesby.
“In the eye of the storm is the last time you want to be doing everything that is required to do it properly,” he said.
That included pre-funding it through the establishment of a giant depositor compensation fund paid for by levies charged to deposit takers, reminiscent of the Natural Disaster Fund that stands behind Toka Tū Ake The Earthquake Commission.
Riskier deposit takers would pay higher levies, and safer ones like banks would pay lower ones. Only deposit takers which met certain standards, and invested the way they said they would invest, would be allowed to join, and remain in the scheme.
“Strong” rules for deposit takers would be developed, the Reserve Bank said.
During the global financial crisis, South Canterbury Finance was covered by the guarantee scheme rushed in by then Finance Minister Michael Cullen, but it later turned out that the finance company was in a disastrous mess that left a huge bill for the taxpayer.
The Depositor Compensation Scheme would come at a cost to depositors. A consultation document released on Monday 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.