Bank collapse insurance to include major corporates

A Reserve Bank-administered deposit insurance scheme, which has been years in the making, is a step closer.

The Government has introduced a bill to Parliament that establishes the scheme.

Once the Deposit Takers Bill is passed, banks and other deposit takers will have to pay levies into a fund that would be used to compensate customers if the banks collapsed.

The bill includes Cabinet’s April 2021 decision for the scheme to provide $100,000 of cover per depositor, per institution.

So, if a person or business had $300,000 spread across a few accounts at a bank that collapsed, they would be compensated $100,000.

If that person or business divided their $300,000 across two banks, which both collapsed, they would be paid $200,000 in total.

The proposal is for the scheme to be fully funded by levies paid by regulated deposit takers, including banks, building societies, credit unions and finance companies. If levies collected were not enough to cover payouts, the Crown — taxpayers — would cover the costs.

Currently, depositors risk losing everything if there’s a collapse, unless the Government decides to bail out the troubled institution.

Finance Minister Grant Robertson confirmed institutions more at risk of folding would pay higher levies than lower-risk institutions.

Banks asked for the differentiation, as the large amount of capital they’re required to hold typically makes them relatively stable compared to some other deposit takers.

Robertson said risk-based levies would also encourage deposit takers to avoid excessive risk-taking.

Levy levels will be outlined in regulations that are yet to be written.

It is possible institutions will pass the cost of levies on to their customers.

Government officials are still looking at how large the scheme’s fund should be, and how long it should

The absence of depositor protection has been a longstanding gap in New Zealand’s financial safety net. This legislation closes that gap and brings New Zealand in line with international practices. Grant Robertson,

Finance Minister

take to grow the fund to the desired size. Robertson said other countries with similar deposit protection schemes aim to ensure that, within the first five to 20 years of a scheme being created, levies collected are equivalent to between 0.3 per cent and 5 per cent of deposits covered.

Robertson started looking at creating a deposit insurance scheme in November 2017, when he launched a major review of the Reserve Bank Act 1989.

Cabinet has progressively been making decisions on the scheme’s design on the back of advice from the Reserve Bank and the Treasury, which have consulted extensively with key stakeholders and the public.

The most recent set of Cabinet decisions, which fed into the creation of the bill, were made in June. Cabinet made two fairly technical changes to the proposal on the table at the time.

Firstly, it decided to allow “large” non-financial corporations to be covered by the scheme.

Previously, they were excluded because the Government wanted to encourage them to monitor the risk of putting their money with different deposit takers themselves.

However, after considering feedback, Cabinet decided the administrative burden of deciding which corporates were and weren’t “large”, and therefore covered by the scheme, would be too onerous.

The other notable change Cabinet made to the prior proposal was that it decided to enable some deposit takers to get permission to be exempt from the scheme.

This might apply to those that don’t take retail deposits.

The insurance scheme is expected to be implemented in 2024.

Robertson said, “The absence of depositor protection has been a longstanding gap in New Zealand’s financial safety net. This legislation closes that gap and brings New Zealand in line with international practices.”

New Zealand and Israel are the only countries in the OECD that don’t have deposit protection schemes.

Separately, the Reserve Bank is considering whether New Zealand needs an insurance scheme that protects insurance policyholders if their insurer collapses.

Insurers would pay levies into a fund, which would be tapped into if an insurer couldn’t meet its claims obligations.

No decisions have been made on whether such a scheme is necessary.