Depositor compensation scheme protects Kiwis’ money
New Zealanders will have up to $100,000 of their deposits in any eligible institution guaranteed in the event that institution fails, under legislation introduced in Parliament today.
The Deposit Takers Bill is the third piece of legislation in a comprehensive review of the Reserve Bank of New Zealand Act and follows the Reserve Bank of New Zealand (Monetary Policy) Amendment Act 2018, which changed the objectives and decision making process for monetary policy, and the Reserve Bank of New Zealand Act 2021, which dealt with institutional arrangements for the Reserve Bank.
The Bill has been the subject of two rounds of public consultation. It brings all deposit takers (such as banks, credit unions, building societies and finance companies) under one set of rules and protects New Zealanders’ money through the introduction of a depositor compensation scheme.
“The absence of depositor protection has been a long-standing gap in New Zealand’s financial safety net. This legislation closes that gap and brings New Zealand in line with international practices,” Grant Robertson said.
“It provides economic security for eligible New Zealanders if their bank or other deposit taking institution fails while helping protect the country’s financial system and wider economy.
“The $100,000 limit has been doubled after consultation and will fully protect 93 percent of depositors.
“The scheme will be pre-funded by levies on deposit takers and supported by a Crown backstop.
“Officials are currently exploring options for setting the required size of the fund. Approaches taken by other countries range from 0.3 percent to 5 percent of covered deposits built up over a five to 20 year period.
“The levy is also expected to be risk-based, with deposit takers paying different rates depending on an assessment of the risks they pose, which will encourage them to avoid excessive risk-taking that may financially harm Kiwis,” Grant Robertson said.
The Bill also gives the Reserve Bank the ability to set standards as the main tool for imposing prudential requirements and modernises the regulation and supervision of all deposit takers and strengthens New Zealand’s financial crisis framework.
“The Reserve Bank will have stronger and a broader range of supervisory and enforcement powers to ensure compliance and avoid breaches,” Grant Robertson said.
“Taken together, the recommendations will considerably strengthen New Zealand’s financial system safety net and contribute to a robust framework of protections for depositors. It also brings our protections into line with those in place overseas.”
More on the details of the Deposit Takers Bill can be found here.
Licensed deposit-taking institutions include banks, credit unions, building societies, and retail deposit finance companies that are eligible to be licensed deposit takers.
The Deposit Takers Bill will comprise three main parts. These are:
- A set of recommendations around the prudential regulation and supervision of deposit takers: the objectives for the Reserve Bank under new sectoral legislation for deposit takers; the prudential boundary for ‘deposit taking’; the licensing framework and how prudential requirements will be imposed; a new accountability framework for directors of deposit takers; the suite of supervisory and enforcement tools available to the Reserve Bank, and; the appeal rights afforded to parties impacted by prudential decisions of the Reserve Bank.
- Introduction of a formal scheme to protect depositors from loss if a deposit taker fails. New Zealand has been an outlier internationally given the absence of such a scheme in this country. Depositors will be covered up to $100,000 of their deposits at any single deposit taker once the scheme is implemented.
- New Zealand’s deposit takers’ crisis management framework has been strengthened, informed by international experience during and since the global financial crisis, but tailored for New Zealand circumstances. The suite of recommendations will provide a clear mandate for the Reserve Bank as the resolution authority, while enhancing the suite of powers available to manage a deposit taker in distress.
Currently, all OECD countries have deposit insurance except Israel and New Zealand. Globally, there are 92 jurisdictions having deposit insurance schemes in place, according to International Deposit Insurance Association.