New Zealand is poised to end its role as an international outlier when it comes to deposit insurance.
The Deposit Takers Bill is expected to be introduced to Parliament in the third quarter of this year. Included within it are proposals for a depositor compensation scheme to cover bank depositors in the event of bank, or non-bank deposit taker such as a building society, failing. Depositors will be covered for a total of $100,000 per institution, per depositor.
Speaking in interest.co.nz's Of Interest Podcast, Geof Mortlock explains what deposit insurance is and what its objectives are.
Mortlock is an international financial regulatory consultant who undertakes work for the International Monetary Fund and World Bank, specialising in financial system stability, resolution of bank failures, deposit insurance and related matters.
Mortlock also explains why it has taken NZ so long to adopt deposit insurance. According to the International Association of Deposit Insurers, at least 145 jurisdictions have some form of explicit deposit insurance.
Additionally he talks about the $100,000 limit, how the deposit insurance fund will be established including how much this will cost and what it's likely to mean for the interest rates depositors are paid.
Mortlock also talks about which products are likely to be insured, or covered by the scheme, and which are unlikely to be, whether a depositor preference regime should be introduced in the event of a bank failure, how the Crown's deposit insurer should operate, and more.
The Reserve Bank expects the Deposit Takers Bill to be passed into law in mid-to-late 2023, with a depositor compensation scheme expected to be up and running in early 2024.
Your access to our unique and original content is free, and always has been.
But ad revenues are under pressure so we need your support.
Supporters can choose any amount, and will get a premium ad-free experience if giving a minimum of $10/month or $100/year. Learn more here.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.
Not sure I have the time to listen to 30 mins of audio. Can someone tell me who pays for the insurance? Banks? Depositors? Taxpayers?
I can't be bothered listening either, but using my infallible financial industry crystal ball, I can tell you that it won't be the banks.
Any premium will be passed on the the depositor somehow, and underwritten by the taxpayer as insurer of last resort.
But it could also be 'customers' in total; those who lend their surpluses to the banks (fondly called Depositors) and those who do the reverse - borrowers?
ASB never releases the full data for their fell financial wellbeing study but "more than a third of Kiwis are living pay-day to pay-day and nearly half have less than $1000 in savings." I could dig around for more but can't be bothered. However, approx 70% have
I guess my other question is where is the incentive for a bank to be prudent, or a depositor to be prudent when choosing a bank? They are taking away any possibility of the market pricing the risk aren’t they?
Shouldn’t it work like any other investment where the shareholders and investors take the hit? Why so special?
I guess my other question is where is the incentive for a bank to be prudent, or a depositor to be prudent when choosing a bank? They are taking away any possibility of the market pricing the risk aren’t they?
John Key's position was that if you remove any requirement for banks to be accountable for deposits, then they will moderate their behavior and not behave like moneylenders to drunken sailors.
Re JK's position; Pardon? It seems counter intuitive? Remove those requirements and they won't give a fat rats about depositors.
Yes. Open resolution or whatever they called it.
I would accept OBR (open bank resolution, aka depositors taking a haircut) if and only if the capital adequacy and quality was increased by a substantial amount. It appears Mr Orr has put that on the back burner orr dropped it altogether. Someone in the know could comment.
I think the problem here is that banks are private companies (yes they are publicly listed, but their shares (ownership) are generally in the names of private individuals or organisations), and unlike any other private company, their customers property becomes the property of the bank (and the customer becomes an unsecured creditor) with virtually no liability for the bank on how it treats that property. Banks to all intents get to act with a high degree of impunity. Ordinary people do not get any choice these days. It is to all intents impossible to operate without a bank account, the customer does not get to negotiate the terms and conditions of holding the bank account (it is to all intents a loan document which details the terms that the bank takes your money), and if you don't like it you can go to any other bank to find that . their terms and conditions are virtually identical! The customer has no power. And wait there's more - who do you think will pay for the deposit insurance? Now consider this in this light do you consider that for just one bank in a country of between 4 - 5 million people that it is reasonable to make a profit of $1.5 billion? From the above you will quickly realise that within that profit is included any money you have on deposit in that bank.
The increased bank regulatory capital requirements announced in December 2019 are still happening. Covid-19 has seen the timeframe pushed back though, and they are being phased in by 2028.
I think that comes down to what you expect retail banking operations to be.
Most people are fairly financially illiterate and time poor - not many will understand that a Moody's / S&P rating means sweet FA to the consumer other than as a marketing device, or dig into the legislative minutiae to grasp that when you make a bank deposit today, that it's essentially an unsecured loan where the depositor is the first to take up to a 100% haircut with no recourse.
Depositors are at the bottom of the security food-chain, behind even Tier 3 lenders or shareholders, the latter whom could at least launch a class action suit based on tortious negligence if their chosen investment went belly-up. I'd go so far as to suggest that most depositors - usually older folks - would be horrified if they understood this.
Banks historically have built their retail bona fides on probity and trust. They still make this claim to attract depositors and mortgagees, but the facts belie this across the industry as a whole.
This scheme serves to insulate depositors from the worst excesses of the non-retail part of banks (given that their operations are vertically integrated) who have proven they they can't / won't self regulate or act with a reasonable degree of probity when it comes to mortgage lending due to the moral hazard imposed by govt bailouts and cheap money to keep the music going.
That's why depositors are special - the deck is stacked against them.
IMO, they deserve a degree of protection from a moral perspective, and this scheme is a long time coming.
