The Reserve Bank has been urged to consider the impact a depositor compensation scheme will have on finance sector competition. Photo / Mark Mitchell
The Reserve Bank has been urged to consider the impact a depositor compensation scheme will have on finance sector competition. Photo / Mark Mitchell
Small banks, credit unions, building societies and finance companies fear a new depositor compensation scheme risks making it harder for them to compete with the big four Australian-owned banks.
The Treasury and Reserve Bank (RBNZ) are in final stages of designing the insurance scheme, which will ensure individuals and businessesget some of their money back if their bank or other deposit taker collapses.
Deposit takers will pay levies into a fund, which would be used to compensate depositors up to $100,000 each if their deposit taker failed.
If there wasn’t enough money in the fund to settle all claims, the Government would step in.
Most developed countries have deposit compensation schemes, as - on top of stringent capital requirements aimed at preventing institutions from collapsing in the first place - they help strengthen the financial system.
Nonetheless, small deposit takers fear the cost of running a scheme could hit them harder than the big banks.
They’re urging the Treasury and RBNZ to keep costs down by not making the scheme too big.
Responding to a recent consultation, most small banks and non-bank deposit takers (NBDTs) suggested the RBNZ set levies so that within 20 years of the scheme being established, its fund would be worth 0.5 per cent of protected deposits.
Large banks, on the other hand, were happy to build a larger fund, worth 0.8 per cent of insured deposits, to give the public more confidence in the system (ie to prevent people rushing to withdraw their money during a crisis).
Some non-bank deposit takers argued that even if the fund was at the larger end of the spectrum, it wouldn’t be big enough to cover a failure of one of the big four or Kiwibank. Photo / Dean Purcell
A larger fund would also reduce the risk of the Crown backstop being used.
ASB, which was open to the fund being worth up to 1 per cent of insured deposits, also noted other countries targeted slightly larger funds, such as Canada (0.85 per cent) and most European Union member states (0.80 per cent).
However, 11 NBDTs, in a submission made together, argued that even if the fund was at the larger end of the spectrum, it wouldn’t be big enough to cover a failure of one of the big four or Kiwibank.
So, they believed the fund only had to be big enough to cover a failed NBDT or medium-sized bank.
They also made the point that a failure of a NBDT would unlikely cause others to collapse too.
“For example, it is hard to see the failure of a finance company in Auckland impacting a building society or credit union in Hawke’s Bay,” they said.
Most NBDTs believed they should be charged levies equivalent to a set percentage of the value of deposits they hold, arguing their profitability would take serious hits if levies were calculated according to the likelihood of them collapsing.
However, the banks argued levies should reflect the level of risk a deposit taker poses.
The RBNZ was of a similar view, and was wary of not creating a moral hazard.
It explained an approach that didn’t factor in risk would give depositors little incentive to monitor the performance of deposit takers.
“As a result, funds may flow to weak institutions for high-risk ventures at lower cost,” the RBNZ said.
Taking a step back, Wairarapa Building Society cautioned: “Given the Commerce Commission’s market study into competition in the retail banking sector, it is imperative that the RBNZ considers the impact of changes on competition and diversity in the sector.”
It said the most effective way of preventing NBDTs from failing was “surely strengthened prudential standards and direct oversight,” not “disproportionate risk-based levies which are liable to prevent a healthy and diverse financial sector in New Zealand”.
The Treasury will soon do another round of consultation on how the operating costs of the scheme will be reflected in levies, how the fund should be invested, and how the Crown backstop should work.
The scheme is expected to be up and running by mid-2025 (later than previously planned), having been several years in the making.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
