In today's headlines with Wilhelmina Shrimpton, huge inequities in policing, fire in central Auckland apartment, and concern over child language skills.
ANALYSIS
It will be clear to anyone who’s endeavoured to read the Commerce Commission’s 389-page report on improving competition in the retail banking sector that there is no quick fix.
While the most eye-catching recommendation is for the Government to enable Kiwibank to grow, there are several lesssalacious ways the commission believes regulatory settings could make a difference.
One of these is worth focusing on because it’s a live issue with a big price tag: the question of how the costs of establishing a deposit compensation scheme should be distributed across deposit takers.
In mid-next year a major insurance scheme that’s been several years in the making will become operative.
The first $100,000 of an individual or business’s savings at a bank, credit union, building society or finance company will become insured.
So, if you have $200,000 of savings at your bank, and it collapses, you’ll get $100,000 back. If you divide your $200,000 evenly across two institutions that both collapse, you’ll get $100,000 back from each one.
The scheme is being implemented to strengthen the financial system. For example, you’ll be less inclined to withdraw your money from your bank during a crisis, helping trigger a run that sees your bank fall over, if you know that at least some of your money is safe.
Finance Minister Nicola Willis to decide whether deposit compensation scheme levies should be risk-based or not. Photo / Mark Mitchell
But of course, adding this layer of security to the system will come at a cost.
Deposit takers will need to pay levies into a fund (administered by the Reserve Bank and backstopped by the Crown) that’ll be used to compensate depositors in the event of failure.
The thorny question is, should these levies be risk-based?
Should an Australian-owned bank be charged lower levies (proportionately) than a small finance company?
The finance company is more likely than the big bank to collapse, but its failure would be less likely to destabilise the financial system.
This is an issue Finance Minister Nicola Willis is going to have to make a call on soon.
The Reserve Bank reckons levies should be risk-based. The pricing of risk is at the heart of the financial system. It incentivises good behaviour and avoids the creation of a moral hazard.
However, the Commerce Commission reckons levies should initially be flat – worth a set percentage of a deposit taker’s insured deposits.
It’s heard the cries of higher-risk small banks and non-bank deposit takers, worried levies will hit them disproportionately harder than the big banks, making it even more difficult for them to compete.
Reserve Bank modelling suggests the impact of risk-based levies on an institution’s profit could range from below 0.5% for a big bank to above 10% for a non-bank deposit taker.
But it isn’t that straightforward.
The Reserve Bank is of the view that riskier deposit takers have the most to gain from the scheme.
They’re more likely to fail than big banks – remember the 2008 Global Financial Crisis.
The insurance scheme should also give depositors more confidence to use riskier deposit takers.
Would you be more inclined to put your savings with a higher-risk finance company, paying 6.5% interest per annum, than a bank paying 5% if you knew you’d get your first $100,000 back if the institution failed?
For some people, the answer will be yes – a win for the riskier deposit taker.
Okay, but is it dangerous if the insurance scheme causes people to take risks they wouldn’t otherwise take? What if they all flock to risky finance companies?
Drawing on Australia’s experience, the Commerce Commission doubts there would be a stampede.
This doesn’t appear to be a concern for the Reserve Bank either.
It makes the case that if levies are risk-based, they’d hit the bottom lines of riskier institutions harder, forcing them to trim the interest they pay depositors and hike the interest they charge borrowers.
Finance companies might only be able to offer savers, say, 6% interest versus the bank’s 5%, reducing their relative attractiveness a smidge.
Accordingly, there might not be a dramatic level of switching.
Given all the guesswork at play, the Commerce Commission says the Government should err on the side of not burdening small deposit takers with too many costs.
It suggests levies could be flat initially and then reassessed.
Willis will make a call before the end of the year.
The commission says that if she doesn’t opt for a flat levy, she should at least ensure the approach taken to calculating riskiness doesn’t include profitability.
Credit unions, for example, aren’t there to maximise profits, whereas big banks are.
Taking a step back, the commission acknowledges there are tensions between competition and financial stability.
Willis will have to make a call on how to strike the right balance, as she decides who pays what for the creation of a deposit compensation scheme.
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.
