The RBNZ has for some time believed the levies deposit takers should pay into the scheme should be based on the likelihood of them running into trouble.
However, higher-risk deposits takers (like finance companies) believe levies should be flat, proportionate to the size of the deposit taker.
The RBNZ recognised that if it used the risk-based model it was asking the public for feedback on, the median bank’s profitability would take a 0.67 per cent hit. Meanwhile the median NBDP’s profitability would fall by 8.6 per cent.
But because the insurance scheme would make it safer for people to use riskier deposit takers, the RBNZ believed there was scope for these deposit takers to save money by paying their customers less interest.
NBDTs tend to pay savers more than banks to account for the fact they tend to lend to riskier borrowers (who they also charge higher rates of interest).
The RBNZ recognised it was difficult to know whether NBDTs would lower their deposit rates once the insurance scheme was implemented, and how this would affect their competitiveness and profitability.
Geof Mortlock, a consultant who has worked for the International Monetary Fund, which has for years called for the establishment of a deposit insurance scheme in New Zealand, believed NBDTs really needed to market the fact they were partaking in the scheme.
If a saver was aware their first $100,000 of savings held by a riskier deposit taker was guaranteed, they may be more inclined to put their money with that deposit taker - even if they were paid a little less interest than would have been the case if the scheme didn’t exist.
Mortlock said the scheme would need to be seen to be credible for people to have the confidence to use higher-risk deposit takers.
Squirrel’s chief executive, who used to head up Co-operative Bank, David Cunningham opposed deposit insurance on the basis of this exact scenario.
He feared it would create a moral hazard - see depositors take on more risk than was prudent due to the belief they wouldn’t lose money.
He believed the levies the RBNZ was proposing to charge high-risk deposit takers weren’t high enough, and didn’t reflect how much riskier they were than big, highly regulated banks, for example.
Cunningham saw deposit insurance as a way of making the big banks pay to protect the small deposit takers.
Deposit takers are still digesting issues the RBNZ raised around levies in its latest consultation document released on Monday.
Submissions NBDTs made during previous rounds of consultation suggested they were very worried about their ability to absorb relatively high levies.
Wairarapa Building Society said: “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”.
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.
