Costs associated with Finance Minister Grant Robertson's proposed deposit compensation scheme have ruffled feathers. Photo / Mark Mitchell
Costs associated with Finance Minister Grant Robertson's proposed deposit compensation scheme have ruffled feathers. Photo / Mark Mitchell
Debate is raging within the financial sector over how costs associated with creating and maintaining a deposit compensation scheme should be spread.
The Government is designing an insurance scheme that would compensate those who lose money in the event of their bank, credit union, building society or finance company collapsing.
Its proposal, outlined in a bill introduced to Parliament in September, is that deposit takers pay levies into a fund that would be drawn down on in the event of one of them collapsing.
Depositors – individuals and businesses – would be guaranteed compensation of $100,000.
So, if a person had $300,000 deposited at a bank that collapsed, they’d be compensated $100,000.
If they divided their $300,000 evenly across two banks that both collapsed, they would be paid $100,000 by each bank.
If there wasn’t enough money in the fund to pay depositors, the Government would use taxpayer money to help pay them out.
The Reserve Bank would run the scheme, which Finance Minister Grant Robertson hopes to get off the ground next year once the Deposit Takers Bill is passed.
New Zealand is an outlier among developed countries for not having a deposit insurance scheme.
Banks have been lobbying the Government to ensure levies are risk-based, according to their credit rating, capital adequacy and liquidity position, for example.
They argue the risk of them collapsing is mitigated by the fact the Reserve Bank in July started requiring them to increase the amount of capital they hold over a seven-year period.
“The new settings are higher than global peers, set to ensure that a bank’s balance sheet can withstand a 1-in-200-year event (whereas global settings tend to be set to insure against a 1-in-100-year event),” Kiwibank in November noted in its submission to Parliament’s Finance and Expenditure Committee on the Deposit Takers Bill.
The Reserve Bank would run the deposit insurance scheme. Photo / Mark Mitchell
A group of 13 non-bank deposit takers (NBDT), including Auckland Credit Union, Finance Direct and Christian Savings, made a different argument in a joint submission to the committee.
They said levies should be proportionate to the value of insured deposits.
The group believed there should be a flat rate, but systemically important banks should pay a premium, because a big bank’s collapse would affect the financial system as a whole more than the failure of a small NBDT.
“The purpose of implementing the scheme (which requires significant infrastructure as well as the direct cost of depositor compensation) is to promote the stability of New Zealand’s financial system, and this purpose should be reflected in setting levies,” the group said.
The NBDTs worried they would be disadvantaged if levies were based on credit ratings, as “the larger, foreign-owned banks benefit from the implicit guarantee of their parent”.
“The NBDTs consider the depositor compensation scheme levies as potentially one of the greatest risks to their ongoing viability under the new regime,” the group said.
It feared high compliance costs, and “regulatory creep” associated with the broader reform programme the deposit insurance scheme is part of, would “exacerbate the decline of diversity and competition in the sector and further concentrate our financial system into the four large foreign-owned banks”.
Referring to the failure of several finance companies around the time of the Global Financial Crisis, the NBDTs assured, “The issues associated with previously unregulated deposit takers have been effectively addressed since we became subject to prudential regulation in 2013.”
According to the Financial Markets Authority, 51 New Zealand finance companies either went into liquidation or receivership or had payments frozen between 2006 and 2013.
Coming back to Kiwibank, it said levies should be low and be built up slowly.
Ultimately, it believed the fund should be big enough to cover the costs of a small deposit taker failing.
It said Robertson’s commentary had contained some “alarming possibilities” regarding the potential quantum of a levy that would prefund the scheme.
Robertson noted other countries with similar programmes aimed to ensure that within the first five to 20 years of a scheme being created, levies collected were equivalent to between 0.3 per cent and 5 per cent of deposits covered.
The NBDTs didn’t want levies to exceed 0.5 per cent of insured deposits.
BNZ said, “The size of the fund should recognise the significant levels of capital held by New Zealand banks relative to offshore peers, as well as the liquidity management framework.
“Failure to contemplate these factors … may introduce unnecessary costs that will ultimately be borne by consumers and the New Zealand economy.”
It said key parts of the scheme, including around levies, “should be finalised early in the regime to provide the required levels of clarity and certainty for the industry and customers”.
