Reserve Bank’s Deposit Compensation Scheme finally launching - Kiwis’ savings to be protected

Savers will, from tomorrow, have some of their money insured against their bank or other deposit-taker collapsing.

The Reserve Bank is launching its Deposit Compensation Scheme, which has been several years in the making.

The industry-funded scheme will automatically insure up to $100,000 per depositor, per institution.

So, if a person or business had $200,000 deposited at a bank, credit union, building society or finance company that failed, they would get $100,000 back under the scheme.

If they split their $200,000 evenly between two institutions that both collapsed, they would be reimbursed $100,000 from each institution.

Until now, deposit-takers have not been required to refund depositors in the event of a failure.

The scheme is expected to give depositors confidence at least some of their savings are safe. This might prevent them from withdrawing their money during a crisis, triggering a collapse of their deposit-taker.

The scheme also protects the Government, which might come under pressure to bail out depositors in the event of a crash.

Products covered by the scheme include transaction, savings and notice accounts, term deposits, children’s accounts and some PIE funds.

The PIE funds covered are those that invest only in the debt of the bank offering the PIE.

Deposit-takers are required to specify which products are covered by the scheme. The Reserve Bank suggests people check their deposit-takers’ websites to ensure they understand if the accounts or funds they have money in are covered.

KiwiSaver funds, foreign currency accounts, bonds and other tradeable products aren’t covered.

Former Finance Minister Grant Robertson directed officials to start creating the scheme in 2019.

The International Monetary Fund was among the institutions that noted New Zealand was an outlier among developed countries for not having such a scheme to help make the financial system more stable.

What will be different for savers?

The Deposit Compensation Scheme’s launch could prompt people to split their money between deposit-takers to ensure it is all insured.

It may make institutions that pay higher rates of interest more attractive to savers who previously deemed them too risky.

However, the appeal of higher rates may be watered down if these institutions pass the costs of partaking in the mandatory scheme onto their customers.

Because the levies deposit-takers need to pay to fund the scheme are based on the risk of them collapsing, the cost will hit smaller institutions harder than the big banks.

There has been a lot of debate between deposit-takers, the Reserve Bank, Commerce Commission and Government over how levies should be set.

Finance Minister Nicola Willis decided they should be less risk-based than the Reserve Bank suggested to support smaller deposit-takers competing with the big banks.

Credit unions and building societies are also being supported by being allowed to pay lower, flat levies until 2028, before moving to the risk-based model.

The Reserve Bank expected them to collectively pay $700,000 a year over the next three years, and around $1.5 million thereafter.

It expected the big four banks (ANZ, ASB, BNZ and Westpac) to collectively pay $62.2m in levies a year, small and medium-sized banks $15.2m, and finance companies $300,000.

If the Deposit Compensation Scheme doesn’t have enough funding to pay out depositors, the Government will loan the scheme money to cover its costs.

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.