The Government has given the green light for a deposit-protection scheme that would cover almost all Kiwis to up to $50,000 to be developed.
The move comes as part of the second phase of the Reserve Bank Act Review which aims to bring the legislation "up to scratch," according to Finance Minister Grant Robertson.
As part of that review Cabinet signed off, in principle, a deposit-protection regime.
"New Zealand has been an outlier for many years in that we don't have a formal deposit protection regime to support Kiwis if a bank were to fall over," Robertson said.
Although he said Kiwi banks were "safe and sound," the OECD and IMF have said New Zealand's banking system might be more vulnerable in a crisis because there is no deposit-protection regime in place.
"A deposit-protection regime will increase public confidence in the banks."
Government is proposing a limit of between $30,000 and $50,000 for the deposit-protection regime.
This would cover 90 per cent of individual bank deposits in New Zealand, which is similar to international schemes.
As well as the deposit-protection scheme, Robertson also said the second phase of the review would make sure the Reserve Bank had the right tools to hold the banks and their executives to account.
This comes after Robertson said the ANZ had more questions to answer, after the departure of its chief executive, David Hisco, after he misused the bank's funds.
The bank is also in hot water for not correctly calculating its risks, which earned it a censure from the Reserve Bank.
Issues such as these go to the heart of the Reserve Bank's role as a bank regulator and would have been canvassed extensively within the review.
The Government will now be looking at whether the Reserve Bank's ability to police the banks is strong enough.
It will look at the enforcement tools the Reserve Bank has, including whether penalties are tough enough to discourage certain behaviour.
The Government is considering adopting elements of overseas frameworks, which would increase the responsibilities and accountabilities of senior executives for the actions of New Zealand's banks and licensed deposit-takers.
The first phase of the Reserve Bank Act review, released last year, recommended the establishment of a monetary policy committee and adding a focus on employment to the bank's mandate.
Both recommendations were adopted.
The second phase focused on the Reserve Bank's oversight of retail banks in New Zealand and if its regulatory powers should be bolstered.