The Government is committing to introducing a deposit protection regime.
Cabinet has made an in-principle decision to introduce the scheme, designed to protect depositors in the event of their bank going belly-up, under the second phase of the Reserve Bank Act Review currently underway.
The proposal is for the regime to include a limit of between $30,000 and $50,000. This means someone with a $70,000 deposit in a bank that runs into trouble would get up to $50,000 back.
If they had a $50,000 deposit with Bank A and a $50,000 deposit with Bank B, and both banks went under, they would get $50,000 back from each bank, so $100,000 in total. But if they had $100,000 with Bank A, they would only get $50,000 back.
Finance Minister Grant Robertson said the proposed limit would cover 90% of individual bank depositors and 40% of funds in bank deposits in New Zealand.
Who pays?
While the deposit protection scheme's design will be announced in 2020, it is likely to be funded by bank levies, with the taxpayer standing in as a backstop.
Treasury explained: "Deposit insurance transfers the risks and costs of bank failures away from depositors onto an insurance scheme...
"Modern deposit insurance schemes are normally funded by levies on member banks, supported (where necessary) by temporary lending paid for by taxpayers.
"If the insurance scheme is accompanied by a depositor preference, this might also increase banks’ non-deposit funding costs as risks are transferred from depositors onto institutional investors.
"To the extent that depositor protection increases banks’ average costs, this might be passed on to customers through higher mortgage rates or lower deposit rates.
"Alternatively, costs might be absorbed by banks’ own margins and retained earnings. The extent to which costs are shared between banks and their customers depends on competition and contestability in the sector."
Why such a low limit?
Treasury said the $30,000 to $50,000 limit was "broadly consistent" with international schemes in terms of the share of deposits protected (90%) even if the dollar value of the limit was relatively low.
Indeed, Australia has a A$250,000 limit, the UK a £85,000 limit, and Canada a C$100,000 limit, as analysed by David Chaston in this article.
Treasury was conscious of setting the limit at the right level to avoid creating a moral hazard - IE knowledge of a protection scheme causing depositors to take less care when assessing the risks associated with their banks, and banks taking less care with depositors' money.
It said it was a matter of finding the point that would protect most households and small businesses, while leaving large institutional depositors, best placed to monitor bank risk-taking, more exposed.
Treasury also said: "International experience demonstrates that strong regulatory monitoring of deposit-takers’ corporate governance and risk management systems goes a long way to addressing the moral hazard of depositor protection."
Won't banks be safe enough once the Reserve Bank makes them hold more capital?
Treasury recognised the Reserve Bank's proposals to require banks to hold more capital - another move designed to make banks stronger, potentially at a cost to bank customers.
Yet it saw the introduction of deposit protection as a missing part of the "financial safety net".
"Capital tools that help to keep banks safe and sound at the ‘top of the cliff’, must be complemented by robust tools to deal with banks that may still fall to the bottom," it said.
"The OECD and IMF have warned that, without depositor protection, New Zealand is vulnerable to contagious bank runs."
Asked whether the introduction of depositor protection meant the Reserve Bank wouldn't need to go as far as it's proposing with it capital requirements, Robertson said that was a matter for the Reserve Bank to deal with.
“Our banks are safe and sound,” he assured.
"A deposit protection regime will increase public confidence in the banks.
“Overseas experience shows that bank failures can be the result of a few bad decisions that normal bank customers had no influence over and no idea about.”
Robertson said it was yet to be determined whether bank deposits that make up parts of investment funds, like KiwiSaver funds, would be covered by the regime.
The deposit protection announcement was one of three relating to bank regulation from the Government and regulators on Monday after a week of colourful media headlines about ANZ NZ and its recently departed CEO David Hisco.
The Financial Markets Authority and Reserve Bank confirmed that all banks have committed to removing sales incentives from frontline staff and their managers. And the Reserve Bank said ANZ NZ's regulatory capital modelling and director attestation process will be independently reviewed after falling foul of Reserve Bank requirements.
Regulatory regimes for bank and non-bank deposit takers to be combined; Treasury to be the Reserve Bank’s monitoring agent
The Government also announced other in-principle decisions on matters considered as a part of Phase 2 of the Reserve Bank Act Review. These include:
- keeping responsibility for all prudential regulation functions with the Reserve Bank
- combining the separate regulatory regimes for banks and non-bank deposit takers (institutions that are not registered banks, such as finance companies and building societies) into a single ‘licensed deposit taker’ perimeter
- replacing the Reserve Bank’s existing ‘soundness’ and ‘efficiency’ financial policy objectives with a single overarching ‘financial stability’ objective
- establishing a new governance board, which will be given statutory authority over all Reserve Bank decisions (other than those reserved for the Monetary Policy Committee)
- establishing the Treasury as the Reserve Bank’s monitoring agent
The Reserve Bank Act Review was agreed in the Coalition Agreement between Labour and New Zealand First.
Phase 1 addressed monetary policy. It resulted in an employment target being added to the Reserve Bank’s inflation target, and saw a Monetary Policy Committee established to set the Official Cash Rate, so this responsibility wouldn't be left with the Governor.
Phase 2 considers the Reserve Bank's role as banks' and insurers' prudential regulators.
Cabinet has decided the next consultation in Phase 2 will consider whether the Reserve Bank’s supervisory regime is sufficiently strong. It will also review the enforcement tools the Reserve Bank has, including whether penalties are tough enough to discourage bad behaviour.
Increasing the responsibilities and accountabilities of senior executives on the table
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.
Australia’s Bank Executive Accountability Regime (BEAR) and the UK’s Senior Managers Regime are two examples of frameworks that assign duties to individual decision-makers at banks, so that if things go wrong the individuals directly responsible can be identified and held to account.
“These regimes go a step further than New Zealand’s current Director Attestation Regime for banks, by also holding senior managers to account for the prudent management of their bank within their area of responsibility,” Robertson said.
More information is available here.
86 Comments
Maybe ..maybe not .."The first point is that the Deposit Guarantee scheme (the one up to $250k) is not currently active.."
https://digitalfinanceanalytics.com/blog/sold-a-pup-the-bank-deposit-ba…
Robbie Barwick from the Australian Citizens Electoral Council has also been highlighting these issues. https://www.youtube.com/user/CECAustralia/videos
If you watch any of the CEC - this interview between Robbie and Philip Soos of LF economics is the one to watch. Only a continuation of mortgage fraud by the banks (obviously their banks are different to ours) can stop the collapse of the Australian housing market.
and the deposit scheme in Australia covers over 100 financial institutions - with 100% cover (250K) for each individual account - allowing a true chance of spreading risk. And NZ will offer effectively only 70% deposit cover across a small number of banks..... still an outlier in not protecting depositors.
I would presume that if someone were to spread deposits amongst all major banks it would effectively increase the total insurance cover limit (up to an additional 50k per bank) on an individuals total deposits. Its per deposit as opposed to per individual. Married couples combined could effectively capture total cover well over $700k for starters.
I wouldn't worry about the Overseas Buyers Ban top end property prices would have fallen anyway since China's clamp down due to Trumps tariff waving, that's why both Australia and Canada's property markets are hurting too. Personally I think it would have been better to bring in a tax rather than a ban at least it would have collected some revenue.
Well it's not all bad news the migration flood gates could open again with the recent HK civil unrest, just depends if they can get their money over too? Unfortunately I don't think they will be able to get their capital out since the CCP have clamped down further.
In good times the banks make billions of dollars lending for housing speculation. Risks and profits are magnified using derivatives. In bad times the banks use depositors as human shields to extort bail outs from governments. The productive economy is siphoned away during the bubble run up, and the bailout impairs the government balance sheet thereby robbing the future of state funded productive investment.
Not sure how the Gov. will do it in NZ. In the US for eg. the FDIC is an independent gov. agency that overseas the banks (read compliance with banking laws) and the deposit Insurance program. The banks pay the premiums, so a depositor might pay a few cents indirectly out of pocket in minimally reduced interest rate, but the rates NZ banks give you are so far out of reality you would never know.
The US Treasury guarantees the deposits (FDIC) should something go wrong. People scream that the taxpayers would pay. But you would have to have huge catastrophic failures for the Gov. to get involved.... this is just ignorant fear mongering.
In the US the Treasury has only had to back up the FDIC once in its history and that was paid back within two years. Not 1 cent has been lost by a depositor due to a bank failure since its instigation in 1934..that includes the GFC in 08-09.
IT will take time for NZ to build up premiums because they have become so far behind in prudent decisions with regard to this issue, thats why the Gov. will need to guarantee it . It would just be paid back thru the banks premiums as time went on so it would not cost the taxpayer a cent in the end if this did happen.
Now they just need to be more realistic in their coverage. $50,000...what a joke.
Agreed.
Does one split one's funds between banks in $50,000 parcels?
Will this apply to KiwiSaver accounts operated by banks (although the KiwiSaver are separate entities to their parent bank)?
Questions may be premature as it is signed off in principle only, but initial reaction and queries.
P8, as per my comment above, it would seem logical a married couple could effectively capture over $700k total cover. I would have thought logistically its viable per deposit and not per individual. If it were any other way it would require banks to disclose customer details. P8, for many more people that were concerned about OBR, for peace of mind and security, having cash outside of property is looking more attractive by the day. Don't tell REA-TTP I said that lol! (^o^)
If you had 50 grand in each of two banks. And the rule was you have to add them together. You heard that one bank was going bust so there would be a run on that bank: Too late to get that out, so you quickly go to the other "good" bank and withdraw that 50 grand. All OK! However if everyone else does that, second bank goes belly up too!
In this case the banks would probably lock their doors! Banks do not hold large sums of cash - they only hold enough for their day to day business needs. If you wanted to withdraw $50k you would need to advise them in advance so they can order the cash in for you.
At what point will the depositor be protected? Important to get a clarification on this because it is murky legislation in Oz which needs clarity still. Does it occur at point of failure? Or the minute a bank gets into strife. If the bank doesn’t fail but deposits are bailed-in to save it, will the government guarantee apply? Or only when the bank actually fails?
In UK and Xanada (typo, but appropriate for their housing market bubble), the depositor guarantees only apply in the event of a bank failure. Prior to that, bail-in of deposits can be used to shore up a banks capital ratios and the guarantee doesn’t apply - not that much of their populous understand this.
A Lawyers picnic ahead and not something that engenders confidence in the banking system, particularly for an announcement on this so soon after the ANZ debacles - which haven’t finished yet.
Westpac however could be another concern, and letting their economist shout about 7% property rises suggests that they may not be particularly comfortable with their existing loan book and are desperate to hide the Auckland price slide and collapse in upper end sales volumes. How much interest only debt have they created into this bubble?
Fascinating to watch what’s coming out of the woodwork at present.
Banking deposit protection has been in discussion since January this year and as far back as December 2017, so it has been in the pipeline for a while.
I think I prefer the other deposit insurance scheme that basically allows better coverage, discussed in this earlier article in Dec 2017.
Interest article : Treasury modelling suggests introducing deposit insurance would see savers pay a couple of dollars a year for every $1000 of deposits up to $100,000.
https://www.interest.co.nz/personal-finance/91463/treasury-modelling-su…
Unfortunately I fall in the 10% deposit group and i suspect I'll be worse off under this regime than taking a haircut under OBR, even with spreading over the major banks. $100k should be the deposit protection level. Cheapskate Coalition getting the 10 % deposit group to subsidise the 90%
Timing is appalling... where does this leave the RBNZ on its capital proposals and all of the submissions it just received?
All of the effort that has gone into that is completely wasted.
Im neither for or against a deposit insurance scheme..... but would it be asking too much for the Finance Minister to coordinate this with the RBNZ?
Totally.... Orr has been banging on about the social implications of a bank failure and the need to protect taxpayers from having to step in and bail a bank out.... that was the whole basis for increasing the capital requirements.
Now Robertson announces that the government will be on the hook and will bail out taxpayers to a maximum of some yet to be finalised amount.
I was going to refer to it as 'amateurish'... but I somehow think that doesn't quite cut it and is insulting to all amateurs.
The banks (and the RBNZ) have put considerable work into the submission process for the capital reforms... all of which is now useless. I'd send Robertson the bill.
Utterly moronic.
"Finance Minister Grant Robertson said this proposed range would cover 90% of individual bank deposits, and 40% of funds in bank deposits, in New Zealand."
Given the NZ banking system's current loan assets to deposit liability ratios of over 100%, the other 60% of funds in bank deposits that remain uninsured may still be vulnerable to being removed from the banks. Many of these amounts could be deposits from large businesses operating in New Zealand. Any corporate treasurer of a large business should be well aware of reducing the credit risk of having deposits in excess of insured amounts held with banks.
Or perhaps the people at treasury have finally woken up to how the banking system actually works. Who knows, maybe they read interest and have watched some of Professor Werner’s exposes on how the vast majority of bank deposits are actually created through a simple bit of double entry book keeping. I’ve posted this before, but it is worth doing so again for those that haven’t seen it.
I am not a nimby
There’s no need for KiwiBuild, there is no housing shortage and construction debt and the building boom (into a declining market) is the rare positive force driving GDP, but it is just debt accumulation. The housing crisis is not about any lack of stock, it’s all about too much money creation for financial assets in what has been a classic financial Ponzi scheme.
The government may finally be waking up to how much bullshit was being (still being) proliferated by many media outlets and vested interests over the past decade.
Another way of putting it is that this game of musical chairs has seen several chairs removed at once and many of the players will end up falling on their arse.
There's no housing shortage (Tens of thousands new migrants arrive each year).
There's no lack of stock (The entire suburbs being added to the North West with willing buyers beg otherwise).
What else have you got in that grab-bag of greatest hits there? "The US Army is not just outside the city limits of Baghdad"? An oldie but a goodie.
There is a shortage of good quality stock available for rent. And for homeless.
There is a surplus of stock and house and land packages, and apartments, which are not selling, especially above $1m a piece.
RE NZ over 90 OTM shows this.
As does study of how many 4 beds have been built in Rodney and WC in last 7 years cf how many 3 beds.
Immigrants largely rent from their own networks already here, and are mostly too young and too low on income ladder, to afford to buy.
Yes agreed the Housing shortage doesn't really exist in the city areas like Auckland. Also based off the 2013 census there were more than 33,000 Auckland dwellings officially classified as empty (Wouldn't be surprised if that figure was double now).
So there's one really really simple way to address the housing shortage especially in large city areas and that's to help free up empty homes. The way you do that is to introduce a "Empty Homes Tax" and target inner city areas, AKL would be the best place to start, that revenue can be used to build new homes and it may help to persuade to rent out or sell on if they want to avoid the this tax. Empty homes taxes have already proved successful in other countries going through the same issues that we've faced. Take Canada's Vancouver for an example, In their first year of the empty home’s tax they generated revenue of close to $38-million, eight million more than they originally expected to collect.
REA-TTP, are you still in the mindset that investment property is safer than Bank deposits in a crisis? Our Government has made a smart and prudent move in light of the prevailing risks present from offshore...
The cost of this scheme won't nessasarily be borne by deposit holders either!
Predictably minimal cover. Perhaps a stroke of genius as many will have more to insure and must diversify to our lesser banks to spread the insured sum. Hopefully Rabo investors may not have to pay any insurance levy as continuing existing deposits there are already protected.
Todays announcement is a joke. NZ banks source most of their funds for lending (mortgages etc) off shore. That said, when it all turns to custard in the US etc, the Fed isn’t in a position to bail out the banks next time. Instead there’ll be ‘bail ins’, the banks will put a freeze on bank deposits - including KiwiSaver. ATM’s will be configured to a max $50 a day (Greece) as the contagion spreads globally while banks call in their inter bank loans and mortgages. The banks win, we loose. It’s not a matter of if, but when. The only way out is not to have in the system.
Personally I think they should do the exact opposite. Spend some money on advertising informing the public that banks are not safe and that the NZ govt will never bail one out. Encourage investors to invest wisely instead of with whoever offers the best rate. Encourage the banks to act wisely to win deposits.
I guess if they were a truly safe bank then they should be able to fairly easily express where their deposits are invested. Lies should invoke board and CEO prison sentences.
I wouldn’t trust any bank that relies on dodgy complicated accounting tricks to make money (but it seems we all do as we assume bail out).
Hi JimboJones.
I understand your reasoning, but we have to consider that many families are so busy with both parents working to pay the mortgage debt, rent (landlord debt), credit card interest (debt), kids clubs (personal loan debt but Billy deserves to do clay pigeon shooting, he shares a bedroom with two siblings) and also taking them there, that they don’t have the time to read anything other than Stuff.. which is crap.
I’ve looked at the ANZ financials and spoken to the editor of their internal news and I still don’t get it. KPMG reported on $2.7 trillion NZ dollars of derivatives exposure at NZ banks as of Sept 2015. At ANZ (RBS, I jest) at the end of 2015 it was 1.2 trillion.. Gareth Vaughan wrote an article in March 2016 on this site about this KPMG report.
Recent agglomerated accounts ANZ NZ and Oz suggests 90 billion in derivatives exposure now... how has that deleveraging of risk happened so quickly - Deutsche haven’t been able to do it that quick?
It doesn’t make sense, and even if you think you know it all and do read a lot of this stuff there are huge gaps in the data being provided.
Anyone who doesn’t have the time and relies on Stuff and The Herald would be rubber ducked without regulation. (Which has been absent)
Umm.. It could get quite bad depends on how lax the Ozzy banks have been in regards to mortgage lending and how much both NZ and Oz could be effected by "Negative Equity" and the domino effect it could cause through out our finical systems. But so far I can't see that much build of on mortgagee properties either here or in Australia that could cause any banking collapse. Here's an Australian web site to keep an eye on for mortgagee properties: https://www.forcedsale.com.au/properties
That’s my thoughts to real agent. What return does the bank give us anyway- 2-3%. Better to be safe than sorry and buy a safe to put fiat in for a few years. Not worth the risk for banks to be holding it. If the banks are looking at offering insurance it doesn’t say that the banks are confident that things will go belly up..
It sounds as though it was done to placate the banks:
https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12…
What – so with more than $50,000 I’m joining the ranks of “large institutional depositors” – I think not – again, NZ$50,000 although useful, is not a particularly large sum to have deposited – talk $100,000 insured and at least at that point you’re trying to protect what may be the true majority of funds at risk.
Hi Custard
I’ve had a think on this a bit more now and spoken to a couple of people in the UK.
Remember that the average KiwiSaver balance is just 19k - so the likelihood is that most of the young probably don’t have over 50k saved in deposit accounts as well. But the young who fall in the 90% would also be energetic enough to possibly cause an issue to the system if their deposits were bailed in.. let’s just say that passions are more voracious in youth.
Those with 100k plus held on deposit are very likely to be much older.. bail in would make them upset and no doubt they would write a number of very strong letters to the government and they may even go on a march, (hip replacements allowing) but they are very unlikely to turn cars over, set fire to things and run around in a yellow vest.
A guarantee for the 90% makes sense as it covers the millennials and a few x-ers. Does it create a moral hazard in the banking sector (moral seems to be an unusual term given recent revelations) but yes it will.
Move in the right direction, but too little detail to make a call on the structure or threshold where it kicks in. My concern is that the banks will get off the hook for bad behaviour, when they should be held accountable. So some of the suggestions about how the scheme will be funded sounds better than straight insurance. Hurry up and wait now.
Sounds like a sensible compromise to me.
I don't have anything close to $50k in the bank, but I think it's fair to say that if I did I would look a little more carefully at which bank I put it in.
The regulators have done work to try and make sure the banks' positions are more transparent; that's one part of the puzzle. This provides the incentive for depositors to care. The missing piece is the education of the public, so that they know a) there is a risk and b) there are ways to judge that risk vis-a-vis different banks.
If those things all worked together, banks might actually have an incentive to be responsible. It's just crazy enough to work.
come on set the limit at something reasonable. May as well stick funds under the mattress. Already the returns on term deposits are paltry.
Also for a government that stated they wouldn't introduce any new taxes. What exactly is this? A levy? And how much will this levy (tax) cost depositors. And how much tax will the State generate from it?
All fiat currencies return to their intrinsic value - zero. Fiat is a Latin word.. Translated into English, fiat means “Let it be done”.There 180 fiat currencies in the world today.
They used to say you should save 10% of your income in Cash for a rainy day. I've heard that now you should save 10% of your income to Gold. Every day, I see Gold is up. Gold will last forever. Gold is God's money.
It seems to me that our Prime Minister doesn't really know what the OBR actually is. She speaks of it as another form of depositor protection whereas it is nothing of the sort. It is designed to utilize depositors money in order to prevent bank inslovency. Depositors take a "haircut" on their savings at the expense of the bank not failing. It's a "bail-in". In the terms and agreement you have with your bank, you have not been a "depositor" for some years, rather you are an "investor" in the bank. You have lent your money to a bank, not deposited it. It is important that everyone be aware of this.
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