By Gareth Vaughan
New Zealand is poised to end its role as an international outlier when it comes to deposit insurance.
The Deposit Takers Bill is expected to be introduced to Parliament in the third quarter of this year. Included within it are proposals for a depositor compensation scheme to cover bank depositors in the event of bank, or non-bank deposit taker such as a building society, failing. Depositors will be covered for a total of $100,000 per institution, per depositor.
Speaking in interest.co.nz's Of Interest Podcast, Geof Mortlock explains what deposit insurance is and what its objectives are.
Mortlock is an international financial regulatory consultant who undertakes work for the International Monetary Fund and World Bank, specialising in financial system stability, resolution of bank failures, deposit insurance and related matters.
Mortlock also explains why it has taken NZ so long to adopt deposit insurance. According to the International Association of Deposit Insurers, at least 145 jurisdictions have some form of explicit deposit insurance.
Additionally he talks about the $100,000 limit, how the deposit insurance fund will be established including how much this will cost and what it's likely to mean for the interest rates depositors are paid.
Mortlock also talks about which products are likely to be insured, or covered by the scheme, and which are unlikely to be, whether a depositor preference regime should be introduced in the event of a bank failure, how the Crown's deposit insurer should operate, and more.
The Reserve Bank expects the Deposit Takers Bill to be passed into law in mid-to-late 2023, with a depositor compensation scheme expected to be up and running in early 2024.
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ASB never releases the full data for their fell financial wellbeing study but "more than a third of Kiwis are living pay-day to pay-day and nearly half have less than $1000 in savings." I could dig around for more but can't be bothered. However, approx 70% have <$10,000 in cash savings.
https://www.asb.co.nz/documents/media-centre/media-releases/asb-data-sh…
I guess my other question is where is the incentive for a bank to be prudent, or a depositor to be prudent when choosing a bank? They are taking away any possibility of the market pricing the risk aren’t they?
Shouldn’t it work like any other investment where the shareholders and investors take the hit? Why so special?
I guess my other question is where is the incentive for a bank to be prudent, or a depositor to be prudent when choosing a bank? They are taking away any possibility of the market pricing the risk aren’t they?
John Key's position was that if you remove any requirement for banks to be accountable for deposits, then they will moderate their behavior and not behave like moneylenders to drunken sailors.
I would accept OBR (open bank resolution, aka depositors taking a haircut) if and only if the capital adequacy and quality was increased by a substantial amount. It appears Mr Orr has put that on the back burner orr dropped it altogether. Someone in the know could comment.
I think the problem here is that banks are private companies (yes they are publicly listed, but their shares (ownership) are generally in the names of private individuals or organisations), and unlike any other private company, their customers property becomes the property of the bank (and the customer becomes an unsecured creditor) with virtually no liability for the bank on how it treats that property. Banks to all intents get to act with a high degree of impunity. Ordinary people do not get any choice these days. It is to all intents impossible to operate without a bank account, the customer does not get to negotiate the terms and conditions of holding the bank account (it is to all intents a loan document which details the terms that the bank takes your money), and if you don't like it you can go to any other bank to find that ... their terms and conditions are virtually identical! The customer has no power. And wait there's more - who do you think will pay for the deposit insurance? Now consider this in this light do you consider that for just one bank in a country of between 4 - 5 million people that it is reasonable to make a profit of $1.5 billion? From the above you will quickly realise that within that profit is included any money you have on deposit in that bank.
The increased bank regulatory capital requirements announced in December 2019 are still happening. Covid-19 has seen the timeframe pushed back though, and they are being phased in by 2028.
and;
I think that comes down to what you expect retail banking operations to be.
Most people are fairly financially illiterate and time poor - not many will understand that a Moody's / S&P rating means sweet FA to the consumer other than as a marketing device, or dig into the legislative minutiae to grasp that when you make a bank deposit today, that it's essentially an unsecured loan where the depositor is the first to take up to a 100% haircut with no recourse.
Depositors are at the bottom of the security food-chain, behind even Tier 3 lenders or shareholders, the latter whom could at least launch a class action suit based on tortious negligence if their chosen investment went belly-up. I'd go so far as to suggest that most depositors - usually older folks - would be horrified if they understood this.
Banks historically have built their retail bona fides on probity and trust. They still make this claim to attract depositors and mortgagees, but the facts belie this across the industry as a whole.
This scheme serves to insulate depositors from the worst excesses of the non-retail part of banks (given that their operations are vertically integrated) who have proven they they can't / won't self regulate or act with a reasonable degree of probity when it comes to mortgage lending due to the moral hazard imposed by govt bailouts and cheap money to keep the music going.
That's why depositors are special - the deck is stacked against them.
IMO, they deserve a degree of protection from a moral perspective, and this scheme is a long time coming.
So let's say XYZ bank is falling on hard times with a number of dubious loans and this is known to the public. So to attract investment they are offering higher rates than other banks. With the guarantee, you may as well put your money there. Then when they do eventually fall over, the government end up paying out all original depositors plus these new people that had nothing to lose. I thought we would have learned from SCF!
This example implies a high degree of information in the marketplace that XYZ is issuing crappy loans.
This simply isn't the case for Tier 1 retail banks. Their books are so big, that it's really about aggregate risk.
And when they're all doing it, facilitated by RB loose monetary policy and regulatory unwillingness to put in tested measures like stringent operational monitoring, DTIs etc., you have a problem.
Worth noting also that SCF was not a Tier 1 retail bank. It was a finance company and subject to different rules.
I just don't see that as an issue.
If a registered bank (that is all the deposit guarantee applies to) was doing something that blatant and applying a significant percentage points uplift (which in incredibly unlikely) on the competition, then we have bigger systemic issues in play.
The couple of idiot depositors they attract would be neglible to the amount of people bailing ship.
Fair point, Gareth.
I was of course being a little flippant, but my crystal ball wasn’t too far off the mark.
As per the intro (paraphrasing): Funded by deposit takers and be underwritten by a government guarantee.
Around 11m in: "It'll be paid for by depositors ultimately, because the cost is borne by banks.”
It was started under Labour and broadened under National when South Canterbury Finance collapsed. Background below.
And;
I'll listen to the audio now, though I hope it's not a justification piece for bailing out the highly profitable NZ Retail Banks.
How can they not be profitable? Everything is set up in their favor.
Just about the Uffindell guy. He spent years butterflying around banks doing work on AML, etc. Even at Westpac who were later exposed as being a laundry for all kinds of nefarious people and behavior. Media and the snowflake brigade even do their best to ignore this.
The problem with this is that $100k is not enough for those with the most to loose. If you have $1000 or less like most people, yeah its bad but hardly the end of the world. Even $250k is still not enough but better, at least you have less trouble spreading that about different banks, even if you have a million. This could end up to be an option ? Savers will be paying for it with lower returns on their TD's for sure.
"The problem with this is that $100k is not enough for those with the most to loose."
In the scheme of things, I'd say it's <$1000 deposit holder in cash accounts that have the most to lose currently (i.e. they are more likely to be financially precarious), not those with $100k+ in the bank.
I take it this deposit scheme is for individuals only. If you have a Kiwisaver or some other investment in unit trust and a few thousand others also have with investments with same institution and lets say that institution has $5m with a specific bank which falls over. There is no protection for that institution so you'll take a haircut on your Kiwisaver or other investment. I did ask an institution about this and never got a clear cut answer other than we spread our risk. I don't believe this as these institutions get sweet hearts deals with a specific bank so put all there spare funds into one bank.
I have argued for years that NZ should join the rest of the world in having this.
The last survey-2014?- found that most thought that their deposits were already covered and what i think many who oppose this don't take into account is the very real possibility/likelihood of the domino scenario should one bank get into serious trouble. In other words, a run on the banks which would force the government's hand as it did in the UK with Northern Rock in 2007. If you don't know the story, it's worth a look.
As a depositor I expect to pay for this security and already have TDs with several banks.
Yep just like the mortgage on your house, the bank can call that in anytime they want as well and kick you out on the street if you cannot pay it. Nothing is 100% secure, even "Insurance" fails if the problem is simply to large, the insurance companies fail. The whole system lives on the edge, really wouldn't take that much to end up with a Mad Max event.
I think RBNZ, if that's the correct institution, are asking the insurance companies about increasing their capital reserves. Why the RBNZ has to go through such a laborious process I don't know. Surely the RBNZ have enough experts to come up with a number and impose that?
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