New Zealand's long awaited Depositor Compensation Scheme (DCS) launches in July. So just what will, and what won't be, covered by the DCS?
The basic deal with the DCS is it will provide protection of up to $100,000 per eligible depositor, per licensed bank, building society, credit union and deposit taking finance company, in the event of deposit taker failure.
Legislation behind the DCS features within the Deposit Takers Act (the Act). This defines a protected deposit to mean a debt security issued by a licensed deposit taker. This requires the debt security in question to need to be one or more of the following:
Current accounts and savings account. This can be a call debt security, a call credit union share, a call building society share, or a credit union savings account product.
Term deposit products. This can be a fixed term deposit product, a fixed term redeemable building society share, or a credit union fixed term deposit product
Notice account products. This can be a bank notice product, or a product that is substantially equivalent to a bank notice product, except that it is not issued by a registered bank.
The Act says when it comes to coverage for revolving credit contracts under the DCS, depositors have a right to be repaid, or paid interest on, a positive credit balance in connection with a revolving credit contract, like a revolving home loan or credit card contract.
What about PIEs?
Depending on how Portfolio Investment Entities (PIEs) are structured, they may or may not be counted as protected deposits. PIEs are term deposit funds that offer investors the tax advantages of the PIE regime.
A Reserve Bank spokesperson says some banks offer cash and term PIEs that invest only in the debt of that bank.
“Many depositors will view this interchangeably with regular call or term deposit products,” the RBNZ spokesperson told interest.co.nz.
“A captive cash PIE, as defined in regulation 3 of the Deposit Takers Regulations 2025 will be a relevant arrangement (that the deposit is treated as being held by the PIE for, or on behalf of the depositor) and those relevant arrangements can be protected by the DCS.”
However, the Reserve Bank says the definition of captive cash PIE includes that the PIE invests only in protected deposits issued by a single deposit taker and the units are issued by the deposit taker or its associate. If a PIE does not meet the captive cash PIE definition it will not be a protected deposit.
Deposit takers will be required to list all protected deposit products on their website, including PIEs if applicable, from July 1. There will also be a trademark to be stamped on all banking products covered by the DCS.
Deposits will also only be protected if payments of the principal and interest are only in the New Zealand dollar, or a currency of a kind that is prescribed by the regulations (if any).
The terms of the debt security must be under New Zealand law and it also has to meet the requirements prescribed by regulations.
What's not included
According to the Act, deposits that won’t be protected include debt securities that are issued out of, or administered by, an overseas office or branch of a licensed deposit taker.
Managed investment schemes like KiwiSaver and other retirement schemes are also not protected.
Nor are redeemable shares (other than a redeemable share issued by a credit union, a friendly society, a co-operative company, or a building society) which means bonds and other tradeable products don’t have protection.
A debt security that is declared by the regulations not to be a protected deposit won’t be covered by the scheme.
What will the protection look like?
In the case of deposit taker failure, the coverage from the DCS will apply differently depending on how you’ve structured your deposit.
For example, if you have multiple deposits worth over $100,000 in just one bank and that bank fails, you will be paid only a maximum cap of $100,000 from the DCS.
But if you have one deposit over $100,000 in one bank and another deposit worth over $100,000 with a finance company and both those deposit takers fail, you would be paid up to $100,000 twice depending on your deposit amounts in those companies.
The same goes if you have multiple deposits under $100,000 with different deposit takers.
The DCS’s payout system also looks different if you share a deposit with another person. If you were a single person and you had a deposit that was worth $200,000, you would be paid $100,000 from the DCS if your deposit taker failed.
But if you shared that $200,000 deposit with someone else and that deposit taker failed, then those two people would be eligible for up to $100,000 compensation each.
The DCS is set to launch on July 1. A fund backing the DCS will be funded through levies paid by deposit takers, and be built up over 20 years to a size equivalent to 0.8% of protected deposits, or about $1 billion.
New Zealand has been an outlier among Organisation for Economic Co-operation and Development countries in not having a deposit insurance scheme. In its 2017 assessment of the New Zealand financial sector the International Monetary Fund recommended the introduction of a deposit insurance scheme.
*There's an explainer on the DCS from the Reserve Bank here.
**See more on non-bank depositors that will be covered by the DCS here.
***And there are two Of Interest podcast episodes with much more detail on the DCS. They are here and here.
7 Comments
So funds get frozen under the OBR rules (for god knows how long), the 'loss' hasn't crystallised so any payout will be delayed for months, possibly years as the bank is restructured.
Time is Money. Any they will take plenty of it.
Unless there are new OBR rules the old scheme operated more or less along these lines. RBNZ would determine the haircut depositors would take, say 25%) and set these funds aside so that the bank could continue operations in I think was in 24h so individual customers could continue with day to to day banking. I think the 24h is pie in the sky so lets say very likely within a week. The way I now see it is any investment funds who invariably hold cash funds with only one bank, would become the recipients of OBR and I suspect a very high percentage "taken" by RBNZ to sort the banks insolvency out. So if you have UTs whether KS or just a general investment UT fund you'll take a haircut in varying %'s.
So how are the levies worked out? Are they effectively gleaned from all deposits or just those covered, cause there appears a heck of a lot not covered. For instance a couple with $200k term deposit vs an individual with $200k TD one fully covered one only half, will that $100k not covered get a higher rate?
Currently, Xceda Finance which will be covered, offers 6% on a 6 month TD-minimum $2500. This is the clear market leader. But will they still over this premium when their TDs are as well protected as the major players?
Am I correct in saying that the primary method of addressing (major) bank failure will remain the OBR and that the DCS will only be used after the OBR has been applied?
In the event of a big bank(s) failure, the DCS won't be big enough. So in those circumstances the OBR would be one of the options available to the RBNZ and government. If a non-bank deposit taker, small or perhaps medium sized bank fails, the DCS would likely be the resolution tool used. I recommend listening to the podcasts linked to in the article above with Geof Mortlock. And there's more from Geof here; https://www.interest.co.nz/personal-finance/123860/deposit-insurance-expert-suggests-100k-cap-will-need-be-increased-over-time
For information on how the OBR might be implemented if it was actually used, see this article; https://www.interest.co.nz/bonds/64411/if-bank-failed-and-open-bank-resolution-policy-was-implemented-how-would-it-affect-bank
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