Reserve Bank governor Wheeler not keen on bank deposit insurance

New Zealand is the only country in the OECD without deposit insurance.

The Reserve Bank is unlikely to introduce state-backed insurance on bank deposits, saying the moral hazard is too high and it prefers the option of protecting those with small balances through guaranteed repayments.

New Zealand is the only country in the OECD without deposit insurance, with Israel's central bank in the process of introducing the state guarantee on bank deposits.

Governor Graeme Wheeler told Parliament's finance and expenditure committee, at the central bank's annual review this morning, that developing a deposit insurance fund would take an "awfully long time" and New Zealand's banking system is highly concentrated in bigger banks.

"Where they tend to be most successful is in banking systems with a large number of very small banks, and some of those collapse over time, but our setup is completely different," Wheeler said "We do worry about the moral hazard issues, for example, what is the incentive bank managers would feel knowing there's a bailout fund set up."

There would also be difficulty in charging appropriate premiums, Mr Wheeler said. "You would want to make sure you were adopting appropriate credit risk pricing to build up that fund. You'd be saying bank X, the deposit levy on that is so much, bank Y, the levy is so much again. You end up with differential rates."

Grant Spencer, deputy governor and head of financial stability, said there was scope for the minister to determine a minimum guaranteed repayment amount to protect small depositors, and the bank was having some discussion as to whether to fix that number more specifically, at around $5000.

James Shaw, Green party co-leader and finance spokesperson, said there was a view the banking market is concentrated because New Zealand doesn't have a deposit insurance scheme, so savers don't feel confident putting their money outside the major banks. Such a scheme could encourage competition, he said.

Mr Spencer said the bank didn't want to encourage unfair competition by guaranteeing a riskier institution, as happened with the collapsed South Canterbury Finance.

"People suffered, and the government suffered as a result. To avoid that, you need a risk-adjusted insurance premium but, when you look around the world, you never actually see proper risk-adjusted premia. You often have a bias toward a flow of funds to riskier banks, and that's the moral hazard issue," Mr Spencer said. "We support more the approach of de minimis to protect smaller deposit holders rather than putting in protection for $250,000, as you might have in Australia."

(BusinessDesk)

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