Ratings agency Moody's is predicting consolidation of the non-bank deposit-taking sector as part of a “flight to quality” under the extended retail deposit scheme.Moody's Investors Service said weak institutions, unable to qualify under the ne
Ratings agency Moody’s is predicting consolidation of the non-bank deposit-taking sector as part of a “flight to quality” under the extended retail deposit scheme.
Moody’s Investors Service said weak institutions, unable to qualify under the new scheme and struggling to retain their deposit bases, will need to merge with other institutions or disappear.
Depositors at weak institutions that did not qualify for the new scheme could encounter a temporary moratorium on repayment of their deposits if their institution experienced a deposit run, which could be credit negative.
Ultimately, the consolidation should lead to a stronger non-bank deposit-taking (NBDT) sector with larger, more diversified institutions, it said.
Moody’s made the comments in its ‘Moody’s Weekly Credit Outlook’ following the kick-off of New Zealand’s new retail deposit scheme, which began on October 13, and will run until December 31.
“We expect to see a flight to quality as depositors at weak institutions (which do not qualify for the new guarantee) move their funds to stronger institutions, which include banks and NBDTs that are approved under the new scheme,” said Moody’s.
The large number of banks, building societies, credit unions, savings institutions and finance companies approved under the old scheme, in place from October 2008 to October 2010, helped maintain confidence in New Zealand’s financial institutions during the recent financial crisis, the agency said.
While a large number of weak institutions made claims under the previous guarantee when they experienced liquidity issues, this would not be as easy for firms approved under the terms and conditions of the new scheme.
Stricter eligibility guidelines required deposit-taking institutions to have a credit rating of Ba or higher and to have been guaranteed under the old scheme. Collective investment schemes are no longer eligible.
Moody’s said this should alleviate the “moral hazard risk” that guarantee schemes tended to attract.
“We do not expect banks to apply under the new scheme as their deposit bases appear to be stable and their balance sheets reasonably sound,” said Moody’s.
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