Banks to get deposit insurance regime

Finance Minister announces decision in principle to protect most bank depositors.
Finance Minister Grant Robertson.

The government has decided in principle to introduce a bank deposit protection regime.

In a statement, Finance Minister Grant Robertson said New Zealand had been an outlier for many years in not having a formal deposit protection regime – government-funded insurance to repay depositors in the event of bank failure. 

“Our banks are safe and sound," he said. "However, the OECD and IMF have said that our banking system might be more vulnerable in a crisis because we don’t have a deposit protection regime. A deposit protection regime will increase public confidence in the banks.”

The government said it was proposing a deposit limit of between $30,000 and $50,000. This would cover 90% of individual bank deposits in New Zealand and is similar to international schemes. The decision followed consultation with the financial sector.

“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. A deposit protection scheme will help protect customers like a young couple saving a deposit for a house, people saving for their retirement or the small business operator who keeps money aside for a rainy day.”

The government also said the next consultation in Phase 2 of the Reserve Bank review would look at whether its supervisory regime was sufficiently strong. It would review the enforcement tools the Reserve Bank has, including whether penalties are tough enough to discourage certain behaviour.

The government was 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 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 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.

Credit rating agency Moody's Investors Service welcomed the scheme, saying it would increase depositor confidence and in particular will benefit smaller banks.

"The country’s major banks already benefit from a high level of public confidence, due to their size and systemic importance. Furthermore, smaller banks do not have the same level of access to the wholesale funding markets as larger banks, and are therefore more reliant on deposits for funding," it said.

Final decisions on the full details of a deposit protection regime and strengthened accountability standards will be announced in early 2020.

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