Table of Contents
- History of Bank Guarantees in New Zealand
- Latest Update 2023: What We Now Know About the Proposed Bank Deposit Protection Scheme
- Does a Government Bank Deposit Guarantee Make Our Banks Safer?
- How Does the Proposed N.Z. Bank Deposit Guarantee Compare to Other Countries?
- Alternative to Relying on the Bank Deposit Protection Scheme
Estimated reading time: 9 minutes
How safe are your bank deposits? Does New Zealand have a bank deposit insurance scheme? Or is there a government bank deposit guarantee?
The short answer is no. New Zealand doesn’t currently have a bank deposit protection scheme. With a recent question from a reader it seems many people are still not aware of this. (See: How to Safely Hold Dollars, Remain Liquid, and Seize Short-term Opportunities).
However this looks set to change in 2023 or maybe more likely 2024 or even later. The Labour/New Zealand First government announced a plan on 24 June 2019 to introduce a bank deposit protection scheme for New Zealand.
The initial proposal included a deposit guarantee with a limit between $30,000 and $50,000.
That would have covered around 90% of individual bank accounts – in line with other international schemes. Around 40 percent of total individual bank deposits would be covered by the scheme, since a small number of wealthy savers have much larger savings on deposit than $50,000.
“The deposit insurance scheme would likely be funded by a levy on the banks, backed by government funds if the levies collected at the time of a banking collapse were insufficient to fulfil the terms of the scheme. The existing ‘open banking resolution’ system that New Zealand already employs would continue to run alongside the insurance scheme, [Finance Minister] Robertson said.”Source.
History of Bank Guarantees in New Zealand
Prior to October 2008 New Zealand had no bank guarantee scheme.
But as Australia was about to announce a government guarantee of their banking sector we were pretty much forced to follow suit.
However, the guarantee was only for a set period. From 12 October 2010 it was voluntary. But none of the major NZ banks elected to go into the scheme. The extended scheme was then wound up on 31 December 2011.
From 2013, if a bank failed in New Zealand, the Reserve Bank of New Zealand (RBNZ) has had in place the Open Bank Resolution (OBR). In a nutshell this means that bank deposits (i.e. customer savings) are used to bail out the bank.
The RBNZ would temporarily close a failing bank. Then determine what capital is required to keep the failing bank functioning. The RBNZ would then “haircut” all depositors by this amount to “bail in” the bank. Then reopen the bank and allow depositors access to their remaining funds.
Learn More about the OBR: Bank Failure | Could it Happen in NZ? | The Reserve Bank Thinks So
Video Explanation of the OBR:
Therefore, any deposits you hold above the deposit protection limit would still be subject to a “haircut” or “bail in” under the OBR scheme.
Latest Update 2023: What We Now Know About the Proposed Bank Deposit Protection Scheme
A public consultation period ran until October 2021, seeking feedback on the details of the proposed bank deposit protection scheme.
As a result of this consultation the Labour government decided to increase the level of protection to $100,000 per depositor, per approved financial institution. The Deposit Takers Bill has been drafted and is expected to come into law in mid to late 2023.
“After the Act comes into force, there will be a transition period to allow both the Reserve Bank and regulated entities time to adapt to the new regime. A significant work programme over several years will be required to implement the new prudential framework for deposit takers.
…The Depositor Compensation Scheme is being prioritised ahead of the rest of the Act coming into effect and is expected to be up and running in late 2024.”Source.
So the official line is the $100,000 protection per depositor won’t be in place until late 2024. However even this date may be hopeful. As this article says:
“Deposit guarantee scheme in place for 2024? Don’t bet on it.”Source.
This $100,000 level will protect 93% of depositors. Although it will only cover 40% of deposits by value. Because a small number of depositors – around 7% – hold about 60% of total deposits and will remain uninsured.
The scheme will be funded by a taxpayer-backed fund like the Earthquake Commission fund, built up over time by levies from the banks the scheme covers.
The original proposal estimated an insurance fund of $2-$3 billion would be needed for the proposed regime. Which could be built up over a decade through a 5 percent levy on bank profits, or a premium of 20 basis points on insured deposits.
“Any increase in banks’ funding or operating costs under a depositor protection regime might be passed on to bank customers through higher mortgage rates or lower term deposit rates, or might result in a lower supply of credit to the real economy. This could adversely affect investment and economic activity in New Zealand.”
But we’d imagine that figure will need to be doubled, given the coverage has doubled. As the initial proposal stated, it’s likely these costs will be passed on to deposit holders via lower interest returns. Or through mortgage rates or maybe even higher fees.
So while there is a bill drafted and likely to be passed this year, there are still a lot of unknowns around funding and therefore timing of it.
What About Accounts at Multiple Banks?
Following the consultation, it was determined that accounts held at multiple banks by one individual will also be covered. So you should be able to “spread your eggs” across a number of banks and therefore achieve greater coverage than the $100,000 limit.
Also if a couple have a joint account they will have coverage of $100,000 per person.
Will Bank Deposits Held by a Kiwisaver Scheme be Covered by a Deposit Guarantee?
The deposit insurance scheme will cover transactional, savings and term deposits currently offered by registered banks, and the equivalent products offered by non-bank deposit takers. Bonds, debentures, capital notes, equities and KiwiSaver funds are among the products that won’t be covered.Source.
However some might think there is a question mark about the guarantee of bank deposits held by KiwiSaver schemes.
Currently the RBNZ “Open Bank Resolution (OBR) Pre-positioning Requirements Policy”, includes a compendium of liabilities. This lists says:
“Kiwisaver and PIE funds invested in the bank’s products such as deposits will be treated like other customer accounts.”
So Kiwisaver funds invested in the likes of cash and term deposits would be subject to the OBR i.e. bail in.
Therefore unless Kiwisaver bank deposits are specifically included in the new guarantee scheme, it would seem they will be subject to the OBR and a haircut. We haven’t found anywhere that it says they will be included.
Does a Government Bank Deposit Guarantee Make Our Banks Safer?
No. It merely shifts some of the risk from deposit holders on to the government. Or rather potentially on to tax payers. As it will take a long long time to build up a buffer via the proposed levy. So in the meantime the fund will be able to take a loan out from the government to cover any bank failures until there are sufficient funds. Which could be many, many years away.
Either way the risk is not to any individual bank. But rather to its deposit holders (via OBR) and taxpayers (via a potential loan to the deposit protection scheme).
In fact there is a very good argument that bank deposit guarantees encourage banks to chase higher returns and therefore take higher risks. As they will not “foot the bill” if they go under. This is known as privatising the profits and socialising the losses.
How Does the Proposed N.Z. Bank Deposit Guarantee Compare to Other Countries?
33 of the 35 OECD countries have deposit insurance or government guarantees. Up until this announcement New Zealand and Israel were the two exceptions.
So how does the proposed scheme limit of up to $100,000 compare to other developed countries?
The below graphic which (we’ve amended to include the guarantee limit for New Zealand) shows that despite the increase, the New Zealand guarantee is still significantly less than 6 of these 7 nations:
Alternative to Relying on the Bank Deposit Protection Scheme
So would the implementation of a deposit protection scheme mean you simply don’t have to worry about the financial soundness of your bank?
No. As we’ve said before, if there was a problem with one bank in New Zealand, there would likely be problems with many of them. The small number of banks in New Zealand means the risk of contagion is very high.
So a failure of one could soon turn into a failure of many. Result? The government would likely have to bail out many banks by way of a loan to the bank deposit scheme fund. On top of this, depositors holding more than $100,000 with a bank would be “bailed in” via the OBR.
A government bailout would likely still be funded by the individual. Just indirectly – through higher taxes, higher inflation etc.
With inflation rates currently higher than bank deposit rates (and likely to stay that way for some time in our opinion), this could lead many people to question the benefit of leaving large amounts on deposit with a bank.
Why take the risk of leaving money in the bank for virtually no return? Or when inflation is taken into account, possibly a negative return. A.K.A. – A loss.
We think more and more people are likely to seriously consider turning a good part of their savings into gold and silver instead.
Why Buy Gold Instead of Leaving Savings in a Bank?
Because you will still have liquid funds readily able to be turned into cash should they be needed.
There is no risk of failure as gold and silver are the only financial assets with no counterparty risk. Learn more.
Plus with gold and silver there is also the possibility of significant upside. See: How Do You Value Gold | What Price Could Gold Reach?
Shop the range of available gold and silver bars and coins today.
Editors Note: This article was originally published on 3 July 2019. Last updated 16 May 2023 with the latest announcements on the new scheme.