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.
However this may be about to change. The Labour/New Zealand First government announced a plan on 24 June 2019 to introduce a bank deposit protection scheme for New Zealand.
The deposit guarantee is likely to have a limit between $30,000 and $50,000.
This would cover 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. 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 your hold above the $30,000 to 50,000 limit would still be subject to a “haircut” or “bail in” under the OBR scheme.
What We Don’t Yet Know About the Proposed Bank Deposit Protection Scheme
There is now a consultation period to seek feedback on the details of the proposed bank deposit protection scheme.
The proposal estimates 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 there is a good deal yet to be determined…
What About Accounts at Multiple Banks?
For example, we don’t know how accounts held at multiple banks by one individual would be impacted. Could you “spread your eggs” across a number of banks and therefore achieve greater coverage than the $30-50,000 limit?
Will Bank Deposits Held by a Kiwisaver Scheme be Covered by a Deposit Guarantee?
The guarantee of bank deposits held by KiwiSaver schemes is also “yet to be determined”.
But 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.
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 (as it will take a long long time to build up a buffer via the proposed levy. Or rather on to tax payers.
Either way the risk is not to any individual bank. But rather to its deposit holders (via OBR) and taxpayers (via 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 $30,000 to $50,000 compare to other developed countries?
The below graphic which (we’ve amended to include the proposed guarantee limit for New Zealand) shows that the New Zealand guarantee is much less than 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 have to bail out many banks by way of this bank deposit scheme. On top of this depositors would be “bailed in” via the OBR.
A government bailout would likely still be funded by the individual. Through higher taxes, higher inflation etc.
With interest rates at record lows and likely to fall further, this could question many people about 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 turned to 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.