Depositor guarantee would protect households' savings, but come at a cost

Tuesday, 1 August 2023

Deposit guarantee schemes are in place in many other countries.

Treasury Te Tai Ōhanga has revealed the possible hit to the interest rates banks would pay savers during the “build-up phase” of the depositor compensation scheme.

It has released a consultation paper on how the “depositor guarantee scheme” should be funded.

The scheme is designed to pay compensation for losses of up to $100,000 to each depositor with money at any licensed deposit-taker that hits financial trouble and collapses.

Deposit-takers include banks and finance companies, though the vast majority of deposits are with banks.

But the creation of a giant fund to back the scheme would come at a cost during the build-up phase, potentially in the form of a 0.6% to 2% reduction in profits for deposit-takers, the Treasury paper indicates.

However, if the deposit-takers decided to pass on the costs to depositors, that would have the effect of reducing deposit rates by between 4 to 15 basis points in the build-up phase.

A deposit rate of 6% would be reduced to between 5.96% and 5.85% under Treasury’s 4 to 15 basis point range.

The FMA has published a new guide to managed funds following research suggesting more New Zealanders are considering alternative investments because of low interest rates.

Similar schemes exist overseas, and during the Global Financial Crisis in 2009, the government implemented a temporary deposit guarantee scheme in order to prevent runs on finance companies and banks.

The guarantee scheme should be in place by late 2024, and will be funded by levies on deposit-takers.

Whether the likes of banks pass these costs on to depositors in the form of lower deposit interest rates, or levy fees, was a “commercial decision” for them to take, Treasury said.

Treasury believes the fund backing the scheme should be built over the next 10 to 20 years to between $600 million and $1.4 billion in size.

Calculations for how big the fund should be were based on how big losses had been on failed deposit-takers here and overseas. However, the fund size was not intended to be big enough to cope with multiple large bank failures.

Treasury said the costs to the scheme in the event of one of the big five banks failing (ANZ, ASB, Bank of New Zealand, Kiwibank or Westpac) would be “up to $3.3b”.

Choosing to build the fund over 20 years, as opposed to 10, would enable levies to be lower each year, but a longer timeframe would result in the government taking on more short-term risk.

A second approach to levies could be to calculate them based on an insurance model, in which annual levies were charged based on the risk of compensation payments being required in the year the levy was charged. These would be charged indefinitely, regardless of how big the fund backing the scheme became.

South Canterbury Finance went bust after the Global Financial Crisis, and the temporary deposit guarantee scheme meant the taxpayer copped the losses, not depositors.

As with the Natural Disaster Fund, which backs the Toka Tū Ake EQC fund, the depositor guarantee scheme fund will be backed by a taxpayer guarantee.

Treasury said the government maintained a liquidity buffer of cash and liquid, high-quality financial assets to enable it to immediately respond to unexpected events, such as economic crises.

“The Government currently holds $15b as a buffer,” Treasury said.

Any losses to the Crown from depositor guarantee scheme payouts, however, will be recognised as loans to paid back through higher levies on deposit-takers in the following years.

Treasury’s paper said the scheme was only part of New Zealand’s financial “safety net”, and thought needed to be given to other mechanisms to reduce the likelihood of failure, such as how deposit-takers are regulated.

Development of the scheme has been under way since 2018.

Submissions close on September 25.