Compromise over levies for deposit guarantee scheme

Friday, 8 November 2024

The big four banks will be allowed to levy their depositors at a lower rate, to reflect the assessment they have a smaller chance of falling over.

Building societies, credit unions and finance companies will need to pay into a fund guaranteeing people’s savings at a somewhat higher rate than the major banks, Finance Minister Nicola Willis has announced.

That is to reflect the assumption they have a higher chance of falling over than the banks.

The former government decided on the need for the levy-funded Depositor Compensation Scheme last year.

Such schemes are common and overseas.

It will be designed to guarantee people’s savings up to the value of $100,000 per person in each financial institution, when they put their money in accounts operated by licensed deposit-takers, such as building societies and banks.

There had been concerns that if a guarantee scheme was not set-up it would be the Government that might in practice need to come to the rescue of depositors in a crisis.

ANZ chief executive Antonia Watson reiterated her claim at select committee that the bank did not make super profits.

But the issue of how to divvy-up the levies needed to build up the compensation fund has at times been fraught, with the Reserve Bank focussed on financial stability and the Commerce Commission more concerned with the possible impacts on competition.

The Commerce Commission had favoured financial institutions paying into the Depositor Compensation Scheme at flat rates to ensure the scheme did not harm competitors to the major banks.

But the Reserve Bank had argued that levies should be very much “risked based”, to avoid the scheme effectively subsidising people who chose to put their money into higher-paying but more risky accounts.

It is understood the Government views its levy settings as a compromise.

The four largest banks will still contribute about 76% of the levies for the fund.

Official advice suggests that figure would have been about 83% if their lower likelihood of falling over hadn’t been taken into account at all.

In a separate compromise, credit unions and building societies will pay into the fund at a flat rate until a new prudential-management regime is fully in force in 2028.

Willis said the levies had been set to “reflect the likelihood of a payout occurring, the impact of the levy on entity soundness and the predictability of levy payments”.

The Commerce Commission wanted to “err on the side of not adding to the burden of smaller deposit-takers” until the effects of the scheme became clear, Willis said.

But she expected the guarantee scheme would “improve competition overall”.

“New Zealanders are more likely to be willing to switch deposit-takers if they know their deposit is protected in the event of a deposit-taker failing,” she said.