A bank insurance scheme to protect depositors' funds if a bank collapses is being brought in.
The scheme doubles the proposed coverage limit to $100,000 for each depositor in an approved bank. Photo: 123rf
The scheme, first proposed two years ago, will have a limit of $100,000 for each depositor in an approved bank, double the original planned limit.
"We originally proposed a $50,000 limit for deposit protection but after listening to feedback this has been increased to $100,000. This will fully protect 93 percent of depositors," Finance Minister Grant Robertson said.
He said the scheme will start in 2023 and was part of a broader suite of measures to strengthen the regulation and supervision of the financial system.
New Zealand has been one of the few developed economies not to have a deposit guarantee scheme, which has been recommended for years by the OECD and IMF.
Although not detailed, it is likely the scheme would be paid for by a levy on the banks to allow a build up of funds as insurance, which might require government backing initially.
The scheme would apply to banks, credit unions, building societies, and finance companies taking deposits.
Other measures being taken include spelling out the range of measures the Reserve Bank can use to control risky lending, such as loan to value ratios and debt to income measures. At present the RBNZ has to seek government approval for each measure it might want to use.
The RBNZ's powers of supervision and enforcement of the banking and finance sector, and the behaviour and accountability of directors will also be beefed up.
"While New Zealand's financial system is sound and well positioned to withstand the stress posed by Covid-19, these reforms ensure the Reserve Bank is better equipped to protect and promote financial stability in the future," Robertson said.
"Taken together, the recommendations will considerably strengthen New Zealand's financial system safety net and contribute to a robust framework of protections for depositors."
The RBNZ currently oversees a system called "open banking resolution", which is based on all parties sharing the losses in the event of a bank collapse.
Separately the RBNZ is pushing on with plans to require banks to increase the amount of capital they hold.
The Bankers' Association said the scheme and other changes being brought in should bolster depositor confidence in the industry.
Chief executive Roger Beaumont said: "Today's announcement will provide depositors with an extra layer of security for their money in the unlikely event of a bank failure".
The setting of levies to pay for the scheme and where the costs should lie would have to be worked out, he said.
"We support a risk-based approach to setting levies where lower risk entities, such as banks, pay lower levies because they are less likely to call on the scheme."
The new scheme also had to be worked in with other regulations covering the sector such as the Reserve Bank's move to require banks to hold more capital in case of future financial shocks, and the current rules that allow bank deposits to be drawn on if a bank fails, Beaumont said.
