The research suggests deposit interest rates may drop when the scheme is introduced, particularly at non-bank deposit takers. Photo: RNZ
New research suggests deposit interest rates - particularly at non-bank deposit takers - could fall significantly when the Reserve Bank introduces its deposit protection measure.
The Depositor Compensation Scheme (DCS) - expected to come in mid-year - would allow eligible depositors to have up to $100,000 of their savings protected in the event of a bank, building society or finance company failure.
It was estimated the scheme would protect around 93 percent of depositors in New Zealand.
Massey University adjunct professor of banking David Tripe, said the changes - while good for financial security - would affect interest rates at non-bank institutions.
"What it means is that because they no longer have to monitor the health of the institution or to worry quite so much about potential failure or challenges with the institution, they shouldn't expect to get as high an interest rate as they have previously," he said.
"Now, for the banks it may not be a lot of difference [but] for the non-bank deposit takers, I think we'll see a more sizeable reduction in their deposit rates compared to the bank rates."
Professor Tripe's paper noted that prior research on the effects of deposit guarantees was "somewhat limited".
New Zealand had a temporary deposit protection scheme in the wake of the 2008 financial crisis, when various finance companies collapsed.
Professor Tripe said a comparison of bank and finance company deposit rates before and after the introduction of the previous deposit guarantee measure, saw a wide gap of more than two percentage points during the financial crisis.
But the gap reduced "substantially" once the guarantee came into place, settling at around 0.5 percent.
"Perhaps that will be an indication of what we should expect once the DCS comes into effect in July 2025," Professor Tripe said.
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