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Deposit protection reduces case for RBNZ's bank capital increases, Robertson hints

Monday 24th June 2019

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A bank deposit protection scheme may help defuse the battle between the Reserve Bank and the country's biggest trading banks over how much extra capital they should have to hold on their balance sheets, Finance Minister Grant Robertson indicated today.

There is "clearly an interaction between what happens between deposit insurance and what the bank does with its capital requirements," Robertson told journalists after announcing several in-principle decisions about the future regulation of the banking system, including a deposit protection scheme for deposits of up $50,000 in any one bank account.

The RBNZ’s proposals include increasing minimum common equity tier 1 capital from 8.5 percent currently to 16 percent for the four major banks and to 15 percent for other banks and curtailing the use of hybrid debt instruments to meet capital adequacy ratios. The country's four Australian-owned trading banks are lobbying intensely against the proposals, threatening to lend less if they're required to hold such large additional sums on their New Zealand subsidiaries' balance sheets.

The New Zealand banking system is already relatively well-capitalised by international standards, but the Reserve Bank believes the country's banking system needs to be significantly more resilient and capable of withstanding a financial crisis than it is already.

Putting a deposit protection scheme in place would end New Zealand's outlier status as a country without such a scheme and would create a buffer against crisis that could reduce at least some of the need for the banks to hold more capital on their books.

The protection scheme would guarantee deposits up to $50,000 in every bank account, funded by a combination of bank levies and government guaranteed backing, along with the existing 'open bank resolution' scheme. The current OBR scheme has been criticised for offering no deposit insurance or explicit government guarantee - a policy pursued to date on the theory that it would sharpen both the banks' and their depositors' focus on the stability of the banking system.

Asked whether the deposit protection scheme might see the Reserve Bank ease back on its proposed new capital requirements, Robertson said: "Clearly that's a matter for the bank. The regime that we have is that they make the decision.

"What I'm saying is that there is a total system of a financial safety net here. That includes regulation, it includes the supervision arrangements, it includes resolution arrangements, it includes deposit protection arrangements and it includes bank liquidity.

"You put all of those things together you have a good solid financial safety net. Clearly, they work in synch with one another and so any decisions made at either end of that scenario will have to reflect the other end of it."


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