Advisory: Publication of funding strategy for the Depositor Compensation Scheme

Friday 5th July 2024

Source: The Treasury

The first funding strategy for the Depositor Compensation Scheme (DCS), known as the Statement of Funding Approach (SoFA), has been published today. The publication of the SoFA is an important milestone towards implementing the DCS in mid-2025.

The SoFA provides estimates of the costs of the DCS over the next five years and sets out the strategy for funding these costs and liabilities over time. The funding strategy supports the objective of the DCS to contribute to financial stability by protecting eligible depositors in the event of a deposit taker failure.

The SoFA uses targets for building a DCS fund to set the amount of levies that will be collected over time. This will result in a predictable forward path of levies and is consistent with international practice. The SoFA sets a target fund size of 0.8% of protected deposits, consistent with estimates of the cost of failure scenarios to the DCS. The fund will be built over 20 years to spread the cost equitably over a large cohort of deposit takers.

The other aspects covered in the funding strategy are targeted towards public confidence in the DCS, while ensuring efficiency in delivering the scheme. The SoFA requires the Reserve Bank to maintain the real value of the fund, taking into account inflation over the long term, with a focus on liquidity to enable swift payouts after failures. Should the fund fall short of covering the DCS's liabilities, the Crown will provide cost-reflective loans to the scheme.

This first SoFA covers the period from 2024 to 2029. The SoFA will be reviewed at least every five years, to enable the funding of the DCS to be adapted in response to new information, including evolving evidence about likely costs. The Treasury will also monitor the liabilities of the DCS and recommend an out-of-cycle adjustment in certain situations described in the SoFA, including if there are failures that draw on the funding of the DCS.

The SoFA document is available on the Treasury website: https://www.treasury.govt.nz/publications/sofadcs/statement-funding-approach-depositor-compensation-scheme-2024

Note: Te Pūtea Matua - Reserve Bank of New Zealand is leading work on the DCS Regulations, which includes design of the DCS levies. You can find more information about the Reserve Bank’s role in connection to the DCS on the Reserve Bank website.

ENDS

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