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Govt to introduce deposit insurance; RBNZ keeps prudential supervision

Monday 24th June 2019

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Finance Minister Grant Robertson wants to keep prudential supervision under the Reserve Bank's purview and plans to introduce deposit protection to bring New Zealand into line with other developed nations. 

Cabinet today signed off on an in-principle decision to introduce a deposit protection regime for deposits between of $30,000 and $50,000, Robertson said in a statement. That would cover about 90 percent of individual bank accounts, which he said was in line with international schemes. Around 40 percent of total individual bank deposits would be covered by the scheme, since a small number of wealthy savers have much larger savings on deposit than $50,000.

The treatment of bank deposits held by KiwiSaver scheme has also yet to be determined.

The deposit insurance scheme would likely be funded by a levy on the banks, backed by government funds if the levies collected at the time of a banking collapse were insufficient to fulfil the terms of the scheme. The existing 'open banking resolution' system that New Zealand already employs would continue to run alongside the insurance scheme, Robertson said.

OBR is a system that would allow a distressed bank to be closed temporarily and where its customers would take a so-called 'haircut' on their deposits in proportion to the bank's difficulties. New Zealand has been unusual for having only OBR and no deposit insurance scheme for smaller-scale depositors.

"Our banks are safe and sound. However, the OECD and IMF have said that our banking system might be more vulnerable in a crisis because we don’t have a deposit protection regime. A deposit protection regime will increase public confidence in the banks," Robertson said in a statement. 

Both the Organisation for Economic Cooperation and the International Monetary Fund will be releasing semi-annual reviews of New Zealand over the coming days, giving a policy prescription on how New Zealand can better match each entity's typical policy prescriptions. 

The government wants feedback on some of the finer details on how the scheme should be introduced. The paper estimates an insurance fund of $2-$3 billion would be needed for the proposed regime, which could be built up over a decade through a 5 percent levy on bank profits, or a premium of 20 basis points on insured deposits. 

"Any increase in banks’ funding or operating costs under a depositor protection regime might be passed on to bank customers through higher mortgage rates or lower term deposit rates, or might result in a lower supply of credit to the real economy. This could adversely affect investment and economic activity in New Zealand," the paper said. 

Robertson also decided in principle to keep prudential supervision under the Reserve Bank's umbrella, although that decision wasn't heralded in the press release. He turned down proposals to set up an independent prudential authority as being too expensive and unnecessarily duplicating some of the central bank's functions. Similarly, he didn't consider merging the RBNZ's supervisory functions with the Financial Markets Authority's market conduct role the right outcome. 

He decided to ditch the 'soundness' and 'efficiency' high-level objectives for the Reserve Bank in favour of a single 'financial stability' goal and will combine the separate regulatory regimes for banks and non-bank deposit takers. 

Robertson will also establish a new governance board with responsibility for all Reserve Bank decisions except those reserved for the monetary policy committee while beefing up the Treasury's oversight responsibilities. 

"The board will be accountable for the performance of the institution as a whole, will set the organisation’s strategy, and will oversee the actions of management - the governor and senior staff - while management will have delegated day-to-day responsibility for running the institution within the parameters set by the board," the paper said. 

The next round of consultation in the review of the Reserve Bank's governing legislation will include whether the supervisory system is strong enough, what regulatory tools and powers the central bank should have, what its role in macro-prudential policy should be, how its balance sheet tools should be used, the features of a crisis management regime, how it should interact with other government agencies, and how it should be funded and resourced. 


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