It appears policymakers prefer charging finance companies, building societies and credit unions more (proportionately) than banks to reflect the fact they’re more likely to run into trouble.
The Reserve Bank suggested, in a consultation document, deposit-takers could be charged a flat rate, equivalent to 0.1 per cent of deposits covered.
Nonetheless, it flagged the importance of levies reflecting risks, suggesting it might not favour a flat rate.
A risk-based approach would cost non-banks the equivalent of as much as 0.35 per cent of their insured deposits. Meanwhile, it would cost around half of banks the equivalent of less than 0.1 per cent of their deposits. The others would pay around 0.2 per cent.
The Reserve Bank proposed two risk-based approaches. The first – setting levies based on credit ratings – would have the greatest impact on non-banks. Indeed, some don’t even have credit ratings.
The second approach would see levies based on a suite of indicators – capital adequacy, asset quality, liquidity, and business model and management.
The Reserve Bank estimated this option would see just over half of non-banks pay levies worth less than 10 per cent of their profits. For the rest, it said the impact on their profitability could be “more material”.
As for the impact on banks, the Reserve Bank said the cost of all three approaches would be worth less than 5 per cent for all but two banks’ profits. It would be equivalent to 1 or 2 per cent of a number of banks’ profits.
Banks want a risk-based approach, noting that meeting stringent capital requirements is already costing them. Meanwhile, Financial Services Federation executive director Lyn McMorran preferred a flat levy.
The debate is raging as the spotlight is on bank profits and competition in the sector, with a Commerce Commission market study under way.
McMorran said non-banks had been willing to partake in the deposit insurance scheme, provided it didn’t cost too much.
She recognised banks and non-banks have their differences, but stressed there was a place in the market for both, and didn’t want high compliance costs to drive smaller players out of the market.
The Reserve Bank believed levies should reflect the likelihood of an institution failing, to avoid the creation of a moral hazard.
It explained an approach that didn’t factor in risk would give depositors little incentive to monitor the performance of deposit-takers.
“As a result, funds may flow to weak institutions for high-risk ventures at lower cost,” the Reserve Bank said.
“Unless effective steps are taken, the deposit insurance system may face the possibility of increased losses and the economy as a whole may suffer as a result.”
This said, the Reserve Bank recognised it had to be aware of the impact levies would have on the “soundness” of deposit-takers.
It was cognisant of supporting diversity and competition in the sector.
“Predictability, transparency and practicality” was the third principle the Reserve Bank identified as important when setting levies.
It noted a flat rate would be good in this regard, whereas setting levies based on a range of indicators would be complex.
Indeed, McMorran questioned how a deposit-taker’s “management” would be objectively measured and factored in.
Members of the public have until September 25 to provide feedback on the matter to the Reserve Bank.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
