Establishing scheme to insure deposits taking a little longer than expected

Bank and non-bank deposits likely to be insured by 2024. Photo / Supplied

Establishing an insurance scheme to protect depositors in the event of their bank, finance company, building society or credit union collapsing is taking a little longer than expected.

The Government’s depositor compensation scheme is on track to being operational by late 2024, rather than early 2024, as previously anticipated.

The proposed scheme will see $100,000 of deposits per person or business, per institution, insured.

So, if someone had $300,000 of savings at a bank that collapsed, they’d get $100,000 back. If they spread their $300,000 evenly across two banks that both collapsed, they’d get $100,000 back from each bank.

The scheme will be funded by levies paid by deposit-takers and backstopped by the Crown.

Work on the scheme began in 2017, well before the pandemic and Silicon Valley Bank and Credit Suisse ran into trouble. Its establishment will mean New Zealand is no longer an outlier in the OECD for not having such a scheme and will come on top of the Reserve Bank (RBNZ) requiring banks to hold more capital.

A document released to the Herald under the Official Information Act shows the RBNZ on November 21 wrote to Finance Minister Grant Robertson to explain how difficult it would be to get the scheme running by early 2024.

The regulator sought Robertson’s view on an amended timeline, which could see the scheme operational by September 2024 at the earliest, or January 2025 as another option.

The RBNZ noted the legislation to establish the scheme was introduced to Parliament two months later than planned, in September 2022, and consultation by the finance and expenditure committee overlapped with the Christmas break.

It said the “length and complexity” of the bill were “pertinent” and offered to advise Robertson on what could be done if issues raised during the select committee process slowed progress to the point the bill couldn’t be passed before the election.

However, Robertson confirmed to the Herald the Government remained committed to passing the bill before the election, and having the regime set up in 2024.

The RBNZ noted a key challenge was that the scheme required secondary legislation to clarify which products will be covered, what deposit-takers need to pay in levies, and how depositors would be paid out in the event of a collapse.

Banks want to pay lower levies because they argue they’re safer and more regulated than non-banks, so are less at risk of failing.

Non-banks say they should pay less because loading them up with higher compliance costs will make them even less competitive. Furthermore, a non-bank’s failure would have less of an impact on the financial system than a bank collapse.

The RBNZ noted some deposit-takers only want the scheme implemented in 2026, once other parts of the bill, which deal with how a customer is defined in the event of a failure, are finalised.

It acknowledged that “until SCV [single customer view] files are developed, a payout will require significant manual resources to determine entitlements and pay compensation, which means compensation is likely to take longer and increases the risks of error”.

Nonetheless, the RBNZ concluded the insurance scheme could still get up and running ahead of the SCV issues being dealt to.

The RBNZ said that if the Government wanted the scheme set up by September 2024, it would need to consult on details captured in secondary legislation (like levies) in April or May.

Robertson’s office confirmed this consultation will happen in the middle of the year.

It will follow the finance and expenditure committee reporting back on April 11 (a couple of weeks later than initially planned) on its consultation.

It’s likely that work to establish an insurance scheme would progress under a National-led government if the Deposit Takers Bill wasn’t passed pre-election.

The party’s finance spokeswoman, Nicola Willis, backs the concept, and the party supported the first reading of the Deposit Takers Bill. However, it will go through the details via the select committee process before committing to supporting the bill through its second reading.