The committee responded to the NBDTs’ concerns, suggesting a few clauses be added to the Bill to put more emphasis on requiring the Reserve Bank to take a proportionate approach towards regulation.
Specifically, the committee suggested the law require the creation of a “proportionality framework” that factors in the size, nature and relative risk to financial stability of different kinds of deposit-takers.
The committee recognised small deposit-takers generally pose less risk to the system than large banks. Accordingly, the requirements needed to ensure banks operate prudently “may be excessive” for smaller entities.
“Prudential regulation is not a one-size-fits-all game,” the committee said.
“We agree that an insufficiently nuanced approach to the regulatory standards could impose unnecessary compliance costs on deposit-takers, and potentially reduce diversity and competition in the sector.”
The NBDTs, in their submission to the committee, called for a proportionality framework to be required by law.
“The Bill should actually be an opportunity to encourage the independent New Zealand-owned banking sector and reduce New Zealand’s existing concentration risk, dependence on offshore banks and improve competition, innovation, financial system diversity and financial inclusion in the banking sector,” the NBDTs said.
“[To] date, the regulatory burden has not corresponded with any benefits to being prudentially regulated compared to the benefits given to the banks. This makes growing or starting a small, retail deposit-taking business an unattractive proposition and this Bill should reverse that, not make it worse.”
The committee noted the big four Australian-owned banks dominate the deposit-taking sector, accounting for 85 per cent of its assets. Non-bank deposit takers, on the other hand, account for less than a per cent of the sector’s assets.
“However, these smaller deposit takers play an important role in providing access to financial services for New Zealanders who may struggle to access finance from the big banks,” the committee said.
It suggested clauses also be added to the Bill to emphasise the need for regulation to support New Zealanders having “reasonable access to financial products and services”.
The Government will now consider the Finance and Expenditure Committee’s recommendations ahead of the Deposit Takers Bill having its second reading in Parliament.
The aim is for the Bill, which the National Party supports, to be passed before the general election in October.
Secondary legislation will be needed to get the deposit insurance scheme up and running by late 2024.
This would see deposit takers pay levies into a fund which would be drawn down on to compensate depositors in the event of their deposit-taker collapsing.
Compensation would be capped at $100,000 per depositor, per institution. The scheme would be backstopped by the Crown.
The Finance and Expenditure Committee was broadly happy with the proposed design of the scheme, and only made a few technical recommendations to improve it.
Nonetheless, important and controversial details around how much different entities should pay in levies are yet to be ironed out.
Banks want to pay lower levies because they argue they’re safer and more regulated than NBDTs.
NBDTs say they should pay less because loading them up with higher compliance costs would make them less competitive, and a NBDT’s failure would have less of an impact on the financial system than a bank collapse.
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 requiring banks to hold more capital.
