Nicola Willis unveils how the new deposit compensation scheme will be funded

Finance Minister Nicola Willis has put a stake in the ground in the debate between banking competition and financial stability. Photo / Mark Mitchell

Finance Minister Nicola Willis is seizing her first big opportunity to show she’s serious about eroding the dominance of the big banks – but not at all costs.

Speaking to the Herald, she unveiled how the Government plans to go some way to supporting the little players through its new deposit compensation scheme.

The scheme will see the first $100,000 of an individual or business’ deposit at a bank, finance company, credit union or building society guaranteed from July 1.

So, if someone had $200,000 deposited at a bank that collapsed, they’d get $100,000 back from the insurance scheme. If they spread their $200,000 evenly between two institutions that both failed, they’d get $200,000 back.

Banks and other deposit takers will fund the government-backed, Reserve Bank-administered scheme by paying levies into it.

The question until now has been, who pays what?

The Herald can reveal Cabinet has decided levies will be risk-based. So, riskier deposit takers will pay more, relative to the value of insured deposits, than the big banks.

However, a slightly smaller portion of the risk will be priced in than what the Treasury and Reserve Bank, which regulates deposit takers and is tasked with maintaining financial stability, recommended.

The levy rate applied to the riskiest cohort of deposit takers will be three times that of the rate applied to the least risky cohort.

If the risk was entirely priced in, the riskiest group would pay 12 times more.

Credit unions and building societies will also be given a hand-up by being allowed to pay lower, flat levies until 2028, before moving to the risk-based model.

ComCom vs Reserve Bank and Treasury

The Commerce Commission, which is interested in increased competition, had recommended all deposit takers initially pay flat levies (worth a certain percentage of insured deposits) until the impacts of the scheme were better understood.

Willis decided not to go this far. She believed watering down the proposed risk-based pricing and temporarily giving credit unions and building societies some leeway would support competition.

She explained that, under the Deposit Takers Act, she wasn’t empowered to set levies in a way that specifically supported competition. Rather, she could set levies to maintain “soundness” in the financial system.

She argued that not hitting smaller deposit takers too hard with high levies would support their viability. Some smaller institutions warned policymakers the cost of the scheme could drive them out of business.

However, the Reserve Bank and Treasury’s argument was that riskier deposit takers had a lot to gain from the scheme.

Some people would move their money to riskier institutions paying higher rates of interest because their deposits would be guaranteed.

The Reserve Bank and Treasury acknowledged sufficiently risk-based levies would see some deposit takers forced to cut costs by lowering their deposit rates. This would limit their relative attractiveness.

The Reserve Bank and Treasury thought this was a good thing. They were mindful of not creating a moral hazard – the scheme encouraging people to make riskier decisions than they otherwise would.

Where Willis landed was a step away from what the Reserve Bank and Treasury wanted. But she didn’t jump entirely into the Commerce Commission’s pro-competition camp.

The Reserve Bank and Treasury opposed giving credit unions and building societies an “implicit subsidy” with a flat rate until 2028.

The details

Cabinet decided levy levels will depend on the amount of capital a deposit taker has, its liquidity, profitability and asset quality.

Less weight will be put on profitability than previously proposed in acknowledgement of the fact some deposit takers aren’t set up to make profits.

Smaller banks also have lower returns on equity, partially because the Reserve Bank’s capital rules require them to hold more capital than the big four Australian-owned banks.

The Reserve Bank expected the big four banks (ANZ, ASB, BNZ and Westpac) to collectively pay $62.2 million in levies a year, small and medium-sized banks $15.2m, and finance companies $300,000.

It expected credit unions and building societies to collectively pay $700,000 a year during the three-year transition period, and around $1.5m thereafter.

The Reserve Bank recognised credit unions and building societies faced “long-term business model challenges”, but said temporary levy relief wasn’t the answer long-term.

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.