NZ to create insurance scheme for bank deposits

Move draws mixed reactions from sectors

NZ to create insurance scheme for bank deposits

Insurance News

By Gabriel Olano

The New Zealand government is set to introduce an insurance scheme for bank deposits, which will protect depositors’ money in case of a bank’s collapse.

The Cabinet has decided to adopt the final measures of the Reserve Bank Act Review, which will include legislation, known as the Deposit Takers Act, to enable the creation of the insurance scheme, which will also include non-bank deposit takers such as building societies and finance companies.

The scheme, which was proposed two years ago, will begin in 2023 and have a limit of $100,000 per depositor in each authorised institution. This is double the original proposed limit of $50,000. 

According to Finance Minister Grant Robertson, the increase in limit, which will fully protect 93% of depositors, came about from public feedback. The source of the funds has yet to be fleshed out, but these would likely involve levies from involved institutions. 

New Zealand is one of the few developed nations that does not have a deposit guarantee mechanism, despite the recommendations of the Organisation for Economic Cooperation and Development and the International Monetary Fund.

Reception to the proposal was mixed.

Adrian Orr, Governor of the Reserve Bank of New Zealand, lauded the move, describing it as a “significant milestone” in strengthening the regulatory framework.

“This new Act will broaden and clarify the scope of our role, which has evolved significantly since the Reserve Bank began prudentially regulating banks more than 30 years ago. It also modernises our regulatory processes and instruments,” Orr said.

“The reforms also provide important new enforcement tools which will help us to manage emerging issues, and an enhanced crisis management framework to effectively respond to any failures and minimise the impact on the financial system, the economy, and society.”

Meanwhile, opposition party ACT criticised the Deposit Takers Act, describing the move as “moral hazard madness” that allegedly led to the global financial crisis.

“This is the socialisation of banking,” said ACT leader David Seymour. “The Minister of Finance is saying 93% of bank customers don’t care about bank stability because the taxpayer will bail them out.”

According to Seymour, deposit insurance passes the responsibility for banks’ risk-taking to the Kiwi taxpayer, which he says will lead to greater instability in the financial system. 

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