Govt takes risk-based approach to deposit guarantee scheme

A risk-based funding model for the new depositor compensation scheme will see the four largest banks bear most of the cost of the safety net with smaller entities subject initially to a flat fee.

Thursday, November 14th 2024, 8:08AM

by Kim Savage

The levy imposed on banks, building societies, credit unions and finance companies will vary based on the size and riskiness of the institutions concerned, Finance Minister Nicola Willis has announced.

Considerations include the likelihood of the need for a DCS payout, the impact of the levy on entity soundness and the predictability of levy payments.

“The levy will be based on total deposits covered by the scheme, so the four largest banks will pay about three quarters of the total,” said Nicola Willis.

The DCS comes into effect in July next year and protects depositors up to a value of $100,000 each if their deposit taker fails. Earlier this year, Treasury flagged in its statement of funding approach that the scheme was most likely to be triggered by a non-bank deposit taker with an event potentially costing between $800 million and $1 billion up front. In total, the fund will be 0.8% of the deposits protected by the scheme.

Credit unions and building societies will pay a temporary flat levy until the new scheme is in full force in 2028.

“This reflects careful consideration of the impact of the levy on entity soundness, during a period of significant regulatory change for this sector,” said Nicola Willis.

“I note the Commerce Commission recommendation that the Government err on the side of not adding to the burden of smaller deposit takers, until the effects of the DCS become clearer.”

The DCS was expected to improve competition in the sector, the Finance Minister said, although the impact of the scheme would be monitored.

“New Zealanders are more likely to be willing to switch deposit takers if they know their deposit is protected in the event of a deposit taker failing,” she said.

Tags: Financial advice