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RBNZ reform could bring in deposit insurance

New Zealand may finally implement deposit protection as part of a review of the Reserve Bank.

New Zealand is currently the only country in the OECD without any kind of deposit insurance. This means that if a bank fails depositors have no protection and the Reserve Bank could give savers 'haircuts' to help recapitalise a failing bank. That means savers deposits would be cut arbitrarily by the Reserve Bank to ensure the bank could reopen. 

A temporary deposit protection scheme was established during the financial crisis to give spooked depositors confidence in the banking sector, but it lapsed in 2010. 

Then-Reserve Bank Governor Alan Bollard said at the time that “in the absence of a Government guarantee, it is vital that depositors understand the risks and the potential trade-off between risk and return”.  

This is a key argument of deposit protection detractors. They argue a protection regime encourages banks to take unnecessary risks, knowing their customers have no incentive to evaluate those risks before choosing a bank. 

But this is usually counterweighted against the fact that consumers often lack sufficient knowledge to assess their institution’s viability and in a small and relatively exposed country, a large shock could hurt even the strongest financial institutions.

The announcement was made by Finance Minister Grant Robertson when releasing the terms of reference for phase two of the Reserve Bank Act Review on Thursday. 

The review is part of a shake-up of the Reserve Bank Act, which is now nearly 30 years old, although its role expanded in the late 2000s to include insurance companies and non-bank deposit takers. 

Details of phase one of the review, focusing on the bank’s role in setting monetary policy, were announced on March 26. 

Other aspects that will be reviewed include macro-prudential policy, cooperation with Australian regulatory agencies, and crisis management. 

Orr keen on DTIs

Much of that thinking will be guided by the IMF’s 2017 Financial System Stability Assessment.

That report suggested the inclusion of a debt-to-income tool to supplement the bank’s current loan-to-value tool. This would prevent banks lending to people who were unlikely to be able to service their debt. 

The Reserve Bank, which will be part of the review, is known to seek the inclusion of the debt-to-income tool in its macro-prudential "tool kit". Governor Adrian Orr told a select committee in May that he was “positively pursuing them” through the review.

"We really do want to get our heads around it. If it is a tool where no one is worse off and someone may be better off then we would like to add it to our tool kit," he said.

Another recommendation made by the IMF was for the bank to move from its “three pillars” approach to regulation. These pillars are “self, market, and regulatory discipline”. It argues the bank should adopt a more intensive approach to supervision of the financial system.

A levy on banks?

The IMF also said the bank operated under “specific resource constraints” and that staff numbers were “insufficient”. It recommended increasing resources and technical capacity to keep up with the bank’s regulatory role. 

The funding for that extra resource will have to come from somewhere. This review will question whether industries regulated by the bank should pay for the privilege. The terms of reference include looking at whether an industry levy would be appropriate.

Whatever changes are suggested will come slowly. The terms of reference do not say when the review is due to report, only that legislative changes are expected to be implemented within the current parliamentary term, which ends in 2020.

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