Banks could face $23b safety bill

Treasury has costed the Government's deposit protection scheme at $2.7 billion, that comes on top of a $20 billion Reserve Bank plan to makes banks safer.

The Government’s deposit protection scheme could cost banks $2.7 billion, or 34 percent of one year's profits. 

The Government on Monday said it would begin work towards a scheme to insure between $30,000 and $50,000 of depositors' money in the event of a bank collapse. It said the scheme would be funded by a levy on banks, which would build up the scheme over a number of years.

While details have not yet been hashed out, Finance Minister Grant Robertson said most international schemes were funded by a bank levy towards a fund to pay-out should a bank collapse.

Inactive costings by Treasury suggest the $50,000 guarantee would mean $135 billion of deposits insured. The cost for insuring that would be $2.7 billion, roughly equal to 34 percent of banks’ profits over one year.

Treasury modelling suggests a 5 percent banking levy on profits, which would build up the $2.7 billion fund in seven years. 

But that’s not all that’s being done to make banks safer. Last year the Reserve Bank announced plans to protect banks against a one-in-200 year crisis by forcing the big four Australian-owned banks to hold more capital.

But this comes at a massive cost: the Reserve Bank estimates it would soak up the equivalent of 70 percent of bank profits over 5 years, roughly equivalent to $20 billion. 

With a five percent banking levy to fund the depositor protection scheme banks would be forced to cough up 75 percent of their profits over five years, equivalent to nearly $23 billion. 

The central bank has so far said banks would absorb most of the cost of the capital requirements, suggesting they might add around 20 to 40 basis points to net interest rate margins. Other banks like UBS have said banks would have a more limited appetite for absorbing the cost, suggesting mortgage rates would rise between 80 and 125 basis points. 

Finance Minister Grant Robertson told Newsroom the Government had taken the decision to establish the scheme “in principle”.

“The details of how that scheme will operate are now being designed. Therefore any specific costings are only estimates at this time,” Robertson said.

“A number of factors will be taken into account including how to phase in any bank levy that might be associated with the scheme. And the costs to consumers,” he said. 

National’s new finance spokesperson Paul Goldsmith supported the idea of deposit protection but said the Government should wait until the Reserve Bank settles on its capital adequacy plans before pursuing the scheme. The capital adequacy plans would effectively make banks safer, reducing the need for depositor protection, but pursuing both at the same time risked piling costs onto consumers. 

“I think it would make sense to at least be aware of both tranches of work before concluding one,” Goldsmith said. 

“Make no mistake there are some potentially significant costs here, when you add that to the bank capital requirements, there are potentially some substantial costs that would flow inevitably through to the cost of borrowing in New Zealand and the access of farms, businesses, and households to capital,” he said. 

When unveiling the plans Robertson said the deposit protection scheme and capital requirements changes “interacted” but did not crossover.

“I wouldn’t say it’s crossover. It’s a relationship between the two and you have to find balance,” he said.

“Clearly there’s an interaction between what we do in terms of depositor protection and what the bank itself does in terms of capital requirements,” Robertson said 

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